Take outs

• A ‘better position’ is not a subjective test, rather an objective one
• A ‘better position’ can’t be trivial, it must be meaningful to the client
• Advisers should always be aware of the client priority rule

In our recent Netwealth webinar, Best Interest Duty: Five Years On, The Fold Legal founder Claire Wivell Plater reminded advisers what is expected of them.

A quick recap

In addition to the obligation to ‘provide appropriate advice’ and ‘warn the client if advice is based on incomplete or inadequate information’, the best interest duty, which came into effect on 1 July 2013, added the requirement to ‘act in the best interests of the client’ and to ‘prioritise the client’s interests’.

“It basically means the advice should leave the client in a better position,” Ms Plater said.

“That's because consumers who seek financial advice expect that their adviser will leave them in a better position, once they have provided advice.”

What constitutes a ‘better position’?

This is an important question and one many in the advice industry asked themselves when the duty was first introduced five years ago. Some may still be confused about it today.

Ms Plater said the advice provided does not have to be perfect. It's an objective test. It's what a reasonable person would think.

“That depends on a bunch of things, like what position would the client have been in if they didn't follow the advice?”

“You don't assess that with the benefit of hindsight. You assess it based on what the position was at the time.

“It also depends on what advice the client sought and what they were seeking to achieve; their objectives and their needs. If there are any product features that clients particularly value, then it depends on whether the client understands what those features are and is prepared to pay the cost of those features.”

One thing ASIC does stress is that the “better position” can’t be trivial. It must be meaningful to the client.

Not changing a thing

In some cases, it may be appropriate for an adviser to advise the client not to change anything.

“If the client is on track, ASIC's view is that it's more appropriate for you to tell the client not to change anything,” Ms Plater said.

“What you're doing at that point is giving the client the comfort and the knowledge that their current plan and their current trajectory is what they need. And that is actually valuable in itself.”

Advisers should always be aware of the client priority rule, which states that the adviser should place the client’s interests ahead of their own. They shouldn’t, therefore, recommend a product to create extra revenue, recommend a product that’s not in the client’s interests, or over-service clients to generate revenue.

What to avoid

• One-size-fits-all advice
• Unjustifiable switching
• Being inflexible about products
• Giving advice that requires expertise you don’t have
• Failing to assist the client to prioritise their conflicting goals
• Cross-selling initiatives that don’t prefer the client’s interests or demonstrate an additional benefit.

Find out more

Listen to the Netwealth webinar, Best interests duty – five years on, for more information on what you need to know about fulfilling your best interest duty.

Views expressed are of the interviewee and may not be the opinion of Netwealth or its related companies.