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Financial advisory
RES5Financial Advisory Services✓M5 — RES5 — Rules, Ethics & Skills for Financial Advisory Services
The cornerstone of the sales/advisory process is that a financial adviser must have a reasonable basis for any recommendation on an investment product made to a person who may reasonably be expected to rely on it. This flows from Section 27 of the FAA, and the detailed standards sit in the Notice on Recommendations on Investment Products [FAA-N16] (issued under s.58 FAA; effective 1 Jan 2012; last updated 17 Sep 2021). A reasonable basis means the adviser gave due consideration to the client's investment objectives, financial situation and particular needs, and — for a Specified Investment Product (SIP) — the client's knowledge or experience in that product. FAA-N16 requires compliance across (a) Know Your Client (KYC), (b) needs analysis, and (c) documentation & record keeping, with a knowledge gate (CKA for unlisted SIPs, CAR for listed SIPs) layered in. Disclosure is governed by the Notice on Information to Clients and Product Information Disclosure [FAA-N03] (Sections 25 & 26 FAA): disclosure must be clear, adequate and not false or misleading. A representative must comply with any requirement imposed on the financial adviser when acting on its behalf.
10 sections~6 min read
The cornerstone of the sales/advisory process is that a financial adviser must have a reasonable basis for any recommendation on an investment product made to a person who may reasonably be expected to rely on it. This comes from Section 27 of the FAA (extended to exempt FAs and appointed/provisional representatives by Sections 23(4) and 37), and the detailed standards are in the Notice on Recommendations on Investment Products [FAA-N16] — issued under s.58 FAA, effective 1 January 2012, last updated 17 September 2021.
A reasonable basis means the adviser gave due consideration to the client's investment objectives, financial situation and particular needs; and where the product is a Specified Investment Product (SIP), also to the client's knowledge or experience in that product. FAA-N16 requires compliance in relation to: (a) know your client, (b) needs analysis, and (c) documentation and record keeping — with the CKA/CAR knowledge gate layered in for SIPs.
A representative must comply with any requirement imposed on the financial adviser when acting on its behalf. Breach of FAA-N16 is an offence under s.58(5) FAA — a fine up to $25,000 (and, for a continuing offence, up to $2,500 per day after conviction).
Under FAA-N16 the adviser must take reasonable steps to collect and document client information before recommending, including:
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The adviser must highlight in writing that the information given is the basis for the recommendation and that inaccurate/incomplete information may affect suitability. Prior information may be relied on only if the client confirms at the time of transaction that there are no material changes; for execution-related advice the profile is updated at least annually. A digital advisory platform may skip some of this (para 11A) if the process is fully automated, screens out unsuitable clients, resolves inconsistent answers, gives a risk-disclosure statement, and is limited to qualifying CIS units.
Needs analysis (s.27 FAA): the adviser analyses the information to identify a suitable product, considering the product's nature, key risks, investment tenor, fees and liquidity. If no suitable product can be identified, the adviser must tell the client. Where a client declines to give information, declines the recommendation (choosing an unrecommended product), or does not want any recommendation, the adviser may proceed but must document the decision and highlight in writing that ensuring suitability is now the client's responsibility — captured before the client signs the application form or consents to dispose of a product.