[OPINION] What is ‘suitable’ life advice?

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The FMA has flagged suitability of advice is something it will focus on. Steve Wright digs into the issue to explore what suitable advice means for risk advisers.

Tuesday, August 13th 2024, 7:29PM 1 Comment

by Steve Wright

In their latest FAP monitoring insights report, the FMA said they were disappointed some advisers did not effectively demonstrate how the advice they gave a client was suitable.

The FMA have flagged ‘suitability of advice’ as an issue for future supervision focus. FAPs and advisers would be wise to take time to understand what is required to get this right.

What might ‘suitable advice’ mean in practice?

Code standard 3 requires that financial advisers give advice that is ‘suitable’, having regard to the nature and scope of the financial advice. In addition, Section 431L of the FMC Act requires that advisers must exercise the due care, diligence and skill that a prudent adviser would exercise in the same circumstances.

These requirements effectively say… ‘you and the client must agree on the advice you will be giving them, then you must diligently give them that advice with the necessary competence and skill, and, you will be judged by the standard of a prudent adviser’.

A prudent adviser is one with the necessary knowledge and skill and who diligently applies that knowledge and skill to provide suitable advice and recommendations.

Actual ‘suitability’ of advice cannot be determined by examining process, substantive advice can only be determined through a detailed and objective assessment by persons with the necessary knowledge and skill to be a prudent adviser.

Suitability of advice is unlikely to be the same for each client, so is there a ‘checklist’ useful for enabling consistently suitability of advice?

I think the following steps (all of which must be consistent with the nature and scope of advice agreed with the client) may help ensure suitability of life insurance advice for clients. I’m thinking particularly about new clients here, but I think these steps probably also work for subsequent advice given to existing clients.

1. For typical life and health advice, suitable advice will depend largely on the client’s actual circumstances, objectives and needs.  This means properly getting to know the client (or update with changes in their circumstances) with a suitable fact find process.
2. Properly knowing the client, and the necessary technical knowledge (advice technical knowledge, not IT technical knowledge) and skill, will allow a suitable needs analysis, and identification and quantification of client risks.
3. The necessary knowledge and skill will allow suitable advice on avoiding, limiting or transferring risks to an insurer.
4. The necessary knowledge and skill, understanding of the client’s needs, and of insurance products and product solutions, will allow suitable assessment of insurance types required and their sums insured.
5. The necessary product knowledge will allow appropriate product recommendation, or more likely, a combination of products (and their providers).

Advisers must know their products, their policy terms and how to use them, and make suitable product comparisons (relevant to the client’s specific circumstances and needs) when necessary.

Giving advice that is suitable is more than just recommending the right insurance products and sums insured to indemnify against the risk (Life cover for death risk for example): ‘Suitability’ of advice is also likely required for other necessary advice and recommendations, such as:

• Product parameters selected and options chosen or declined;
• Premium type;
• Policy structure and ownership;
• Indexing; and
• Any number of additional things, all of which will be impacted by the agreed nature and scope of advice, and the client’s circumstances and needs.

Will anything less be regarded as the actions of a ‘prudent’ adviser?

On top of this, all the advice must be properly documented and understood by the client.

You’ll notice I’ve made a lot of reference to ‘necessary knowledge and skill’. Knowledge is critical. I don’t believe suitable advice can be given without the knowledge and skill a prudent adviser would be expected to possess. 

Something I’m less clear about is ‘demonstrating’ suitability as required by the FMA. Perhaps this is something that can be achieved by proper explanation and justification for recommendations, in a Statement of Advice (SOA).

In other cases, for instance, comparison of products, suitability might be demonstrated by other means, the evidence of actual comparison, for example.

Whatever the case, advisers and FAPs will need to consider how they draft the content of their SOA and what they include in the client file, to ensure they are able to demonstrate ‘suitability of advice’.

I have questions about what is not ‘suitable’, but I’ll leave that for another time.

Finally, one could argue we’ve been good at selling (life and health insurance) now we must become good at giving advice.

Steve Wright has qualifications in economics, law, tax, and financial planning. He has spent the last 20 years in sales, product, and professional development roles with insurers. He is now independent and helping advisers mitigate advice risk through training and advice coaching.

Tags: FMA Life insurance Opinion Steve Wright suitability

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