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Independent financial advice has been topical in recent years thanks to the Financial Services Royal Commission into misconduct in the banking, superannuation and financial services industry.
The key word here is ‘independent’. So, what does it mean in the context of financial advice?
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 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.
As a result, one recommendation of the Royal Commission 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.”
Finally, that recommendation has come to pass after ‘disclosure of independence’ legislation finally received Royal Assent.
New disclosure rules for non-indepedence
It may surprise readers that for some time it’s been illegal for financial advisers to use the terms ‘independent’, ‘impartial’ or ‘unbiased’ unless that is genuinely the case under the terms of the Corporations Act. Unfortunately, until recently, sections of the financial advice industry were able to skirt around the rules with a policy of ‘don’t ask, don’t tell’.
From 1 July 2021, financial advisers who breach Section 923A of the Corporations Act must advise their clients why they are not independent.
This means advisers can only qualify as independent if they or their Australian Financial Services Licensee (AFSL) and all representatives:
- Did not receive insurance commissions (or rebate them back to clients in full)
- Did not receive any gifts or benefits from product providers
- Had no restrictions regarding the products you can recommend
- Did not own, or are not owned by, and did not have any interest in or association with any products providers.
As it is estimated that less than 2% of Australian advisers and advice firms are independent under the terms of the Act, the new rules will affect most advisers. While this is a welcome development, some argue that the rules don’t go far enough.
Daniel Brammall, president of the Profession of Independent Financial Advisers (PIFA), says an adviser can’t claim to be truly independent or free of conflicts of interest if they charge asset-based fees.
PIFA members sign up to a Gold Standard that includes no links to product manufacturers, no commissions and no asset-based fees. Asset-based fees are charge as a percentage of a client’s funds under management, rather than as a fixed and transparent fee for service.
“There are some ridiculous excuses for asset-based fees and how they align advisers with their clients; hogwash,” says Brammall.
Yet asset-based fees are not included in the ‘disclosure of independence’ legislation. Neither are commissions from mortgage brokers and property sales, which are regulated under different laws.
What Australians want
One of the achievements of the Royal Commission and changes to independence legislation is increased awareness about the issue of unconflicted, independent financial advice among ordinary Australians.
In a PIFA survey of 75,000 Australians aged 40–55, 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 advisers receive a commission for selling them a product or charge a transparent fee for service, 86% said they preferred a transparent fee.
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.
Australians know what they want and, gradually, legislation and financial advisers are closing the gap between consumer expectations and the advice services they are delivered.
Where can you find an independent financial adviser?
Your first step should be to review the SuperGuide’s list of Australian independent financial advisers where you can find all the Profession of Independent Financial Advisers (PIFA) members, plus 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.
The information contained in this article is general in nature.