Statement of Advice

Once you have received your SoA you should take time to study it. The following is a guide to help you understand the plan and decide if it meets your needs and objectives.

Written statements of advice vary substantially from planner to planner but there are five basic points that should always be covered in a well presented SoA.

• Plan objective
• Strategy
• Plan Detail
• Recommended Investments
• Recommended Action

Remember: The advice is for investing your money. While a financial planner can assist with recommendations, the risks and final decision are yours. You should ensure:

• you fully understand the risks associated with each investment;
• the risk level is acceptable to you;
• the investments recommended in your SoA meet your needs and objectives.

Ask questions until you fully understand the SOA You should be comfortable with the SoA before proceeding.

Plan Objective

The plan objective should state what it is seeking to achieve and re-state information you provided to the advisor.

This is to confirm thay have worked with the information you have provided.

Strategy

• sufficient income provided on a stable basis to meet your daily living expenses;
• enough money to be available for planned major expenses;
• adequate easily accessible money to cover unforeseen expenses. This is an important part of any plan.

In addition, your plan strategy should review your existing investments as well as give a summary of recommended new investments.

Plan Detail

• estimated net income;
• appropriateness for individual client needs;
• fees and charges in dollar amounts;
• Government Income Support implications;
• estimated tax liability;
• amounts to be invested in growth and/or income producing investments;
• insurance;
• estate planning.

Recommended Investments

• the name of the investment and the product provider;
• a brief description of the investment;
• the amount recommended for investment;
• the risk factor (level of security);
• the projected income and/or growth for each investment. Past performance is no guarantee of future performance as large fluctuations can occur;
• details of any guarantees;
• fees to be charged for placing investments;
• early withdrawal conditions and exit fees;
• on-going management fees;
• commissions due to the financial planner.

(note: the above fees and commissions may be mentioned in the plan detail)

Recommended Action

This section should clearly detail how you can proceed with the recommendation. Always read the documentation carefully - take it away with you and consider it at your leisure. Never sign on the spot.

Security and Risk

When assessing your SoA it is essential to understand the security of the investments chosen ie. their risk. In its simplest form risk can be defined as “the chance of loss.”

• the measure of the possibility of a market downturn causing a serious devaluation or loss of your money; and
• the chance of lower than expected or no earnings from the investment.

Different investments have different levels of risk. You should be aware that the higher the expected return, the higher the risk. You should look at the risk of each investment and consider if both poor earnings, as well as loss of your money, are possible. Generally, losses in value of an investment will be recovered in time with the recovery of the market.

Investors are fully aware that share and property investments can rise and fall, but not many are aware that investments such as debentures, government bonds and other fixed interest investments can carry substantial investment risks.

The risk associated with debentures is not necessarily a loss of capital but the loss of regular income if the borrower defaults on the loan. The capital and interest are generally recouped at a later date through the realisation of the security held. See NICRI leaflet Debentures.

Government bonds and other fixed interest investments may be sold on the fixed interest market. If the owner requires their capital before maturity it is necessary to sell the investment on the open market. Depending on which way interest rates have moved the investor may make a profit or loss. See NICRI leaflets Fixed Interest Investments and Bond Trusts.

You may invest in direct investments eg. shares and bank accounts, or invest through a managed (pooled) arrangement eg. master trusts, unit trusts etc., where the investment decisions are made by the investment funds’ managers.

To understand the risks of these managed investments, it is necessary to know what the underlying investments (assets) are, ie. what you are ultimately investing in, and how these behave. You need to understand the risks with these assets.

A aspect of investment risk in managed funds is that the manager may change the nature of the fund. For example an investor may have chosen an investment for its specific asset allocation or investment strategy but over time the investment manager has significantly changed the investments held by the fund resulting in either a higher or lower return than was expected. Investors should check with their investment adviser or fund manager if the actual return varies significantly from the expected return. A term widely used is ‘has the fund remained true to the label?’

There are five basic asset classes: cash, fixed interest, equity (share ownership), property and international assets. While the risk varies for each asset class, within each asset class the risk level can also vary from low to high depending on market behaviour, company management or the investment managers’ preferences.

It is essential to fully understand all risks associated with any investment recommended as it is you, not the planner or anyone else, who suffers the losses when they occur.

For further information see the NICRI leaflet Safety, Risks & Scams and refer to our Investment Product Series leaflets for the particular investments which you are interested in, eg. Shares, Fixed Interest Investments, Bond Trusts, Term Deposits, Equity Trusts, etc.