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Independent financial advice has been topical in recent years and is likely to become even more so, thanks to the Royal Commission.
The key word here is ‘independent’. So, what does it mean in the context of financial advice?
Independent financial advice can be defined broadly as advice that is impartial, unbiased, without any potential for a conflict of interest and solely with the client’s best interests at heart.
You would hope that every financial adviser can claim all those things, but very few can because there is a very technical definition behind what makes financial advice truly independent – see SuperGuide article What makes a financial adviser independent? for more detail.
Examples of financial advice that is not independent include advice provided by advisers who:
- Receive a commission (or any other gift or benefit) for recommending specific products and services issued by a financial provider
- Receive remuneration based on the volume of business they place with the issuer of a financial product or service
- Work on behalf of a specific financial organisation and are therefore limited to recommending that organisation’s products or services.
Why is independent financial advice important?
As a consumer, you have a right to know if the financial advice you receive is truly independent or whether it’s been influenced by other factors. That’s because knowing this information may affect your choice of financial product.
The recent Financial Services Royal Commission recognised that Australians should to be able to assume that the advice they get is independent and in their best interests. Yet the Commission highlighted many stories where this was not the case and where some advisers provided conflicted advice.
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As a result, one recommendation of the Royal Commission, which we wholeheartedly applaud, was that an adviser who is not independent should “before providing personal advice to a retail client, give to the client a written statement … explaining simply and concisely why the adviser is not independent, impartial and unbiased.”
Currently there’s no requirement to explicitly state that, so clients may assume they’re getting independent financial advice when they’re not. According to the Government’s published timetable, legislation relating to this recommendation is to be consulted on and introduced by 30 June 2020. As far as we’re concerned, it can’t come soon enough.
An entrenched problem
According to the Productivity Commissions 2018 inquiry into Superannuation, “…despite the Future of Financial Advice reforms, conflicted financial advice remains an egregious problem (especially within vertically integrated organisations).”
Furthermore in 2018 an ASIC report found: “… in 75% of the advice files reviewed the advisers did not demonstrate compliance with the duty to act in the best interests of their clients.”
ASIC is responsible for regulating the conduct of advisers in the financial services industry and in 2017 updated its regulatory guidelines to restrict the use of terms that imply that a financial services business or adviser is independent if that is not genuinely the case.
The use of terms such as ‘independently owned’, ‘non-aligned’ and ‘non-institutionally owned’ are restricted under the Corporations Act and cannot be used to mislead consumers that a financial advisory business is independent. These terms were added to other restricted words that were already in the Corporations Act, such as ‘independent’, ‘impartial’ and ‘unbiased’, which can’t be used by advisers or organisations that aren’t genuinely independent.
A financial advisory business can only use the term ‘independently owned’ if they don’t receive any commissions, volume-based payments, gifts or other benefits from any issuer of a financial product.
What this means in effect is that the way we pay for truly independent financial advice needs to change. Previously it was not always clear to clients how their adviser was getting paid. Commissions and other remuneration may have meant no upfront costs for clients, but because it was somewhat hidden, they may not have been getting advice that was in their best interests. Ultimately, they may not have been getting the best value.
To get truly independent advice you need to pay a fee for service, just as you would to a lawyer, an accountant or a tax adviser. And it appears Australians are ready for change.
What Australians want
One of the achievements of the Royal Commission is increased awareness about the issue of unconflicted, independent financial advice among ordinary Australians.
In a recent survey of 75,000 Australians aged 40–55 by the Profession of Independent Financial Advisers, 73% said it was ‘very important’ that a potential financial adviser be genuinely independent. Even more – 84% – said they would be more likely to invest in a longer-term relationship with a financial adviser if they were genuinely independent.
When asked if they would prefer that advisers continue to receive a commission for selling them a product or charge a transparent fee for service, 86% said they preferred a transparent fee.
Australians know what they want – now it’s up to the government and financial advisers to deliver.
Where can you find an independent financial adviser?
Your first step should be to review the SuperGuide article Find an Australian independent financial adviser where we list all the Profession of Independent Financial Advisers (PIFA) members and other advisers that have declared to us that they meet the independence test.
There will be other independent advisers in Australia who are not yet on our list. If you are unsure about an adviser’s independence, the following questions will help you judge whether they are independent or not:
- Do you receive a commission (or any other gift or benefit) for recommending specific products and services issued by a financial provider?
- Do you receive remuneration based on the volume of business you place with the issuer of any financial product or service?
- Do you work on behalf of a specific financial organisation and are you therefore limited to recommending that organisation’s products or services?
It’s important to know whether the financial advice you’re receiving is independent or not. You should question your adviser to ensure you understand the nature and scope of the financial advice they’re giving you.
Learn more about financial advice in the following SuperGuide articles:
- Find an Australian independent financial adviser
- Financial coaching: What is it and why may you need it?
- What makes a financial adviser independent?
- 8 warning signs that you’re with a bad financial adviser
- Financial advice: What are the risks and benefits?
- Super advice: How to find a suitable financial adviser
- How to find low cost (or free) financial advice
- Retirement planning: How much does financial advice cost?
- SMSFs: What advice can an accountant provide?
- What are the different types of financial advice available?
The information contained in this article is general in nature.
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