How to prepare a clear, concise and effective Statement of Advice

Preparing a clear, concise and effective Statement of Advice (SOA) can be achieved by following a few simple steps. And avoiding some of the more common mistakes. Financial service providers must provide clients with a Statement of Advice with enough information to ensure they understand the personal advice given to them, and decide whether or not to rely on it.

What is a Statement of Advice (SOA)?

ASIC’s definition of a Statement of Advice is as follows:

“A document that sets out the advice given to a consumer by their licensed financial planner or adviser. It must include the basis on which the advice is given, details of the providing entity, and information on any payments or benefits the adviser or licensee will receive.”

Source: ASIC Glossary

The Statement of Advice must be provided in accordance with the Financial Services Reform Act (2002) and include an outline of recommendations made, the reasons for the recommendations and the intended benefit for the client.

What does ‘clear, concise and effective’ mean?

According to Subsections 947B(6) and 947C(6) of the Corporations Act, “The statements and information included in the Statement of Advice must be worded and presented in a clear, concise and effective manner.” As the Corporations Act does not provide a definition of exactly what this means, the terms need to be taken in their natural meaning. So, let’s do exactly that. According to Oxford Dictionaries, these are each terms definitions:

  • Clear - easy to perceive, understand, or interpret.
  • Concise - giving a lot of information clearly and in a few words; brief but comprehensive.
  • Effective - successful in producing a desired or intended result.

To put it another way, the Statement of Advice needs to be written in plain language, is brief yet comprehensive in the information it supplies, and promotes understanding of the financial advisers recommendation.

Legislative requirements of the statement of advice

Your Statement of Advice should provide clear, concise and effective information to your client, allowing them to make a fully informed, educated decision. The following is an outline of the critical inclusions within a SOA.

  • Date of financial advice
  • Description of the personal advice
  • Best Interest Obligations
  • Type of product of service
  • Authorized company, its contact details and AFSL number
  • Personal Insurance Recommendations & opinion
  • Recommendation on Investments & Funds management
  • Disclosure of Information on remuneration, commission & other benefits

Important considerations when preparing an SOA

When preparing a client’s Statement of Advice, there are some critical considerations that you should make. Here’s a quick checklist to help simplify the process:

  1. Use language that matches the client’s experience with financial advice, as well as their language, literacy and numeracy skills
  2. Try to use plain language, minimizing jargon and industry lingo so that the client can understand the information included in the SOA
  3. Present information within the SOA in a logical sequence, such as you would a story, so that your client is able to easily follow the information included.
  4. Ensure that the Statement of Advice includes an outline of the client’s objectives and how the advice would achieve them.
  5. Avoid inclusions of irrelevant information that do not align with the client’s needs

Statement of Advice Checklist

The following checklist will help ensure you prepare a clear, concise and effective Statement of Advice.

The title “Statement of Advice” is on the cover or near the front of the document

The financial Advisers name and contact details are clearly stated together with the authorizing licensee, its AFS licence number and state that the providing entity is the authorized representative of that licensee.

A concise summary of the client’s relevant circumstances

The scope of the advice

The subject matter of the advice

A generic description of the financial products or strategies considered and investigated

Explain why the advice is likely to leave the client in a better position

Statement explaining why the advice and recommendations are considered appropriate, including;

o   Alternate options considered

o   Advantages and disadvantages

Tax considerations pertaining to the advice

Risk disclosure

Disclose if recommendations are restricted to products from an approved product list

Disclose any remuneration, commission and/or other benefits that might be reasonably expected to influence the advice provided

Details of any interests, associations or relationships that may influence the advice provided

Provide a warning if any of the advice is based on incomplete or inaccurate information

Problems with Statement of Advice templates

Templates can be a fantastic tool to improve efficiency within organisations. However, there are limitations and risks that are associated with using templates, particularly when it comes to a Statement of Advice template. The most obvious reason why is that every single client is different – not only in terms of the tailored advice you are providing, but also the client’s financial experience and knowledge, grasp on the English language and many more variables.

Templates can be useful, however take care to tailor the language used in the template to the client and delete any irrelevant information. Sometimes templates contain so much irrelevant information that it takes more time to delete the inappropriate content than to prepare the document from scratch!

Consider using templates in their simplest form – that is, a document structure or table of contents, together with brief instructions and guidance on how to prepare a tailored Statement of Advice. Make sure that the mandatory content is specified within the template, and outline what is optional.

Summary

A Statement of Advice is just one of the many documents that must be prepared by Financial Planners and Advisers. This does not minimize its importance in any way, and in fact can be one of the most critical documents when engaging with clients. The Complii CRM includes the ability to generate, print and send reports on the status of SOAs, ROAs, Expired 708 certificates and many more fundamental items. To learn more please visit www.complii.com.au or call us on 02 9235 0028.

Resources

Statement of Advice Examples

ASIC provides a variety of statement of advice examples including a Statement of Advice for Life Insurance and a Statement of Advice for Scaled advice for a new client.

Statement of Advice Case Study

The following Case Study appears on the Financial Ombudsman Service website and provides an example of unclear and inappropriate financial advice. That is, exactly what NOT to do with your Statement of Advice!

CASE STUDY: Unclear and inappropriate financial advice

Esme was a very elderly war widow; she had exceeded the life expectancy of an Australian female. Her financial situation was uncomplicated. She received more than enough income from her pension and from a small annuity to meet her needs.

Esme received a significant legacy from her sister's estate. This was the first time she had received a large sum of money. She had previously obtained financial advice about her annuity from a financial adviser, but she was otherwise inexperienced in financial matters.

Esme sought financial advice from her regular adviser. She told the adviser that she wanted to top up her annuity with $100,000 and sought her advice about how to invest the balance of the inheritance.

During her discussions with her adviser, Esme said she wanted to invest a small amount in her granddaughter's name, but later she changed her mind because she was concerned about how other family members would view the investment when she passed away and they were dealing with her estate.

The adviser recommended that Esme invest the balance of the inheritance in a managed growth fund. The SOA prepared by the adviser stated the investment in the managed growth fund was 'not capital guaranteed', 'the balance may fluctuate daily due to changes in unit prices' and there was a risk of capital loss if Esme withdrew from the investment early.

Esme accepted the advice and made the recommended investment. The investment performed badly and suffered significant losses. Esme lodged a dispute with FOS, claiming she did not understand the advice provided to her and the managed growth fund was not an appropriate investment in her circumstances.

We noted that an SOA is a disclosure document that is intended to help a retail client understand advice and decide whether to rely on it. Client understanding of the advice is a critical part of the advice process.

After investigating the case, we drew the following conclusions:

  • Esme was inexperienced in financial matters and had very limited knowledge of financial markets and products (as shown by her uncomplicated financial arrangements prior to receiving the inheritance).
  • Esme's primary objective was to leave a legacy for her sons and grandchildren and therefore she wanted to place the money into a secure, capital-protected investment (as shown by her concern about how a proposed investment in a granddaughter's name would be perceived).
  • The information in the SOA about capital volatility associated with the managed growth fund was generic in nature and was not likely to alert Esme to the potential for capital loss. It would have been prudent to put these warnings in language Esme was likely to understand.

We found that if the SOA had been expressed in language Esme was likely to understand, she would not have made the investment. We ordered the adviser to pay compensation to her.

Notes

1.      Section 946A of the Corporations Act

2.      ASIC Regulatory Guide 175 at RG 175.153.

3.      Subsections 947B(6) and 947C(6) of the Corporations Act.

4.      3rd edition (2004), Macquarie Press.

5.      Published April 2011. See paragraphs RG175.188 to RG175.192 (inclusive).

6.      See Rules 4.11 and 4.12.