For over twenty years it has been illegal for financial planners to use the terms ‘independent’, ‘impartial’ or ‘unbiased’ to describe their services without meeting stringent requirements under the law. These laws were intended to prevent advisers misleading the public about retaining conflicts of interest as they deliver their services. Unfortunately this wasn’t enough to prevent large portions of the financial planning industry from promoting themselves in ways that attempt to circumvent the rules.
Last month Royal Assent was finally achieved for ‘disclosure of independence’ legislation that builds on these independence laws, effectively making it illegal even to remain silent on the issue of your independence as a financial adviser. Inspired by the Royal Commission, these laws have come about because the existing regulatory culture of “disclose and anything’s fair game” is not the ethic of a profession, but of an industry seeking to simply set the bar at “whatever isn’t illegal”.
The Australian Defence Force Financial Services Consumer Centre (ADFFSCC) is an organisation responsible for providing financial education and literacy to its 80,000 personnel, Australia-wide. As you can imagine, the Australian military is an organisation that can’t afford to be vague with the language it uses to perform its critical functions for the residents of Australia. Earlier this month the ADFFSCC made the observation that there are still those in the industry who would prefer win the client’s trust by deliberately using loose language. The article is available at https://adfconsumer.gov.au/independent-advice/ and is reproduced below …
Independent Advice – What Does It Really Mean?
Some financial advisers will seek to win your trust by claiming to be ‘independent’. That sounds reassuring. But be warned. The concept of independence in the financial advice industry is not necessarily what you might think it is.
On the one hand, unless an adviser is breaking the law by making a false claim (that has been known to happen), the word ‘independent’ should mean that a financial institution is not an owner, part owner or Australian Financial Services Licence holder of the adviser’s business. That may be reassuring to some clients. If you’re in any doubt about this, you should ask the adviser to prove such a claim or check it through records held by the Australian Securities and Investments Commission.
On the other hand, the use of the word ‘independent’ does not preclude an adviser from receiving asset fees which as pointed out in our article Choosing a Financial Adviser – Follow the Money, are simply commissions by another name.
This perverse outcome has been confirmed in recent legislation requiring financial advisers who are not ‘independent’, ‘impartial’ and ‘unbiased’ to advise their clients why they are not. That sounds like a positive move, however, advisers who charge ‘asset fees’ are (strangely) not impacted by this requirement.
And (even more strangely) that same legislation doesn’t stop an ‘independent’ adviser from taking mortgage broking and property sales commissions because those forms of ‘conflicted remuneration’ are regulated under different laws.
Having considered this, clients might reasonably ask whether they are afforded any real legal protection from the impacts of conflicts of interest when advisers claim to be ‘independent’. The long answer is ‘not much’. The short answer is ‘no’. So, it’s up to clients to ask questions of the adviser to understand what’s really happening behind the use of that term.
To be fair, it’s worth noting that not all incentive arrangements necessarily lead to conflicts of interest and poor outcomes for clients.
The key point is how incentives are designed. Some financial advice businesses have introduced salary packages which enable advisers to earn bonuses, even profit shares, based on criteria other than product sales. These arrangements are to be supported and may even improve clients’ outcomes, such as by encouraging levels of personal service.
However, there are other incentives arrangements which appear to encourage independence of action and ‘best interests’ advice, but actually require advisers to reach sales targets/budgets simply in order to retain their employment.
Variations of these are designed by reference to a so-called ‘balanced scorecard’ which contains a series of performance criteria, one of which is the level of product sales achieved by individual financial advisers. Whilst arguably designed to encourage independence of action and ‘best interests’ advice, the inclusion of this criterion can easily destroy the legitimacy of the arrangement by introducing a conflict of interest which is designed to influence an adviser to sell products whether or not clients need them.
Let’s be clear. Most financial advisers are honest people. In that regard, they are simply a reflection of the citizens in our community. But most financial advisers are also conflicted in numerous and complex ways that may detrimentally affect the advice you receive. So, do yourself a favour and take the time to assess the claims that advisers make about their independence, integrity and honesty. You won’t be sorry if you do.