We have compiled a series of steps that makes sense of the
"clear, concise and effective" requirement for Statements
of Advice (SOAs) in practice. This is based on our experience with
hundreds, if not thousands, of SOA reviews.
6. Provide specific and detailed recommendations
When setting out your specific recommendations, make sure that
you include all important aspects of the advice. Not only is this
good practice, it's also a legal requirement that you set out
the advice in "the level of detail ... a person would
reasonably require for the purpose of deciding whether to act on
the advice". For example, if you are recommending income
protection cover, you need to specify the amount of cover, the
waiting period, the benefit period and, of course, the policy and
insurer that has been recommended. You also need to specify whether
you have recommended cover on an agreed or indemnity value basis
and with level or stepped premiums.
7. Explain the reasons underlying the recommendations
Similarly, it is also a legal requirement that you explain
"the basis on which the advice is or was given", again,
in "the level of detail ... a person would reasonably require
for the purpose of deciding whether to act on the advice".
Using the same income protection example, it is not enough to
simply explain why you have recommended income protection cover.
You also need to explain the basis of all important aspects of your
advice; why you have recommended the amount of cover, the waiting
period, the benefit period, as well as the particular policy and
insurer. You also need to explain why you have recommended cover on
an agreed or indemnity value basis and with level or stepped
8. An SOA shouldn't list client's decisions
You should ensure that your SOA sets out the recommendations you
give your client, and is not a record of your client's
decisions in relation to the advice. In practice, this means that
if, for example, your needs analysis identifies that a client
requires life cover of $1,000,000, you should recommend life cover
of $1,000,000 in the SOA, even if you are certain that the client
will only proceed with obtaining a lower amount of cover. A client
can make whatever decision they want – the SOA should
demonstrate that, whatever decision the client makes, it was
informed by sound advice.
9. Explain risks associated with the advice
An SOA must also clearly explain any risks associated with the
advice, using language that your client will understand. We
regularly see SOAs that contain inadequate risk disclosure; either
because important risks of the advice have not been included in the
SOA, or because the risk disclosure has not been tailored to the
advice or the client. No doubt, you will have also had discussions
with your client regarding the risks of the advice. In addition to
keeping detailed file notes of these discussions, you should also
refer to what was discussed with your client in the SOA. This is an
important risk management strategy. In the event of a dispute about
risk disclosure, it will be easier to demonstrate that you
adequately disclosed the risks to your client.
10. Include best interests considerations
Finally, it is good practice to explain in the SOA why your
advice is in your client's best interests and why your client
is likely to be "better off" as a result of your advice.
If you have followed our tips above, this should be a relatively
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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Partner Tessa Hoser and Associate Livia Li discuss the lending and secured finance environment in Australia.
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