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Risk, Insurance and Superannuation
Construction of a SCALED Statement
of Advice (SOA)
Lecturer: Nidal Danoun
[email protected]
References and Readings
RG90
RG175
Thomson Financial Planning Handbook
Financial Planning in Australia 2019 Essentials Edition, LexisNexis
Corporations Act (Chapter 7)
Overview
SOA provides clear evidence of the value of advice.
The SOA must be developed in a logical and compliant
manner.
Recommendations must be clear, specific and fully
justified.
Appropriate disclosures, disclaimers and warnings must
be included.
Communications must be clear, concise and
appropriate for each particular client.
The 6 steps of the financial planning process
The financial-planning process
Step 1
Step 2
Step 3
Step 4
Step 5
Collect and assess the financial data of the client.
Determine the objectives and goals of the client.
Identify any financial problems that may exist.
Prepare a written plan.
Obtain informed consent and Implement the agreed
written plan.
Establish an ongoing pattern of review. Step 6
Step 1: Collect client data
Life cycle
Each life stage presents differing issues and problems.
There are a number of identified life stages
Savings versus consumption phase
Early family formation
Wealth accumulation phase
Approaching retirement
Post-retirement.
Step 1: Collect client data
Quantitative data
The information in this category includes:
financial data
personal information as to age and investment time horizons
financial objectives.
Qualitative data
The information in this category includes:
goals and objectives
issues and concerns
preconceptions as to the client’s needs in retirement
Steps 2 and 3: Identify goals, objectives, issues, financial situation
If, after analysis, some goals are unattainable or not
obtainable within the timeframe the client has set, then
the financial adviser must work with the client to
determine trade-offs
prioritise the goals.
Steps 2 and 3: Identify goals, objectives, issues, financial situation
Assumptions
The financial adviser will have to make certain assumptions.
The financial adviser must ensure that the client understands
the need for these assumptions and how they will impact the
advice being given.
These assumptions will need to be tested at each annual
review.
Step 4: The preparation of a written plan
Most SOAs have the following format.
a personalised and complying covering letter
a standardised and complying cover page
an Executive Summary that provides the client with a general
understanding of the actions recommended and a summary of
expected outcomes
a table of contents that clearly outlines the structure of the SOA.
The covering letter should
be written on letterhead with contact information (address,
telephone number, email, etc.).
include the name of the licensee and its licence number and ABN .
be signed by the financial adviser, stating that he or she is an
Authorised Representative (or Representative) of the Licensed
Dealer.
Step 4: The preparation of a written plan
Cover page
All SOAs require a cover page that provides the
following information:
that it is a Statement of Advice
the name of the recipient
the date the SOA becomes effective
the name and contact details of the financial adviser who
provided the SOA
the name and contact details of the licensee who authorised
the SOA
a statement that the SOA is private and confidential.
Table of Contents
This page clearly outlines the structure of the plan and can be used
in future to locate specific sections of the plan.
All pages should be numbered, even those in appendices.
Use major headings so that the plan does not seem to be overly
complex.
The body of the SOA usually has six distinct parts:
The basis for advice
The recommendations
An implementation schedule
Fee disclosures and disclaimers
Client sign-off with authority to proceed
Appendices including product disclosure statements.
Step 4: The preparation of a written plan
Executive summary
The Executive Summary should be no more than two pages in length
Constructing a Statement of Advice
Step 4: The preparation of a written plan
Cash flow and balance sheet
Risk tolerance assessment
Assumptions
Concerns and issues.
The recommendations statement of strategy
The client needs to see a clear statement of the strategy
behind the recommendations.
The strategy must be flexible enough to deal with the likely
changes of circumstances.
Step 4: The preparation of a written plan
Risk Management should include strategies for coping
with:
the death of the client(s) and loss of financial stability for
their dependants
accidents causing permanent and total disablement to the
client(s) or a dependant
loss of the ability to earn an income due to illness or accident
the costs associated with a traumatic illness
the need for private hospital cover.
Step 4: The preparation of a written plan
It is important to discuss strategies for risk
management, such as:
avoidance or elimination of the risk
often not possible.
management and control
to some extent possible
can lower insurance premiums.
self-insurance
transfer of the risk.
Step 4: The preparation of a written plan
Taxation
While no strategy should be recommended simply for
tax reduction purposes, a financial adviser must
thoroughly understand the tax implications of the
recommended strategy and product selected.
Wherever a discussion of taxation occurs, the financial
adviser must clearly inform the client that he or she is
not a tax adviser.
Estate Planning
Other advice needs
Step 4: The preparation of a written plan
Investment recommendations
Investment recommendations first need to be generic
and should move from the most tax-effective (usually
superannuation) to the least tax effective (usually
managed funds).
Each recommendation must be referenced to the
client’s risk tolerance asset allocation or the asset
allocation agreed to by the client.
Step 4: The preparation of a written plan
Within the investment strategy, it is important to
consider the most appropriate investment vehicles (tax
structures). For example:
holding assets personally (direct investments)
unit trusts
insurance bonds
superannuation-based investments
retirement and non-retirement income streams.
For most clients, investment recommendations will be a
mix of all of the above.
Step 4: The preparation of a written plan
Superannuation, retirement planning and social
security issues
In relation to retirement planning, there are both financial
and emotional considerations.
It is the role of the adviser to look at the client holistically and
view retirement first as a lifestyle choice.
Specific product recommendations
After the generic discussion on strategies, specific products
must be recommended.
It is necessary to clearly identify the characteristics of each
product, the product provider and how the product matches
the client’s risk profile and financial needs.
Each and every product should be fully justified.
Step 4: The preparation of a written plan
Post-implementation cash flow
The client must be able to see that they can afford to
implement the recommendations.
A post-implementation cash flow will show the client that
he or she still has enough money to manage daily living
requirements, even after implementing the
recommendations.
Fees and commissions disclosure of remunerations
The regulatory environment and best practice require that a
financial adviser disclose all fees and commissions to the
client in dollar and percentage terms.
Disclosure of capacity
The financial adviser reminds the client what areas of
financial advice he or she may provide and the types of
products and services he or she can offer.
Step 4: The preparation of a written plan
Disclaimers
act as a warning as to how the information provided in the
plan can be used and that it is specific to the client and not
for general use. Highlight what the client can rely.
are used to avoid possible legal action by making the client
aware of the scope of the advice.
Monitor and review process
This needs to be personalised for the specific client.
The client needs to know what the annual review process will
be, what will be discussed, and the cost.
Implementation schedule
This schedule is a detailed statement of all actions, including
the completion of forms, the drawing of cheques and the
making of appointments that the client and the financial
adviser need to undertake, in order to implement the plan.
Step 4: The preparation of a written plan
Step 5: Implement the agreed plan
Authority to

proceed to be signed buy the client(s)
Appendices should be strictly limited.
They should contain the financial worksheets that back up
the recommendations in the SOA and summary graphs.
The SOA needs to be signed and dated by the client(s)
Step 5
The implementation of the recommendations can make
or break the relationship with the client.
Constructing a Statement of Advice
Step 6: Review the plan
Scheduled reviews are essential to allow for the
changing nature of the client’s circumstances and that
of the external environment.
Appropriateness of exiting strategies
Review whether the client (s) remain on target to achieve the
goals and objectives
The adequacy of the client’s insurance cover should be
reviewed.
Where additional actions need to be taken by the
client, a new SOA needs to be issued.
Remember ! – Disclosure documents required in
respect of the provision of financial products
Statement of advice (SOA):
An SOA must include:
the name of the party providing the advice
a statement setting out the advice
the reasoning or basis that led to that advice
the remuneration and other benefits received by the provider of the advice
all conflicts of interest that may affect the advice.
Meeting the Best Interest Duty
Remember ! – The legal obligations relating to
the provision of financial advice
Best interest duty and safe harbour provisions:
The best interest duty mean that a planner has 4 separate duties – a duty to:
act in the client’s best interests
provide advice that is appropriate
provide an advice warning
prioritise the client’s interests in the event of a conflict.
Best interest duty and safe harbour provisions:
Act in the client’s best interests:
This process should involve identifying and assessing the:
subject matter of the advice sought by the client.
scope of the advice required.
expertise of the advice provider.
financial products that can be recommended.
Remember ! – The legal obligations relating to
the provision of financial advice
Best interest duty and safe harbour provisions:
Act in the client’s best interests:
Provide advice to a client that would leave them in a better position.
This process should involve identifying and assessing the:
client’s relevant circumstances and disclosing this through instructions.
Best interest duty and safe harbour provisions:
Prioritise the client’s interests in the event of a conflict:
Advice provider must prioritise the interests of the client if the advice provider knows
that there is a conflict between the interests of the client and the interests of the adviser.
Remember ! – The legal obligations relating to
the provision of financial advice
Best interest duty and safe harbour provisions:
Provide APPROPRIATE advice :
Advice must only be provided if it would be reasonable to conclude that the advice is
appropriate to the client.
Advice and recommendation meets the clients GENUINE goals and objectives
Client in a better position
Better position DOES NOT have equate perfect position
Address the client special circumstances
Address the risks associated with the advice and how they can be mitigated
BEST PRCATICE highlight alternatives
Provide an advice warning:
Determining whether the client has provided all relevant information needed to enable
the adviser to provide advice that is in the best interests of the client.
Summary & Key elements
The SOA provides details of:
the basis for the advice
the rationale behind the advice
a restatement of the advice, its benefits and
drawbacks
benchmarks that the
client can use to measure
progress towards goal
achievement
the cost of
implementation of the
plan and any other
benefits the financial
adviser may receive
a detailed implementation plan.
Key components of an SOA:
covering letter
contents page
cover page
executive summary
scope of advice
important information about the client
what the client wants to achieve
the advice to the client.
Other disclosure requirements:
The cost of the advice and how the planner is paid.
Specific disclaimers.
How to proceed.
Appendices
Insurance Advice
Commission CP 245
In Consultation Paper 245 Retail life insurance advice reforms (CP
245) we proposed to implement the retail life insurance advice
reform package, announced by the Government in November 2015
(reform package), by making an ASIC instrument setting out:
(a) the maximum levels of upfront and ongoing commission
payments permitted in relation to life insurance products; and
(b) (b) the amount of upfront commission to be repaid to life
insurers under clawback arrangements.
Source: ASIC
Insurance Advice
Commission Background
The reform package followed ASIC’s Report 413 Review of retail life
insurance advice (REP 413), published in October 2014, and the
John Trowbridge report, Review of retail life insurance advice,
published in March 2015. These reports identified the need to
better align the interests of advisers and consumers in the life
insurance sector. As part of its response to the Financial System
Inquiry, the Government announced that it would support a reform
package in relation to life insurance advice put forward by industry.
Source: ASIC
Insurance Advice
Commission REP 527
The reform package specified the maximum upfront and ongoing
commission amounts, and included that:
(a) the level of commissions would be set at a maximum of 60% of
the premium in the first year of the policy; and
(b) an ongoing commission for policy renewals would be set at a
maximum of 20% of the total of the premium paid for the renewal.
Source: ASIC
Insurance Advice
Commission REP 527
Initially was proposed,a transition period of two years would apply,
setting the maximum upfront commission levels as follows:
(a) from 1 July 2016—80% of the premium in the first year of the
policy;
(b) from 1 July 2017—70% of the premium in the first year of the
policy; and
(c) from 1 July 2018—60% of the premium in the first year of the
policy.
Source: ASIC
Insurance Advice
Commission REP 527
The reform package specified the maximum upfront and ongoing
commission amounts, and included that:
(a) the level of commissions would be set at a maximum of 60% of
the premium in the first year of the policy; and
(b) an ongoing commission for policy renewals would be set at a
maximum of 20% of the total of the premium paid for the renewal.
Source: ASIC
Insurance Advice
Commission REP 527
The reform package also prescribed ‘clawback arrangements’, by
which a certain portion of the upfront commission is paid back to
the life insurer by the financial adviser. Clawback occurs in the first
two years of a policy if it is cancelled or not continued other than
because a claim is made under the insurance policy or because
other prescribed circumstances exist.
Source: ASIC
Insurance Advice
Commission REP 527
The Government indicated in its November 2015 announcement
that, from 1 July 2016, the following clawback arrangements would
apply under the reform package:
(a) When a policy lapses or the premium decreases in the first year
of the policy, 100% of the commission, or the decrease in
commission, on the first year’s premium would be clawed back.
(b) When a policy lapses or the premium decreases in the second
year of the policy, 60% of the commission, or the decrease in
commission, on the first year’s premium would be clawed back.
Source: ASIC
Insurance Advice
Life Insurance Remuneration Act
The Corporations Amendment (Life Insurance Remuneration
Arrangements) Act 2016 (Life Insurance Remuneration Act), which
commences on 1 January 2018, gives effect to the reform package
by removing from the Corporations Act 2001 (Corporations Act)
the exemption from the ban on conflicted remuneration for
commissions paid on certain life insurance products, and by
allowing ASIC to make an instrument setting out maximum
commissions and clawback arrangements.
Source: ASIC
Insurance Advice
Life Insurance Remuneration Act
The scope of the Life Insurance Remuneration Act is largely the
same as the reform package, except:
(a) the reforms have been extended by the Corporations
Amendment (Life Insurance Remuneration Arrangements)
Regulations 2017 (Life Insurance Remuneration Regulations) to
apply to commissions associated with the direct marketing or
direct sale of life insurance, as well as advised sales of life
insurance; and
(b) (b) the commencement date of the legislation is now 1 January
2018 and, therefore, all the transition dates have been updated
(see Table 1).
These updated dates are reflected in the instrument.
Source: ASIC
Insurance Advice
Life Insurance Remuneration Act
Source: ASIC