Inside Money: When is an adviser not giving advice?

When does an advisor not give advice? When showing the exit without also giving instructions on how to shut the door. Photo / Martin Sykes

Ever since the Financial Advisers Act (FAA) was passed into law late in 2008 the financial services industry, regulators and government have been trying to figure out who will actually be caught by it.

This confusion was partly caused by the bizarre decision to define financial advisers based on the complexity of products they dealt in. Under the law, advisers who sold the more complex "Category 1 products" would have to meet more stringent standards than the simple folk who confined themselves to "Category 2 products".

While making the distinction between what products fell under Category 1 and which were more Category 2-like proved difficult enough, the water was further muddied by an over-riding clause that said if an adviser provided a "financial planning service", irrespective of product, they would need to meet the higher standards, or, in the regulatory language, become an 'authorised financial adviser (AFA)'.

The law provided a vague definition of what activities constituted a 'financial planning service' and the Securities Commission, which is involved in drafting the regulations that put flesh on the FAA bones, was initially content to leave it at that.

But, after much clamouring from the industry, the Commission issued further guidance this week on the 'financial planning service' definition.

Reading the guidance note it's pretty clear that almost all advisers - or at least those who pay attention to your unique financial needs (ie any of those who are likely to be of any use to clients) - will have to be AFAs.

This is not such a bad thing but the government could've saved a whole lot of angst and time by saying so in the first place.

The Securities Commission guidance also allows advisers very little wriggle room to escape the AFA requirements, intimating that it will crack down on those who try to structure their businesses and advice processes to avoid the higher standards.

"What is unacceptable is deliberately limiting the areas of inquiry required to meet the standard of care diligence and skill Section 33 demands in order to avoid crossing the boundary into providing a financial planning service," the Commission document says.

And even when clients don't want advice - just buy it, sell it etc - it is incumbent on advisers to let their clients know what they are missing out on by not seeking AFA-level advice.

So when do advisers not give advice? When they show potential clients the door without issuing them instructions on how to shut it on the way out.


David Chaplin