CHAPTER 2

1. CHAPTER 2 Client-AdviserRelationship

2. Introduction • A vast amount of information is available to clients, but an adviser’s judgement is needed. • Building a trusting relationship depends on conscientious work and communication skills. • The financial planning process has six steps. • Comprehensive data-gathering is crucial. • Investment strategies will depend on the client’s tolerance for risk.

3. Information Explosion • A vast amount of information is available to clients • Internet / Websites • Email • The information may not be reliable • Currency • Quality • Bias • Relevance • The adviser’s expertise will be required • Filter • Interpret • Educate

4. The adviser’s expertise will be required • An adviser’s expertise is required for many reasons, including: • To document a snapshot of current situation • To help sets goals for future financial health • To ensure tax efficiency • To sort through the information overload • To provide technical expertise • To develop a plan for financial independence in retirement

5. The Client–Adviser Relationship is Crucial • A climate of trust must develop from outset. • Advising requires a variety of skills, including • — communication, • — technical. • Advisers must have a reasonable basis for their recommendations (KNOW YOUR CLIENT AND KNOW YOUR PRODUCT; Sec 945A & B FSRA). • An adviser’s duty requires that all recommendations are appropriate to the investment objectives, risk profile, financial position and all the needs and circumstances of client.

6. The Client–Adviser Relationship is Crucial • Advisers have a fiduciary duty to be objective, to act in the best interest of client and to be honest, efficient and fair. • Advisers assist clients: • — to identify goals • — to making informed decisions about their financial affairs • —t o protect their incomes and assets and to use them to best advantage • — to choose investment and insurance products that suit their needs and circumstances.

7. Financial Planning Process • A financial plan documents • — where a client is now • — where they want to go • — how they will get there • A financial plan considers • — relevant timeframes relating to goals • — an analysis of client tolerance for risk

8. Financial Planning Process • Planning must be collaborative • — Client & adviser must determine whether and how an individual can meet stated life goals • — The client position, the recommendations and implementation must be discussed, negotiated and agreed • — The client is ultimately responsible for the success of the plan; proper management of financial resources is needed

9. Financial Planning Process • Recommendations must have a reasonable basis • — For holistic advice, the total client position must be evaluated • — Account must be taken of the socio-economic environment, legal issues, client personality and financial status as well as any immediate concerns • — Both financial and non-financial issues that will impact on overall outcomes should be considered if client goals and objectives are to be fulfilled

10. Financial Planning Process • A holistic financial planning process involves six steps • Step 1 — Gather data. The collection and assessment of relevant financial and personal data– including the client’s ability to tolerate financial risk • Step 2 — Analyse the data and determine the objectives and goals of the client • Step 3 — Identify financial problems

11. Financial Planning Process • Step 4 — Prepare the Statement of Advice (SOA); a written plan containing options and recommendations • Step 5 — Make recommendations and implement the plan • Step 6 — Monitor and periodically review the plan

12. Step 1. Data Gathering • Adviser must give a Financial Services Guide (FSG) to a person as soon as practicable once it is clear they may become a client • FSG should include • — Identity of AFSL holder and authorised representative status • — Services available • — Associations • — Fee disclosure • — Dispute resolution processes

13. Step 1. Data Gathering • Data collection is the critical first step • — Quantitative data • Income and expenditure, assets and liabilities • — Qualitative data • Feelings, hopes, career prospects, ambitions, relationships, attitudes to risk

14. Step 1. Data Gathering • Data collection instruments are many and varied, but the information collected will include: • — Personal detail • — Current situation • — Financial position • — Goals and objectives • — Risk tolerance • — Insurance and risk management issues • — Investments • — Superannuation and retirement • — Social security • — Estate planning

15. Step 2. Analysis and Strategy Formulation • Need to determine: • Current cash flow • — Surplus (savings capacity) • — Deficit (debt or asset sales) • Net worth — Statement of assets and liabilities • Goals • — What assumptions about the future are realistic? • — What goals are achievable?

16. Step 2. Analysis and Strategy Formulation • Establish risk tolerance • Review risk profile instrumenteg www.finametrica.com.au • Categorise client as a risk profile type • Relate risk profile to asset allocation • Consider principles of behavioural finance

17. Step 3. Identify problems • Problems may include: • Inadequate insurance • Inadequate retirement saving • Spending exceeding income • Excessive high interest and non-deductible debt, such as credit card debt • Poor financial administration and record keeping • Tax inefficient ownership of assets • Structures that do not maximise social security entitlements

18. Step 4. Written SOA • Test scenarios and document conclusions and recommendations regarding • Insurance and estate planning • Adequacy of retirement savings program • Asset allocation (consistent with risk profile) • Investment vehicles • Investment products • The Statement of Advice is a comprehensive document with explicit recommendations to meet client goals.

19. Step 5. Implementation • Critically important phase • Cements future relationship with client • Implementation schedule designed and documented • Client service agreement signed • Summary of client-adviser agreement — confirms actions as specified in written SOA

20. Step 6. Monitor and Review • Agreement about the terms of the ongoing relationship with the client • Necessary to ensure currency and appropriateness of plan for client needs • Completes the planning process • Frequency of review depends on many factors — eg how often, size of portfolio, market changes • Generally annual reviews are recommended

21. Summary • A vast amount of information is available to clients, but an adviser’s judgement is needed. • Building a trusting relationship depends on conscientious work and communication skills. • The financial planning process has six steps. • Comprehensive data-gathering is crucial. • Investment strategies will depend on the client’s tolerance for risk.