Date posted: 22/04/2021 5 min read

Investment advice: What can’t you say?

When it comes to clients’ financial health, what can CAs talk about and what needs to be left to licensed financial advisers?

In Brief

  • In Australia, you must have an AFS [Australian Financial Services] Licence – or be a licence holder’s authorised representative – to give clients investment advice.
  • In New Zealand, work with a trusted financial adviser to pass on clients who seek financial advice.
  • Accountants without a licence can still give clients broad advice about asset allocation in investment portfolios.

By Penny Pryor

Being so close to the financial affairs of their clients, it’s not uncommon for chartered accountants to be asked about other financial issues a client may be facing. However, unless you hold a financial adviser’s licence, or work for someone who does, you’re hamstrung when it comes to what you can tell them.

Gone are the days when accountants in Australia could give limited advice under the “accountants’ exemption”, which allowed them to guide clients on whether they should set up or wind down a self-managed superannuation fund (SMSF). That was repealed on 1 July 2016 as part of the Future of Financial Advice (FOFA) reforms.

In New Zealand, where a new financial advice regime came in on 15 March 2021, the accountants’ exemption remains for a “qualified statutory accountant” (QSA). It applies when financial advice is given as an incidental part of normal accountancy work. (All New Zealand resident CA ANZ members holding a Certificate of Public Practice automatically qualify as a QSA.)

What CAs can’t advise on

So what can CAs do with regard to investment management assistance for their clients?

The Australian Securities and Investment Commission (ASIC) is quite explicit. An ASIC information sheet for accountants who provide SMSF services states:

Without an AFS [Australian Financial Services] Licence, you may not advise your client about their retirement investment strategy, including whether your client should increase or decrease their contributions into their SMSF, what their overall investment strategy should be for their SMSF (e.g., what the target investment return should be and how to achieve this), or what contributions they should make to their SMSF relative to any other superannuation fund of which they are a member.

Scott Girdlestone, a CA ANZ affiliate member and director, wealth advisory, at William Buck in Sydney, says the best way to navigate the advice area when you’re not a licensed financial adviser is to provide factual information only.

“And do not engage in conversations that will end up with an explicit or implicit recommendation in the eyes of the client,” he says.

“For example, you can state what the level of concessional and non-concessional contributions are, but you cannot recommend that either are done, as superannuation is a product under the Corporations Act.”

Scott Girdlestone, a CA ANZ affiliate member and director, wealth advisory, at William Buck in Sydney.Picture: Scott Girdlestone, a CA ANZ affiliate member and director, wealth advisory, at William Buck in Sydney.

What advice can CAs give?

Although many CAs steer away from telling clients absolutely anything that could be construed as financial advice, there are some instances where they can pass on financial information to clients.

In Australia, the Corporation Regulations 2001 REG 7.1.33A (made under the Corporations Act 2001) says that:

Allocation of funds available for investment

For paragraph 766A(2)(b) of the Act, a circumstance in which a person is taken not to provide a financial service within the meaning ofparagraph766A(1)(a) of the Act is the provision of a service that consists only of a recommendation or statement of opinion provided to a person about the allocation of the person’s funds that are available for investment among 1 or more of the following:

(a) shares;

(b) debentures;

(c) debentures, stocks or bonds issued, or proposed to be issued, by a government;

(d) deposit products;

(e) managed investment products;

(ea) foreign passport fund products;

(f) investment life insurance products;

(g) superannuation products;

(h) other types of asset.

Note: This regulation does not apply to a recommendation or statement of opinion that relates to specific financial products or classes of financial products. 

Bronny Speed FCA is CA ANZ’s financial advice leader and a close observer of the conundrum accountants face. “Given [that] implied advice can fall under the licensing regime, our people have to be very careful to stick to factual information unless they operate under an Australian Financial Services Licence (AFSL) – limited or full,” she says.

“As many accountants are risk averse and don’t want to do the wrong thing, they are handing back their licences as many believe the risk of inadvertent non-compliance is so high it may impact the rest of their business.”

Licences are also being handed back because “the complexity and costs of licensing coupled with the added FASEA [Financial Adviser Standards and Ethics Authority] requirements means that affordable advice is becoming impossible to provide,” says Speed.

But Girdlestone stresses that even in this tight framework, CAs still have a role to play in the financial health of a client.

“It’s fortunate that we have this type of legislation for consumer protection,” he says. “It’s unfortunate the expertise of accountants perhaps hasn’t been recognised the way chartered accountants would have liked.”

“It’s unfortunate the expertise of accountants perhaps hasn’t been recognised the way chartered accountants would have liked.”
Scott Girdlestone, William Buck

What to do when clients want financial advice

Many CAs have stories of frustrated clients not understanding why they were not able to provide the financial information they needed about what appeared to be a simple matter – such as closing an SMSF.

“As recently as last week, I had one of my clients come to me and say is there anything I can do to improve my financial situation,” says Sonia Gibson CA, founder of Sydney practice Accounting Heart and winner of the 2020 Women in Finance’s Accountant of the Year award.

Sonia Gibson CAPicture: Sonia Gibson CA.

“As recently as last week, I had one of my clients come to me and say is there anything I can do to improve my financial situation.”
Sonia Gibson CA, Accounting Heart

Gibson has considered getting a financial licence, but as principal of a small firm it is not practical for her to do so. As well as the licensing costs, there are the additional continuing professional development obligations, on top of what she is required to do as a CA.

For Gibson, and many like her, the solution is to refer the client to a trusted financial adviser. That involves Gibson briefing the financial adviser, who then begins their own fact-find with the client to provide the correct advice.

“The really frustrating thing is not being able to advise on super – for example, a fund that’s got a really low balance and the logical conclusion is to say you need to wind up that fund,” Gibson says.

“Finding a planner who wants to give that advice – because there is a minimum cost for them as well – it can be difficult finding someone who will advise in those circumstances.”

Building relationships

Johann Fernandez CA, senior client manager at Melbourne’s Propeller Advisory, has a referral relationship with a financial adviser he has known for 10 years.

He wants to be sure that any financial adviser he refers clients to doesn’t operate on a commission basis or is remunerated for recommending only particular investment products.

“It’s about building that trust relationship with a financial adviser or a few financial advisers,” he says. “A financial adviser could have that bias where they won’t get an earn out of that property [but] they will get an earn out of a managed fund.”

Fernandez approaches the financial questions of his own clients by being quite specific about what he can and can’t tell them.

“[For example, with] an investment property, I can advise on the best structure to put it in, the tax implications,” he says. “[But] if you are asking me if this is a good time to buy it, I can’t do that.”

As to the set-up of SMSFs in Australia, CAs can assist clients who want to do that, but they have to provide proof that the fund wasn’t established on the accountant’s recommendation.

“You can get them to sign a declaration that they are doing this of their own accord, and they are just getting me to set it up, but it’s a grey area,” says Fernandez.

Advising on asset allocation basics

Accountants without a financial services licence are still allowed to give clients broad advice about asset allocation, so it’s helpful to understand how significant asset allocation is.

“Asset allocation is very important,” says Girdlestone. “There is no dispute that it is the single most important factor in explaining your overall return during a particular period.”

A diversified asset allocation may be used to reduce risk. Investing in a number of uncorrelated asset classes can help reduce the overall volatility of an investment portfolio. This is because not all asset classes are closely correlated. Fixed interest (defined as investment grade debt), for example, is not highly correlated with equity markets over the long term. (See table, left.)

“What this allows is a situation whereby you can reduce the volatility of a portfolio by introducing fixed interest to your share portfolio,” says Girdlestone.

This approach to investment, called Modern Portfolio Theory, was developed more than 50 years ago by Nobel-prize winning economist Harry Markowitz. He provided mathematical proof that you needed to consider the risk-reward outcomes of all investments combined in a portfolio rather than that of an investment in isolation.

Markowitz showed that by combining a number of uncorrelated assets in a portfolio you could achieve reduced risk for a better long-term return. That’s a lesson CAs can still pass on to clients

The correlation of asset classes

The closer the correlation is to 1, the more likely the asset classes are to move in the same direction. When a correlation is negative, asset classes will move in the opposite direction.

The table shows that Australian real estate investment trusts (A-REITs), as measured by the S&P/ASX 300 A-REIT Accumulation Index, have a 0.65, or 65%, correlation with Australian shares (as measured by the S&P/ASX All Ordinaries Index TR). It also shows that bonds are negatively correlated with growth assets. Having a mix of bonds and growth assets in an investment portfolio is common.

The correlation between Australian shares and Australian bonds (as measured by Bloomberg AusBond Bank Bill Index) is -0.01 or -1%.

The correlation between Australian shares and Australian bonds (as measured by Bloomberg AusBond Bank Bill Index) is -0.01 or -1%. Click image to enlarge. Source: Compiled with Morningstar data by Scott Girdlestone, director wealth advisory at William Buck.

Read more:

Providing superannuation services

CA ANZ’s detailed guidance on what services CAs can and cannot provide if not operating under an Australian Financial Services Licence.

Read more on allowable SMSF services

Meeting FASEA’s education requirements

Answers to FAQs for members wanting to navigate Financial Adviser Standards and Ethics Authority (FASEA) education requirements.

Find out more

Financial advice in NZ

Are you providing financial advice in NZ? Check if you fall under the accountants’ exemption.

Find out if you qualify for the exemption

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