Article 1: Standards 6, 9, and 10

By Marshall Ross, Acenda Partner Education Manager

Part 1: Peering into the crystal ball

Examining Standard 6 in the context of risk advice

Much of financial planning involves considering clients’ futures – their financial goals, situation over the long term, and aspirations for retirement. Naturally, this means discussing the ‘what-ifs’.

Standard 6

You must take into account the broad effects arising from the client acting on your advice and actively consider the client’s broader, long-term interests and likely circumstances.

Peering into the proverbial crystal ball helps clients plan and prepare for events that could impact them in the future. Standard 6 of the Financial Advisers and Planners Code of Ethics (the Code) asks advisers to actively consider both: 

  • the knock-on effects arising from the client acting on this advice and
  • the client’s broader, long-term interests and likely circumstances.  

This requires us to look through the proverbial crystal ball, helping our clients to plan and prepare for events that could impact them in the future.

The risks with ‘what ifs’

As we delve into what the Code terms ‘broader long-term interests and circumstances,’ additional considerations are introduced into the advice process – the greater part of the iceberg lurking beneath the surface. 

Against such a broad spectrum of possibilities, Standard 6 requires advisers to consider the ‘what ifs’. These come with uncertainty, which entails risk to a client’s financial objectives. Risks can be associated with: 

  • investment decisions
  • economic factors, such as inflation 
  • having enough money saved for retirement
  • future regulatory changes that can impact the plan that was put in place.

Life insurance

Another important aspect when considering these ‘what if’ situations is a client’s personal health risks in relation to their financial commitments.

This doesn’t mean every client necessarily needs life insurance. What it does mean is that advisers should consider a risk management approach that may include different life insurance products, depending on the client’s risk tolerance and capacity to self-insure. As with other specialist services – for example, tax, legal, or SMSF advice – referring the client to a specialist may be the most appropriate way to help them manage these risks.

To ensure satisfaction of the Code’s requirements, advice should only be delivered if the adviser believes they are qualified. If they don’t, they must refer their client to someone who is.

If they are qualified, the advice must also consider a client’s likely long-term circumstances. In accordance with Standard 6, the following factors should then be considered:

Superannuation

Super is a big part of financial planning when it comes to having a concessionally-taxed environment to accumulate funds for retirement. Over the last decade, super has also become a common ownership and funding vehicle for life insurance products. This brings several factors into play that must be considered under Standard 6.

Funding insurance from super via a rollover or account debit from a client’s accumulation balance has a clear impact on their retirement savings. This is due to the money lost at the time and the future compounded value of that money at retirement lost through lack of compound growth.

While the personal cash flow benefit of super ownership is appealing, a client must be made aware of how this will impact their cash flow in retirement. This includes regularly considering potential alterations to this strategy, which will help to ensure that the likely long-term circumstance of their retirement isn’t adversely affected.

Estate planning

Life insurance can be a valuable way to facilitate estate-planning outcomes for a client as part of the advice process. However, having a great product and the appropriate sums insured is little value if these proceeds don’t find their way into the hands of the right person, in the right form, at claim time.

Close attention must be paid to the tools at your disposal to ensure that the client’s appropriate wishes are met. These include binding beneficiary nominations, policy ownerships, and claims facilitation for payment of benefits (such as death benefit income streams).

Where specialised advice is required – for example, in setting up a will or a testamentary trust – Standard 6 requires that the client be informed of this and referred to the appropriate legal practitioner.

Tax implications

In terms of life insurance, money flows to the insurer (in the form of premiums) and from them (in the form of claims). Different products and types of ownership (particularly super) will have impacts on tax deductibility and payability.

Under Standard 6, a tax liability created by funding insurance via super must be addressed with the client – for example, as with TPD or the deductibility of premiums in the case of IP insurance held outside of super.

To maximise deductions and minimise potential tax liabilities at claim time, these implications may influence alterations to ownership and funding structures over the long term.

Affordability

As with general financial advice, clients receiving risk advice have finite budgets. The most crucial part of recommending an appropriate insurance solution, therefore, is the client being able to fund it. Regarding Standard 6, this means:

  • helping the client understand what their budget looks like in relation to insurance and
  • considering their priorities when making trade-offs around sums insured and products selected.

When considering the broad circumstances of the client over the long term, the affordability of premiums in the future must also be considered. Overlaying the sustainability of the recommendation helps to demonstrate a risk-management plan that’s there to protect a client over the long term, not just in the present.

Financial goals

Life insurance advice doesn’t happen in a vacuum – from building investments to funding children’s educations to paying down mortgages, clients have a range of commitments and financial objectives.

It’s crucial to help clients understand the appropriate level of insurance for their individual circumstances. This enables them to balance peace of mind with the ability to finance these other important priorities while still being aware of risk exposures that might not be insured.

When it comes to financial goals and aspirations, most people can’t achieve them all. Under Standard 6, prioritising financial goals demonstrates that these broad circumstances have been considered in the advice. It also demonstrates that the client is protected and their priorities are facilitated by the implemented insurance solution.

Summary

In financial advice, managing the ‘what ifs’ is essential to upholding Standard 6 of the Code, and this in turn means managing risk.

Risk advisers must consider these risks when assessing all areas of a client’s financial affairs, considering how they might mitigate them, and advising them on how to do so. This could include insurance products in different forms and amounts.

If we do deliver this advice, we must consider every area of a client’s financial life that their insurance decision touches, from retirement, financial goals and cash flow through to estate planning and tax implications. Financial advice should enhance the client’s position while providing the peace of mind that only adequate planning can.

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Part 2: Sound ethics, good faith

What standards 9 and 10 of the Code mean in practice

Life insurance products in Australia, along with the advice environment, have changed dramatically in recent years. As a result, specialised risk advice has become rarer, yet the knowledge required to provide it has become more specialised.

Therefore, it’s more important than ever that risk advisers giving advice in this area understand these requirements in terms of how they relate to:

  • product recommendations and
  • supporting the development of skills and knowledge.

Standard 9

All advice you give, and all products you recommend, to a client must be offered in good faith and with competence and be neither misleading nor deceptive.

Advisers are expected to fully understand how financial products function and are applied, in order to ensure that all product recommendations are made honestly and without being deceptive or misleading, as required by this standard. Suffice it to say, not knowing the features and uses of different insurance contracts, to take just one example, makes recommending a suitable product in good faith impossible. If a provider identifies a need for advice in a particular area, they must first assess their competency in delivering that advice and refer their client to a more appropriate specialist if they believe themselves not qualified to give it.

Clients must make informed decisions when assessing financial product options. This means advisers must carefully prepare any supporting information for products like modelling and projections to avoid being misleading (even unintentionally).

To avoid misleading clients, it’s important that advisers:

  • include any context (such as assumptions)
  • include any date or modelling shortcomings
  • provide examples of contrary scenarios
  • confirm understanding by asking clients for their interpretation of the data and
  • avoid jargon or overloading clients with data.

Informed consent

The considerations under Standard 9 tie to a central theme of the Financial Planners and Advisers Code of Ethics (the Code): informed consent. For clients to make informed decisions about financial products, they need to be able to interpret information in the correct context and understand what it means for them. If they have done so based on projections or modelling irrelevant to their situation, a client cannot make a truly informed decision about purchasing a financial product.

Standard 10

You must develop, maintain, and apply a high level of relevant knowledge and skills.

Standard 10 emphasises the importance of advisers maintaining a high level of knowledge and skill. Of course, much of this comes from attaining the required continuing professional development (CPD) hours. However, Standard 10 goes further by requiring ongoing competency in the specific areas where advice is being delivered.

This includes staying on top of:

  • product changes
  • legislative changes
  • regulatory changes
  • tax changes, and
  • market/economic changes.

Meeting CPD requirements is just the baseline for ethical professional performance as a financial adviser. Beyond satisfying these, advisers must maintain genuine, up-to-date knowledge in the areas they provide advice. Valuable insights can come from industry resources such as licensees, BDMs, technical teams, peer groups, and professional associations.

Quality recommendations

Together, these factors support high-quality client recommendations. To be presented in genuine good faith, a product recommendation must be based on current, comprehensive knowledge and clearly explained so that a client can make an informed decision about its benefits and risks.

By applying the principles of Standards 9 and 10, delivering ethical financial advice becomes much more achievable.

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