Chapter 3 - The Advice Process and Documentation
The Importance of providing your client with an Engagement Letter.
Although not expressly mandated as a standalone document under the Corporations Act, an engagement letter is regarded as best-practice within the Australian financial advice framework. It plays a critical role in establishing transparency, managing client expectations, and supporting compliance with the FASEA Code of Ethics (now administered by ASIC under the Financial Advisers Standards and Ethics Authority framework).
1. Clarifies the Scope of Advice and Services
An engagement letter clearly defines:
The services the adviser will provide
The services the adviser will not provide
Whether the advice is limited, scoped, or holistic
This is critical in preventing misunderstandings and ensuring the client understands exactly what they are engaging the adviser to do.
Relevant Code reference:
Standard 2 — advisers must act with integrity and in the best interests of the client
Standard 4 — advisers must ensure the client understands the advice and services being provided
By documenting the agreed scope upfront, the adviser demonstrates transparency and avoids inadvertently misleading the client about what is included.
2. Supports Informed Consent
An engagement letter allows the client to make an informed decision before advice is provided by clearly outlining:
The nature of the adviser–client relationship
The services to be delivered
The basis upon which advice will be provided
This ensures the client knowingly consents to the engagement prior to any advice activity commencing.
Relevant Code reference:
Standard 3 — advisers must not advise or act unless the client has given informed consent
Without a documented engagement, it becomes difficult to demonstrate that informed consent was properly obtained.
3. Enhances Transparency Around Fees and Charging Arrangements
Engagement letters typically outline:
Initial advice fees
Ongoing service arrangements (if applicable)
When fees become payable
The circumstances under which fees may change
This transparency is fundamental to maintaining trust and complying with ethical obligations.
Relevant Code reference:
Standard 7 — advisers must ensure clients clearly understand all fees and charges and give informed consent before they are applied
An engagement letter complements regulatory documents such as the FSG by contextualizing fees in plain language specific to the client engagement.
4. Establishes Professional Accountability
By documenting the engagement terms in writing, the adviser:
Demonstrates professionalism
Creates a clear audit trail
Reduces disputes regarding expectations or outcomes
This is particularly important in the event of complaints, ASIC surveillance, AFCA determinations, or internal compliance reviews.
Relevant Code reference:
Standard 12 — advisers must uphold and promote the ethical standards of the profession
Using an engagement letter reflects professionalism consistent with community expectations of a trusted financial adviser.
5. Assists With Managing Conflicts and Independence
An engagement letter can disclose:
Any relevant associations or relationships
Limitations on product availability
The adviser’s role in relation to implementation
This supports transparency and allows the client to properly assess potential conflicts.
Relevant Code references:
Standard 5 — advice must be free from conflicts of interest
Standard 6 — advisers must not accept or act on benefits that could influence advice
Documenting these matters early supports ethical decision-making and trust.
6. Protects Both the Client and the Adviser
From a risk management perspective, an engagement letter:
Reduces ambiguity
Provides clarity if the relationship changes or ends
Supports defensibility of advice files
For licensees, it also strengthens supervision outcomes and demonstrates strong governance practices.
Relevant Code reference:
Standard 1 — advisers must act ethically and in accordance with all applicable laws
A well-documented engagement process supports compliance with both ethical and legal obligations.
Summary
An engagement letter is an essential component of good advice practice in Australia. It:
Promotes transparency and trust
Supports informed consent
Clarifies scope and fees
Reduces disputes and complaints
Strengthens compliance with the FASEA Code of Ethics
While not explicitly mandated under legislation, the use of engagement letters is strongly aligned with the intent, principles, and expectations of the Code, and is regarded by regulators and licensees as a key element of ethical and professional financial advice.