Consumers should be aware that the term "Independent" has a particular meaning in financial advice circles. Platinum adviser Frances Hesse deconstructs the term in response to a query from our Ask an Adviser service. The question was from Gillian B in Sydney.
Q. Is Independent advice important? When choosing an adviser, I am unsure what difference choosing an Independent adviser will make to my situation?
Gillian, great question. To answer your question simply, I would say yes. It is so important that you receive advice that is customised for you and your individual situation. How do you know its independent? First, you need to do some research into the adviser and their firm. Who are they licensed through, who ultimately owns the license they operate through. This information is now available on the ASIC website at https://www.moneysmart.gov.au/investing/financial-advice/financial-advisers-registeras well as Adviser Ratings. Next step is to read the adviser’s Financial Services Guide (FSG) to see any limitations to the advice they can provide. The licensee is the one who is ultimately responsible for the advice provided by their licensed advisers.
You need to understand that the majority of financial planners still operate via a license that is owned (part or whole) or controlled by a financial institution (be it bank, insurance company or industry super fund). Does this make a difference to the advice you get? I believe yes. You see, financial advisers (and here I will limit my comments to licensed financial planners) are all limited in the advice they provide by their licensee’s Approved Product List (APL), which underpins their Professional Indemnity Insurance. Should they choose to provide advice outside that list they either need to seek approval from their licensee or risk not being covered in the event of a claim (which then exposes you).
So, if you are like the typical Australian seeking advice you probably have at least 2 super fund accounts, some Telstra and IAG shares you got via the original float, a home mortgage, some insurance policies you have no idea about and quite possibly an investment property. Who can you see to get advice?
Well an adviser who operates via an institutionally owned licensee has a dilemma. On the one hand there is legislation that requires them to act in your best interests at all times, on the other hand they are owned by a licensee who themselves owns/controls product(s), so it’s in the licensee’s commercial best interests for those advisers to promote their products ahead of anyone else’s (including not for profit). How are these advisers paid? Usually salary plus bonuses; bonuses are often based on sales but usually also now include encompassing service levels, which an improvement. Some however, are paid solely via sales commission. Hence the conflict. So if they want to help you, chances are some of the products you have aren’t covered by their license but are offered by their competitors. Do they spend the effort to seek approval to advise on all your products, research the alternatives and come up with a recommendation that is balanced and in your best interests or do what is commercially expedient and limit themselves to products they know and can advise on?
An adviser who operates through a non-institutionally owned licensee does not have this same limitation. They normally pay a fee to a licensee that is separate and unrelated to product. But beware, even some of these receive indirect benefits from certain product providers - volume bonuses paid directly to the licensee and then shared amongst those advisers supporting those products. Check the FSG again, it’s usually in there towards the end, if such commercial arrangements exist. Does this provide another conflict? I would say it certainly doesn’t make them independent.
What difference can independent advice make? Well when an adviser truly acts in your best interests, they start first and foremost with the strategy. What is it you want to achieve, by when and what resources can we employ to help get you there? So far, none of this advice involves product, and make no mistake the longer an adviser takes in your meeting to put a specific product forward for you to consider, the better off you are. Product selection comes last, after goals and strategy and in some cases, may not be required at all. That’s why clients who pay their advisers for advice are more likely to get customised advice and avoid conflict.
In our firm the biggest difference to our client’s long term financial wellbeing has been in the strategic advice we provided rather than in the investment returns (although we have been very good in that area too). It’s the role we play in advising and supporting our clients in managing their affairs. Getting them on track and staying there when things get tough - illness, job losses, divorce, dementia and even death.
So who is a truly independent adviser? Well ASIC has just brought out a regulation (I am simplifying here, not providing a legal opinion) that states they believe it’s an adviser and their licensee who doesn’t receive any remuneration from a product provider, or if they do, immediately rebates it. In other words, the client is the one who always pays for all the advice. I hear that at last count there are approximately 50-70 financial planners in Australia who might meet this strict definition. There may be more, but it’s certainly a tiny number and whilst the industry is working through this latest hurdle, the cost of advice goes up and up and is less available to the average Australian.
So yes, always seek independent advice. It may not come from an adviser who is able to call them themselves one of the few truly independent advisers, but you can certainly eliminate many who have clear conflicts. Good luck!
Frances Hesse is Principal and Senior Financial Planner at Lifetime Advisers at East Ryde in Sydney. Frances has over 25 years experience in the financial services industry.
General Disclaimer: The information contained in this article has been prepared on a general advice basis only and does not take into account your specific objectives, needs and financial situation. The information may not be appropriate to your individual needs and you should seek advice from your financial adviser before making investment decisions.
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Comments5
"Still under 100 but growing in number Trish Power's article is attempting to identify and list Independent Advisers https://www.superguide.com.au/retirement-planning/truly-independent-financial-advisers-in-australia (yes, I am on this list). "
Naomi Horobin 09:34 on 18 Sep 17
"The lengthy response above (pity this response is conflicted) is off the mark. Frances is broadly correct re Independent advisors numbering fewer than 100. Independent advisors are those who meet the Corporations Law definition and there would be probably less than 100 in Australia. So, she (Frances spelt with an 'e') is right. But surely independence should be viewed upon from 2 angles, that of the professional involved and that of the client. From a client's perspective it is important for advisors to not just do the right thing, but to be seen to be doing the right thing, through their business practices and their business arrangements. Being independent eliminates the confusion - as an advisor with an institution some years ago, I never paid for software, conferences, and my advisor fees to the licensee were reduced if the in house product was supported to a certain extent. You cannot be classed as independent if you are receiving any benefits from your licensee that you are not paying full price for. Yes, we all have APL's to deal with, but you need to be able to say to your client that you have a broad based APL that does not reflect licensee or associated interests, and that your recommendations are not influenced by anything other than the clients best interests and be able to prove it, by not accepting any benefits that may come to you by supporting in house product. Transparency is one of the big advantages of Independence, and being aligned to institutions blurs to lines, makes it difficult to be transparent. I'm working towards being independent and I congratulate those who have taken the steps to get there."
Peter 11:57 on 16 Sep 17
"Unfortunately Frances has decided to put forward a one-sided, one-eyed, and dare I say it, conflicted position. To suggest that advisers with the backing of a large institution doesn't start with "what you want to achieve, by when and what resources we can employ to help you get there" is either dishonest or ignorant. You will find just about every adviser in the industry will follow a similar process of what's important to you, and how can we help you get there. In addition, the recently implemented Future of Financial Advice (FOFA) regulation dictates that all advisers act in the best interests of their clients, and despite the fact this shouldn't need to be regulated (you'll find most advisers are honest people who are about their clients), consumers can seek comfort knowing they are protected by law. I have coached hundreds of advisers and advice practices across a range of models, and there are pros and cons of both arrangements. Those who choose to license themselves through an institution, often make that decision based on the fact that they and their clients have the backing of a large organisation behind them (Ask the clients of Storm Financial, Centrepoint, etc - those firms who left their clients high and dry post financial crisis whether they wish they had this support from a large institution). These 'aligned' advisers are not compelled to write the 'house' product, and in fact, are required by law to recommend the most appropriate and competitively priced product that meets the clients needs. If they don't, or their licensee doesn't allow this, they will need to answer to ASIC. Do these advisers receive benefits from their licensee and product providers? Often yes, and you will be made aware of these via the firms Financial Services Guide and in the Statement of Advice you receive. Do independent advisers receive benefits from product and other providers. Often yes, and whilst many may indicate they aren't rewarded by product providers, ask them if they've EVER been taken to a 5 star restaurant, Corporate Box, Conference, etc, that's been paid for by a provider. If they say no, I'd suggest they may not be entirely dishonest with you. Most 'independent' advisers will still use between 1-3 preferred 'platforms' and be rewarded for it. This is no different to an 'aligned' adviser who will use the same or similar suite of products. Why do firms restrict their use to a few platforms, because it creates efficiencies for their practice. Even though these are their preferred platforms, both sets of advisers can still recommend the non-preferred product. As I mentioned, there are pros and cons of both arrangements. It's just frustrating that Frances has chosen a forum like this to provide his own conflicted response rather than trying to truly educate clients. To suggest there are only 50-70 truly independent advisers is also false and misleading. "
Pity this response is conflicted 17:36 on 15 Sep 17
"If I'm reading this right is this person saying that of all the financial advisers in Australia, only 50-70 are really independent and all the other are compromised? That would seem like an outrages situation. If that's true its no wonder advice scandels happen. How can the government let this continue? Royal Commission Now."
James Light 15:43 on 15 Sep 17
"If I'm reading this right is this person saying that of all the financial advisers in Australia, only 50-70 are really independent and all the other are compromised? That would seem like an outrages situation. If that's true its no wonder advice scandels happen. How can the government let this continue? Royal Commission Now."
James Light 15:39 on 15 Sep 17