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!
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.