CHAPTER 2 Client-Adviser Relationship. Introduction A vast amount of information is available to clients, but an adviser’s judgement is needed. Building.

CHAPTER 2

Client-AdviserRelationship

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.

Information Explosion

• A vast amount of information is available to clients

o Internet / Websites o Email

• The information may not be reliableo Currencyo Qualityo Biaso Relevance

• The adviser’s expertise will be requiredo Filtero Interpreto Educate

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

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.

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.

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

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

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

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

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

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

Step 1. Data Gathering

Data collection is the critical first step

— Quantitative dataIncome and expenditure, assets and liabilities

— Qualitative dataFeelings, hopes, career

prospects, ambitions, relationships, attitudes to risk

Step 1. Data GatheringData 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

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?

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

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

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.

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

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

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.