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Independent financial advice has been a topical issue in recent months, and thanks to the Royal Commission is likely to become significantly more prominent in the coming years. It can broadly be defined 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 includes 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?
Consumers have a right to know if the financial advice they receive is truly independent or whether it has potentially been influenced by any other factors. That’s because knowing this information can affect their choice of financial product.
The independence of financial advisers didn’t miss the attention of the recent Financial Services Royal Commission. They recognised that many Australians could assume that the advice they were getting was independent and purely in their best interests. This Royal Commission highlighted many stories of where this was not the case, and where some advisers provided conflicted advice.
They made the following recommendation, which we wholeheartedly applaud.
The law should be amended to require that a financial adviser who would contravene section 923A of the Corporations Act by assuming or using any of the restricted words or expressions identified in section 923A(5) (including ‘independent’, ‘impartial’ and ‘unbiased’) must, before providing personal advice to a retail client, give to the client a written statement (in or to the effect of a form to be prescribed) explaining simply and concisely why the adviser is not independent, impartial and unbiased.
This means that those advisers that do not meet the ‘independent’ criteria would need to tell clients know upfront that is the case. Currently there is no requirement to explicitly state that, so advice clients could assume they are getting independent financial advice when they aren’t. Both the Coalition and the ALP have said that they support all recommendations of the Royal Commission, so we hope this will be legislated soon.
A recommendation of the recently concluded Financial Services Royal Commission was that any financial 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.”
And 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 that “..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 remain unable to 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 truly independent financial advice needs to be paid for in a different way to how it has in the past. Previously it may not have been 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, it also could mean that they may not have been getting the advice that was in their very best interests, and they may not have ultimately been getting the best value.
To get truly independent advice you need to pay fees for service, but this is no different to going to a lawyer, an accountant or a tax adviser.
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 though. If you are interested in potentially receiving advice from an adviser and you are unsure about their 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 any financial advice that 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:
- Financial coaching: What is it and why may you need it?
- Find an Australian independent financial adviser
- 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?