When a client comes to you with one financial question, do you need to take them through a comprehensive advice process?
Not necessarily.
New Zealand’s principles-based regulatory regime already gives financial advisers considerable flexibility over the nature and scope of the advice they provide. But advisers have not always felt confident using that flexibility, particularly when deciding how far they need to look beyond the specific advice a client has asked for.
Financial Advice New Zealand (FANZ) is seeking to provide greater clarity through its proposed Common Practice Standard: Nature and Scope of Advice. The proposed Standard does not change the law or lower the bar for financial advice. Instead, it aims to give advisers greater confidence to make use of the flexibility the regime already allows.
What does that mean for you?
Potentially, it means you don’t need to default to a comprehensive advice process every time a client wants help with a specific financial decision.
For example, a client might want advice about their KiwiSaver fund, how much life insurance they need or a particular lending decision. Depending on the circumstances, you may be able to focus your engagement on that particular need.
But a narrower scope doesn’t lower the standard of advice. Your advice still needs to be suitable, and the client needs to understand what you are – and aren’t – advising on.
How much do you need to know?
FANZ’s proposed guidance distinguishes between the information you need to provide advice on the matter in scope and a broader, but less detailed, view of the client’s circumstances.
In other words, you need sufficient depth to provide suitable advice on the issue you are advising on. Beyond that, you need enough information to identify whether your recommendation could create foreseeable harm elsewhere.
That doesn’t automatically mean completing a full fact-find.
FANZ’s consultation material gives the example of a client asking whether they are getting the most out of their KiwiSaver. The adviser gathers the information needed to advise on KiwiSaver, but also takes a broader look at matters such as debt and short-term cash needs. If the client has significant high-interest credit card debt, directing additional money into a locked-in investment could potentially leave them worse off.
The adviser doesn’t necessarily need to provide comprehensive debt advice. But they shouldn’t make a recommendation without considering an issue that could materially affect whether that recommendation is appropriate.
So where is the boundary?
This is where professional judgement becomes important.
Before providing advice within a limited scope, the proposed Standard asks you to consider whether the limitations agreed with the client are appropriate and whether proceeding could expose them to foreseeable harm outside that scope.
If something relevant emerges, you might:
- Discuss it with the client and agree to broaden the scope.
- Refer the client to someone with the appropriate expertise.
- Decide not to proceed with the advice.
Simply telling the client what your advice doesn’t cover isn’t enough if something outside the scope could materially affect the advice you are giving. The purpose of looking beyond the immediate scope isn’t to turn every engagement into a comprehensive one – it’s to identify whether there is a reason you shouldn’t proceed as planned.
What could you do differently?
While the Standard is still only a proposal, it provides a useful prompt to consider how you currently approach advice.
When a client comes to you with a relatively contained financial question, do you automatically put them through your usual full advice process? Or could you appropriately tailor the process to the advice they actually need?
If you provide advice within a narrower scope, consider whether you can clearly demonstrate:
- What the client asked you to advise on.
- What was outside the agreed scope.
- That the client understood those boundaries.
- That you gathered enough information to provide suitable advice.
- That you considered whether the limitations could create foreseeable harm elsewhere.
- Why you were comfortable proceeding – or what you did when you weren’t.
And remember, a narrower engagement doesn’t reduce the level of competence required. You still need the knowledge and skill necessary to provide suitable advice on the matter in front of you.
Why this matters
Used appropriately, the flexibility already available under the regime could allow advisers to provide advice that is better matched to what a client actually needs – making professional advice simpler and more accessible for people who may not need, want or be able to justify the cost of a comprehensive advice engagement.
Have your say
The Common Practice Standard: Nature and Scope of Advice is currently a consultation draft.
We encourage advisers to read the consultation document and consider how the proposed approach would work in practice. Does it give you greater confidence to make use of the flexibility already available? Are the boundaries clear and workable?
FANZ is inviting feedback from the profession, so if you have a view, consider making a submission. This is your opportunity to help shape how the final Standard works in practice.