Ethics and Professionalism in Financial Advice
SMSF Premium Solutions Pty Ltd (SMSF Premium) is an independently licensed AFSL located in a regional area.SMSF Premium’s advisers are strong advocates for the use of SMSFs to enable clients to manage their own retirement savings. Its three financial advisers are Bob Danilo, Sara Pham and Phil Rogers.The firm has long-established referral relationships with other professionals in the community, including the local mortgage broker.
BobDanilo(61) established the business 25 years ago and went into partnership with Sara Pham(47) 10 years ago.
Bob and Sara are the principals and owners of SMSF Premium,employing financial adviser Phil Rogers (42) and a client support officer,Alex Petrov (21). They do not employ a para planner as Bob and Sara feel they better tailor their Statements of Advice (SOAs) by preparing them themselves.
Bob started his career as a stockbroker and now has 30 years’ experience as a financial adviser. Bob has a well-established client base.His clients range in age from 55 to 80 years and are mostly self-funded retirees and some small-to-medium-sized business owners. Bob has a preference for direct equities and most of his clients are invested in diversified direct share portfolios within an SMSF structure. Bob looks after his existing clients while any referrals for new clients go to Sara or Phil.
Sara has 20 years’ experience as a financial adviser. Her clients range in age from 30 to 55 years, and include local professionals and some of the children of Bob’s clients. Sara started her career as a real estate agent before becoming a financial adviser. She has a particular interest in assisting clients who want to invest in property via an SMSF structure.
Phil has 10 years’ experience as a financial adviser. He has been employed by SMSF Premium for the past two years. Before joining the firm, Phil was employed by a large, institutional licensee and was supported by a client service and para planning team. Phil enjoys working at SMSF Premium but has had to adapt to being more hands-on with client administration.
Alex is the client support officer and is responsible for general office administration, including scheduling meetings and updating and maintaining client records in the customer relationship management (CRM) system.
Bob and Sara have engaged you, a compliance specialist, to conduct an audit of their client files. With the commencement of the FASEA Code of Ethics from 1 January 2020, SMSF Premium wants to ensure they are complying with the Standards and Values of the Code and to identify any areas for improvements.You will meet individually with each of the three financial advisers to review their client files.
Your first meeting is with Bob. The file you have selected to review is for his client Dorothy Smith who is 75 years of age.Dorothy has been a client of Bob’s for many years. Dorothy’s late husband, Arthur, who was a long-term friend of Bob’s, passed away three years ago. Dorothy is now the sole director of the corporate trustee of her SMSF. The last ongoing advice meeting between Bob and Dorothy occurred last month. There is a brief file note confirming that minor portfolio changes were implemented but no other detail was recorded. You notice there is a risk profile on record for Arthur from some years ago but you cannot locate any record of a risk profile for Dorothy. In fact, the file notes for Dorothy are very brief and there seem to be large gaps between contact in the period since Arthur died.
You ask Bob to tell you about Dorothy, mentioning the issues you have noted.
Ah, yes —Dorothy. I’ve known Dorothy and her late husband Arthur for many years —lovely people. There was never a need to do a formal risk profile with Dorothy because I know she is a conservative investor. Arthur always made the decisions about their finances and Dorothy really isn’t interested in the details. Dorothy just follows my advice; she doesn’t like reading too much paperwork. We mainly discussed her family and holiday plans which may be why the file note is on the brief side. Alex sat in on the meeting and he should have made sure that any notes were uploaded.Why don’t I just write up the file note now as I recall all the details?
You mention that it looks like there was a gap of over two years with no record of contact with Dorothy.
Bob looks puzzled and replies:
Yes, Dorothy was not well for a while and cancelled her meeting last year.I suppose Alexonly got around to rescheduling it recently. I didn’t realise she hadn’t been in for two years, though.
(a) Examine how perception bias may have influenced Bob’s ethical decision-making in his dealings with Dorothy.
(b) Analyse how Bob’s conduct complies with Standard 4 and Standard 5 of the FASEA Code of Ethics.
(c) Discuss how Bob’s conduct complies with the value of Trustworthiness.
Support all your answers by reference to the case study facts and research.
Your next meeting is with Sara. You have requested the file for her client, Lachlan, aged 30, whose parents are long-term clients of Bob. Lachlan first came to see Sara a couple of years ago.
You ask Sara to tell you about Lachlan:
Lachlan came to see me because he was very keen on investing in property and he had heard that he could use his superannuation for this purpose. He bought his first apartment in his mid‑twenties which performed very well, and he wanted to secure another property while market conditions were favorable. I advised him to set up an SMSF and take out a limited recourse loan to invest in another property. He was able to snap up a well-priced apartment in a prime location.
You note that the SOA included modelling based on Lachlan’s circumstances at the time. There is a general statement that the property could be sold in future if Lachlan’s circumstances changed, but there was no further detail or modelling of any alternative scenarios. There was also limited information about the responsibilities of a trustee of an SMSF.You ask Sara about these issues and she explains:
Lachlan came to me wanting to use his super to buy a property and declined advice on any other areas. He said that he didn’t believe his circumstances would change any time soon. I did mention the responsibilities of being an SMSF trustee, but Lachlan will be fine just managing the property. It’s hard to go wrong with bricks and mortar.
In reviewing the file, you have located a series of emails which show that Sara discussed Lachlan’s suitability for the loan with Melanie, the local mortgage broker. Sara and Melanie had a remunerated referral relationship which was disclosed by both parties in client documentation. Melanie had told Sara that Lachlan’s surplus income may not be sufficient to support the loan application. On hearing this from Sara, Lachlan was disappointed, saying:
Sara, I don’t want to miss out on buying this property; can I just state on the application that I am living at home with my parents? That way my expenses would be a lot lower.
Yes, if we produce a new cash flow statement on that basis, that should solve the problem. It’s just a formality anyway.
You press Sara as to whether the documents she submitted to the mortgage broker represented Lachlan’s true financial position at the time. She hesitates before answering:
Lachlan came to me wanting to buy this property. I knew he had a secure job and,anyway, his parents could help him out financially if he ever got into a tight spot. I’ve had a couple of reviews with Lachlan since then and we haven’t needed to update the advice, everything is going well for him.Melanie and I often refer clients to each other and I’ve been able to help a number of clients get into the property market in recent years through this strategy.
(a) Explain how ethical fading may have affected Sara’s ethical decision-making.
(b) Identify and discuss the ethical framework that the client, Lachlan, would be using in his decision‑making.
(c) Examine how Sara’s conduct would be assessed under Standards 3 and 6 of the FASEA Code of Ethics.
(d) Discuss whether Sara’s advice to Lachlan meets her best interests obligations under Standard 2 of the FASEA Code of Ethics
Support your answers by reference to the case study facts and research.
Your last meeting is with Phil. You review the file of Alan and Joy who are in their early fifties. They had little investment experience and had not done any retirement planning previously. Alan and Joy wanted to explore how much they might need in retirement and whether they were on track. Phil provided them with advice to set up an SMSF and rollover their existing superannuation funds into it, with all monies to be invested into a model portfolio of shares/funds held via a wrap platform. Phil’s product research showed that the recommended underlying investment products would be approximately equivalent in cost to their existing products.However, the costs associated with the SMSF as well as the wrap fees would be additional to their current fee structure.This resulted in higher overall costs for the clients. You had some difficulty discerning the current versus proposed fees from the tables shown in the SOA, as the total costs for the proposed portfolio were unclear.
Phil explained that the additional costs were justified because the SMSF would give Alan and Joy more flexibility which would be of benefit when they established retirement income streams in the future. He also stated that the wrap structure would allow access to a vastly wider range of products than their current super funds, including access to direct equities, and would provide consolidated and streamlined reporting.
You ask Phil to tell you more about these clients and the advice he provided to them, which they subsequently implemented:
Alan and Joy contacted me asking for an appointment.They had been invested in super products that had very limited investment choices or features. I discussed with them the many benefits of an SMSF structure and the flexibility it can offer when they move into pension phase. We also discussed the options that are available within the wrap, including the ability to invest in listed securities as well as managed funds. They had never invested in direct shares before and were quite impressed by this.
You ask Phil whether Alan and Joy are involved in the investment decision-making.
No,as they are invested in model portfolios and they are happy to go along with my advice,but of course I get their authority to implement changes.
Having viewed a number of Phil’s client files, you have noticed that the SOAs are heavily templated and often contain extraneous information. Furthermore, many of his clients’ portfolios are structured in a similar way —model portfolios within a wrap, and/or owned by their SMSF.You feel this structure seems quite complicated given some of the client profiles.You put these queries to Phil and he replies:
I use the same SOA template for all clients. It’s good for consistency and ensures compliance requirements are being met. I customize and highlight relevant sections and Alex inserts these into the standard template.Regarding the investment structure, this is the most efficient and streamlined way for me to manage my clients’ portfolios and it enables me to provide better service by spending more time meeting with clients face to face.
(a) Analyze how rationalizations may have presented a barrier to Phil’s ethical decision-making.
(b) Examine how Phil’s conduct complies with Standard 7 and Standard 9 of the FASEA Code of Ethics.
(c) Discuss how Phil’s conduct complies with the value of Competence.
Support your answers by reference to the case study facts and research.
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