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.
Phil’s Response:
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’.
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Comments8
"CBD Adviser - "lots of people were happy to have a big bank standing behind an adviser" because the govt - ie taxpayer,s ie - you and me - decided they had to guarantee the bank deposits so there wouldn't be a classic run on them. It wasn't a couple of Bernie Madoffs who created the GFC - it was banks. They get record profits and when it gets hairy they need the govt to bail them out cause the know the system is flawed and would collapse if regular people in a panic got their way. Short memories indeed. The system is just a big ponzi scheme with risk takers stretching it further and bringing it to the point of collapse time and time again. The bigger the institution the greater the risk - and Banks have just got bigger and less numerous/more concentrated since the GFC. The moral hazard is bigger than ever! And they still think they're doing us all a favour. "
Privatise Profits, Socialise Losses 13:44 on 02 Mar 16
"I work in an aligned practice. We have 10 insurance providers on our APL so I don't think that is an issue from product choice. With regard to our investment APL, the dealer groups platforms are fine but they are expensive. As such, I never recommend my dealer groups options and I always go off the APL. I need to get one off approval everytime but this is never an issue and is never questioned. However, the research team does need to approve this. Personally I think this shows that although aligned, it doesn't mean we have much more limited options for our clients. And I would actually argue that the fact that someone oversees what I am recommending should provide additional comfort to a client that it is much harder to be a "rogue" if I do have someone overseeing me than not. I truly believe that it doesn't matter if you are aligned or not if the adviser is doing the right thing by the client. I think the question of asset based fees (which I never use) and insurance commission (which I unfortunately do use) are more relevant. I also think it is important to recognise the "know your product rule". If I have access to the whole universe of investments, how can I actually understand all of those products to make the relevant to me and for me to consider? If I was unaligned, in essence I would still have my own panel of platforms or managed funds that I like which is effectively my own mini APL. All that being said, I know plenty of advisers who just use their dealer groups products. I think it comes down to the adviser rather than whether they are aligned or not."
TdB 12:55 on 02 Mar 16
""In times of financial stress, people may be compromised" "Storm was supposedly independent" People have short memories when the GFC hit and the major 4 banks in Australia ended up in the top 10 in the world asignificant number of customers were happy to have a big bank standing behind an aligned adviser. Fact is integrity is the choice of the individual aligned or otherwise. One could argue in favor of both models dependent on platforms and APL's. There is always room for improvement."
CBD Adviser 12:42 on 02 Mar 16
"Generalisations are great! Here's one for you - Storm Financial was independent, as were so many of the dud dealer groups over the years. Integrity is not something that you can generalise about"
AL 11:32 on 02 Mar 16
"very well said above 100% agreed I go further as to say dealer grps are very similar if not the same as institution/Co just look at all the "white label" BS that is all about the DG getting their "perceived" share still. I believe the current dealer grp model is old hat and done.. will be very different in 3-5yrs "
troy penney 11:31 on 02 Mar 16
"Well said, Phil, I fully agree with all you've written."
Michael Rees-Evans 11:20 on 02 Mar 16
"Most advisers will do the right thing - a few give the rest of us a bad name. This writer says that in time of financial stress, prople may be compromised - I agree with that but financial stress can effect both aligned and non aligned advisers that could result in the best interest of the client being put on the side board."
Mon 11:20 on 02 Mar 16
"This is all well and good in but if Phil would have to acknowledge there's a snowflakes chance in hell that the big players would allow his prescriptions to come to pass. This is panglossian stuff. Time to deal with the real world."
Greybeard 11:10 on 02 Mar 16