How Can Advisers Demonstrate the Basis for Advice in an SoA?

Of all the compliance failures that are identified in adviser reviews, inadequate basis for advice is the most common. It is also the one that is hardest to fix after the fact, because it reflects a problem with the substance of the advice process - not just the document.

The Corporations Act requires every SoA to include the basis on which the advice is given. That sounds straightforward. In practice, it means demonstrating - not just asserting - that the advice is in the client's best interests, that it is appropriate to their circumstances, and that the recommendations flow logically from what the adviser knows about the client.

This article explains what the best interests duty requires, how the s961B(2) safe harbour works in practice, and what an SoA must show to demonstrate the basis for advice adequately.

What the Law Requires

Under s947B(2)(b) and s947C(2)(c), the SoA must set out the basis on which the advice is given. This requirement is given substance by two further obligations:

• s961B(1): the adviser must act in the best interests of the client when providing personal advice

• s961G: even where the best interests duty is satisfied, advice must also be appropriate to the client's objectives, financial situation and needs

The SoA is the primary place where compliance with both obligations is demonstrated. An adviser who acts in the client's best interests but cannot show it in the document has a compliance problem. The quality of the advice and the quality of the documentation are both required.

The s961B(2) Safe Harbour: What It Actually Requires

Section 961B(2) provides a safe harbour: an adviser who can demonstrate they completed seven prescribed steps is taken to have satisfied the best interests duty. The steps are:

• Identify the objectives, financial situation and needs of the client that the advice is relevant to

• Identify the subject matter of the advice sought by the client

• Identify the objectives, financial situation and needs of the client that are relevant to the subject matter

• Where it is reasonable to do so, make reasonable inquiries to obtain complete and accurate information

• Assess whether the adviser has the expertise to give the advice; if not, refer the client

• If a recommendation to acquire a financial product is made, conduct a reasonable investigation into the financial products that might achieve the client's objectives

• Base the advice on the client's relevant circumstances

Critically, ASIC's position is that completing these steps procedurally is not enough. The SoA must show that the steps were completed with genuine substance - that the adviser actually identified the client's specific circumstances, actually investigated suitable options, and actually based the recommendations on what they found.

Assertion vs Demonstration

The single most important distinction in basis-for-advice compliance is the difference between asserting best interests and demonstrating it. ASIC's expectations around this are clear.

❌ Assertion: "This recommendation is in your best interests and appropriate to your circumstances as it aligns with your investment objectives and risk profile."   ✅ Demonstration: "You have told us your primary goal is to retire at 60 with an annual income of $75,000. Your current superannuation balance is $420,000 and you have 8 years until your target retirement date. Based on projections using your current contribution rate of $15,000 per annum and the recommended Balanced growth option (7.2% p.a. net return assumption), we estimate your balance at retirement will be approximately $890,000 - sufficient to support your target income for approximately 25 years in drawdown, with a conservative withdrawal rate of 4.5% in year one. We considered a Conservative option but this is projected to produce a balance of approximately $720,000 - below the level required to meet your income target without drawing down principal at an accelerated rate."

The second version uses the client's actual numbers, connects them to the specific recommendation, and shows why an alternative was not selected. It demonstrates the reasoning rather than just labelling it.

The Reasonable Investigation Requirement

Step 6 of the safe harbour requires the adviser to conduct a reasonable investigation into the financial products that might achieve the client's objectives before making a product recommendation. This step is one of the most commonly inadequate in practice.

"Reasonable investigation" does not require an exhaustive product comparison in every SoA. What it requires is that the adviser can show they considered the universe of available options and applied genuine analysis to selecting the one that best serves the client. Three things the SoA should reflect:

• What options were considered - at minimum an acknowledgment that alternatives were assessed, with reference to the key ones

• Why the recommended product was preferred - the specific features or characteristics that make it the better fit for this client

• Why alternatives were not recommended - particularly where the client might reasonably ask why a lower-cost or higher-return option was not chosen

An SoA that recommends a specific managed fund without any reference to why that fund was selected over alternatives has not demonstrated a reasonable investigation - even if the fund is, in fact, an excellent choice for the client.

Connecting Client Circumstances to Recommendations

The basis for advice section must draw a visible line from the client's circumstances to the recommendations. This is the structural test: a reviewer should be able to read the SoA and see exactly how each recommendation was derived from what the adviser knew about the client.

In practice, this means the basis for advice section should:

• Reference the client's specific goals, financial situation and relevant constraints - not a generic summary that could apply to any client

• Explain how each recommendation addresses those goals and constraints - not just state that it does

• Address why alternatives were not recommended, particularly where the client might reasonably expect them to have been considered

• Use the client's actual figures where they are available - amounts, percentages, timeframes - rather than qualitative descriptions alone

The Four Basis-for-Advice Failures That Come Up Most on Review

1. Best interests asserted, not shown

A statement that the advice is in the client's best interests without any reasoning to support it. This is the single most common failure pattern across adviser reviews.

2. No reference to alternatives considered

The safe harbour requires a reasonable investigation into products that might achieve the client's objectives. An SoA that recommends a specific product without any acknowledgment that alternatives were assessed has not satisfied this step.

3. Rationale not connected to the client's specific circumstances

The basis for advice reads as a general description of the product or strategy - its features, benefits and how it works - without explaining why it is appropriate for this client given their particular situation, goals and constraints.

4. Appropriateness not addressed separately from best interests

Best interests (s961B) and appropriateness (s961G) are separate obligations. An adviser can satisfy the safe harbour steps and still give advice that is not appropriate to the client's circumstances. The SoA must address both - and they should not be collapsed into a single statement.

A Practical Test

Before finalising the basis for advice section, apply this test: if a reviewer read only the basis for advice section - with no access to the client file, no prior knowledge of the client, and no ability to ask questions - could they:

• Understand who this client is and what they are trying to achieve?

• See why the recommended strategy addresses those objectives?

• Understand why alternatives were not chosen?

• See that the advice is appropriate to this client's specific circumstances - not just compliant with a process?

If the answer to any of these is no, the basis for advice section is not yet adequate.

Is your basis for advice adequate?

RegiReview reviews the basis for advice section of SoA documents against the s961B(2) safe harbour steps and ASIC's RG 175 guidance - identifying where the reasoning is inadequate before a licensee audit or ASIC review does.

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