Adviser Ratings got in touch with Phil Thompson from Rise Financial to get his take on some points we raised regarding the pros and cons of advisers being “aligned or not” to a major institution. We thought his response encapsulated the arguments in favour of non-aligned advisers as well as the arguments for "true" independence so we decided to publish it in full here.
I am passionate about truly independent financial advice because I believe that when you remove all potential conflicts of interest, then you have the best environment and structure possible to provide advice that is in the best interest of the client only. For example:
1) Not being owned (in whole or in part) or licensed by a product provider means that you will not now or ever, be in a position to be forced or encouraged to use a particular product that may not be in the best interest of the client. While the common rhetoric is to say ‘even though we are owned by an institution, we still operate independently’ this still does not remove the possibility that at some stage – if the product provider is facing financial pressure – that a request would be made (verbally or implied, and unlikely in writing) for advisers to increase the use of their owner’s product. This could put even the best intended adviser in a position where they may compromise their best judgment and principles. Remove this connection, remove the risk.
2) Not receiving any incentives from a product provider or their owned licensee (whether that be commissions, discounted training, discounted software or discounted professional indemnity insurance costs, free trips away to conferences, golf clubs, etc) means again that you will not now or ever, be in a position to be forced or encouraged to use a particular product that may not be in the best interest of the client. If the product provider or the owned licensee is facing financial pressure, then there is a risk that a request would be made (verbally or implied, and unlikely in writing) for advisers to increase the use of a particular product. The best intended adviser could be in a position where they may compromise their best judgment and principles. Remove this connection, remove the risk.
3) Charging flat fees only for advice and not charging asset based fees. Asset based fees provide an incentive for an adviser to increase the size of funds under management. Flat fees means that an adviser will not now or ever, be in a position to encourage a client invest more with them, rather than pay off a mortgage or contribute funds to their existing superannuation fund, whether retail or industry. To the extreme, we have seen the examples of advisers recommending double gearing strategies with home equity and margin loans which put clients in a disastrous position. But the adviser was paid more for increasing the size of the investment. With asset based fees there is a risk that even the best intended adviser finds themselves in their own financial difficulties, which may lead them to compromise their best judgment and principles again. Remove this connection, remove the risk.
When it comes to the resources of a truly independent financial planning firm, sure they may not be anywhere near those of a large institution, however this does not mean it is not achievable. For example, access to regular training is easily available and affordable. Access to research is readily available and affordable. And while an independent firm may be able to have a large Approved Product List, for operational efficiency, I believe most would have a smaller preferred selection based on their investment philosophy. While we could recommend anything to a client, most would probably only recommend a few which they have researched thoroughly and are confident with. While some may say that this is a problem keeping an APL small, my response to them (and any client) would be ‘if something better comes along tomorrow, then I have the ability to change my recommendation. An ‘aligned’ adviser would likely not have this flexibility. This is the essence of being a truly independent financial adviser in my opinion.
As a final point, as a truly independent financial adviser, I do not want to make changes to a client’s existing investments unless there is a good reason to do so. There are many good investments available (retail funds and industry funds alike), with low fees and well diversified portfolios. I would generally only look to implement a new investment for a client where new funds need a home. For many clients, just understanding how their current funds are invested and the other options available within that fund, is enough to help the client use their existing product better. I believe that by charging flat fees for advice, and removing all conflicts of interest, this allows me to be in a position to advise clients according to what is in their best interest only, not my own I would love to see the financial planning profession move to a stage where this way of advising is the ‘norm’.