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Just because a financial planner’s business card doesn’t display the logo of a bank or insurance company doesn’t mean he or she is independent. Five years ago, 40,000 people were surveyed by Roy Morgan Research on the perceived independence of their financial planner. It turns out that a disturbing number are totally confused on the subject. Not much has changed since.
The financial planning industry as a whole isn’t doing much to dispel this misunderstanding either — quite the opposite in fact. Many are employing terms like ‘independently owned’ to describe their services. But by this definition Storm Financial was independent.
Independence = trustworthy
‘Independence’ is synonymous with trust. Whenever an inquiry is to be conducted or a commission set up to investigate a scandal, it’s invariably an ‘independent inquiry’ or an ‘independent commission’. Why? Because if it’s independent we can rely on there being a strong process, that we’ll get to the bottom of the matter, as ugly as it might be, and the truth will be delivered with neither fear nor favour.
Independent = trustworthy.
Commercially, then, this word is solid gold to financial planners. This is why the law zealously guards this word (and others just like it, such as ‘impartial’ or ‘unbiased’). So much so, in fact, that fewer than 1% of financial advisers meet the standard.
What is this standard? Jump online and Google ‘Corporations Act s.923A’: the financial planning industry knows it as ‘the Independence Law’. A word of warning: it’s not an easy read. As it turns out, financial planners — so drenched in potential conflicts of interest – require a complex nest of legal clauses to prove their impartiality.
The one simple question to ask
On the flip side though, if the adviser satisfies the law, his or her independence is proven. This is good news because if you’re interviewing financial planners the question is simple: “Do you satisfy Section 923A of Corporations Act?”.
In order to be able to use the term ‘independent’, Section 923A says that financial advisers:
- Must not receive commissions from a product issuer [s923A(2)(a)(i)]
- Must not charge asset fees to a client [s923A(2)(a)(ii)]. The actual provision says must not receive ‘forms of remuneration calculated on the basis of the volume of business placed by the person with an issuer of a financial product’. Based on guidance from ASIC, this provision also precludes financial advisers who receive a percentage fee from administration platforms (typically known as wraps) from describing themselves as independent advisers.
- Must not accept gifts from a product issuer that might influence them [s923A(2)(a)(iii)].
What’s more, in order to satisfy the rules, the individual adviser must also be able to make the same declaration about his or her Financial Services License holder, plus, the same declaration for every single other adviser licensed by his or her Licensee [s923A(2)(b)]. One bad apple spoils the bunch, see.
But the law goes further. Financial advisers:
- Must not have any additional product restrictions imposed on them by their Licensee [s923A(2)(d)]
- Must not have any association with either a financial product or a financial product issuer [s923A(2)(e)].
Together these rules entitle the public to a high level of confidence that their adviser is free from conflicts of interest (including hidden ones) that might reasonably skew their advice.
The Gold Standard of IndependenceTM
All Practising Members of the Profession of Independent Financial Advisers (PIFA) meet the independence criteria. They call it the Gold Standard of IndependenceTM. This Gold Standard simplifies the definition of independence into three points, each represented by a gold star:
- No associations with a product manufacturer. This has broad ramifications for the adviser. It means no bank or insurer can have any ownership interests in the AFSL and that there can be no interest in any financial product that might reasonably be capable of influencing the adviser. This earns the adviser the first star.
- No commissions. This means that, unless they are rebated in full to the client, the adviser can receive no payments at all from a product issuer. This includes junket, subsidies and freebies and earns the adviser a second gold star.
- No asset fees. Asset fees, like commissions, are incentives, and incentives are a conflict of interest. Incentives are the working tools of product manufacturers and their salespeople, not advisers. Incentives are what you use to sell phone plans and gym memberships, not financial advice. Avoid them and the adviser earns the third gold star.
ASIC estimates there are 20,000 financial planners in the country. It has also estimated that 80% or more planners are affiliated in some way with a bank or insurance company. Those planners can’t earn their first star.
Of the 20% of planners who are left, most of them still pocket commissions for insurance policies, which means they can’t earn their second star.
And of the remainder who can earn two stars, most still charge asset fees (defending this conflicted method of charging with the misnomer ‘fee-for-service’) which means they can’t get that last star.
If your adviser is not a member of the PIFA then ask them whether they satisfy Section 923A of the Corporations Act. Most financial advisers don’t and, in fact, all advisers are now required to declare this lack of independence in their ‘Financial Services Guide’, plus explain the reasons why.
Insist on it. There’s simply no reason to settle for less.
The author of this article, Daniel Brammall, is president of the Profession of Independent Financial Advisers (PIFA), formerly known as the Independent Financial Advisers Association of Australia (IFAAA).