Best Interests as an Operating System

Australian advice law contains a phrase that sounds like a slogan and functions like a machine: the best interests duty. Section 961B of the Corporations Act even provides a safe harbour, a checklist of steps that, if genuinely performed, demonstrate the duty was met. Identify the client’s objectives and situation. Identify the subject matter of the advice. Make reasonable inquiries where information is incomplete. Assess your own competence to advise. Investigate the products. Base every judgement on the client’s circumstances. Take any other step that would reasonably be regarded as being in the client’s best interests.

Read as compliance, it is a form to fill. Read as an operating system, it is a sequence any serious investor can run on themselves. Most personal portfolio errors map cleanly onto a skipped step. Buying a product before defining the objective inverts the whole sequence. Failing to make inquiries is how incomplete information becomes confident allocation. Skipping the competence check is how people end up trading instruments whose mechanics they cannot describe.

Walking the sequence on a real decision

Take someone considering a geared exchange-traded fund that doubles the daily return of an equity index. Objectives first: is the goal decades away or does it fund next year’s spending, because leverage suits one and destroys the other through volatility decay. Subject matter next: a leveraged product is a trading instrument with daily rebalancing mechanics, not a buy-and-hold equity position, and treating it as the second is the single most common error retail investors make with these products.

Inquiries: has anyone asked what happens to this position in a sideways, choppy market, where a doubled daily return can produce a flat or negative outcome over a year even if the underlying index is roughly flat, purely from the mechanics of daily compounding. Competence: does the investor understand path dependency, or are they buying a familiar index name with an unfamiliar payoff attached. Investigate the product: what is the actual expense ratio, the rebalancing cost, and the historical tracking error against a naive two-times return. Judgement: none of the prior five steps matter if the final decision ignores what they revealed.

The conflicts-of-interest mirror

The safe harbour has a quieter cousin worth naming: conflicted remuneration, the idea that advice should not be shaped by how the adviser gets paid. Self-directed investors carry their own version of this problem, usually as narrative rather than commission. A position held because selling it means admitting a mistake, or because a story explaining the loss is more comfortable than the numbers, is advice from a conflicted party, the investor’s own ego. The best interests duty exists to keep a professional’s incentives from bending their judgement. The same discipline applied inward catches most of what self-directed investors get wrong.

The professional standards regime, from the original FASEA framework

The professional standards regime, from the original FASEA framework through to the current adviser exam, exists to make this sequence reflexive in people paid to advise. Nothing prevents an unadvised investor from adopting the same reflex.

Running the sequence on yourself

Take someone considering a geared exchange-traded fund because a forum thread made a convincing case. Objectives first: what is the money actually for, and on what date. A leveraged product held for a ten-year retirement goal answers a different question than the same product held as a two-week tactical trade, and the sequence forces that distinction before anything else happens.

Subject matter next: gearing is not a stock pick, it is a decision about daily rebalancing, volatility decay, and the difference between the fund’s target multiple on a given day and its realised multiple over a holding period, which are not the same number once volatility is present. Inquiries: does the investor actually understand daily reset mechanics, or is the appeal entirely the multiplied headline return quoted for a period that happened not to be volatile. Competence: has this person read the product disclosure statement, or only the forum thread. Investigate the product: what does its documented performance look like across a genuinely choppy sideways market, not just a trending one. Judgement: does the position size reflect that this is a levered, path-dependent instrument rather than a proportionally larger version of the underlying index.

The conflicts mirror

The duty exists partly because advisers can be paid in ways that quietly bend judgement toward a product rather than a client. The self-applied version of that check is a conflicts mirror: would this decision look the same if there were no forum thread, no marketing, and no fear of missing a rally already underway. If the honest answer is no, the process has already been compromised,

The duty does not end when the advice is given

The duty is sometimes described as if it only governs the moment advice is given, but the safe harbour’s structure implies an ongoing obligation, since circumstances identified at step one do not stay fixed. A recommendation that satisfied best interests when a client’s income was stable can fail the same test after a job loss, without a single word of the original advice having changed. This is the same logic as the review step in the six-step process, applied specifically to the duty itself rather than to the strategy in general.

Worth naming plainly: the safe harbour is a defence, not a guarantee of a good outcome. Following every step faithfully can still produce advice that performs poorly, because markets are uncertain and no process eliminates that. What the sequence guarantees is that the advice was reasoned rather than sold, which is a different and more honest promise than a guarantee of results, and the only promise a process like this was ever capable of making.

whether or not anyone was being paid to compromise it.

The duty is owed to clients. The logic is available to everyone.