If you read newspapers, you’re aware that the financial advice industry struggles to manage conflicts caused by ownership, targets and remuneration. Accountants, as a profession, have generally managed to avoid these conflicts by not providing financial advice to their clients. Instead, accountants refer clients to specialist advisers and mortgage brokers.
It seems like a good strategy. Is it really?
Let’s approach the question in another way:
Is your accountant acting in your best interests if they refer you to an adviser or broker who receives commission from product manufacturers?
Let’s unpack this question by starting with the problem of commissions. The accounting profession is, as a matter of principle, opposed to commissions. In fact, the Accounting Professional and Ethical Standards Board (APESB) states in its Code of Ethics that:
“Accepting such a referral fee or commission creates a self-interest threat to objectivity and professional competence and due care.”
The Code of Ethics for Professional Accountants highlights the fact that commissions create a “threat to objectivity and professional competence”. Although the Code also suggests possible safeguards, most of these revolve around the limited mechanism of disclosure, which we know is an ineffective way to deal with these conflicts.
So, should accountants ever refer clients to financial advisers and mortgage brokers who take commissions?
It’s a reasonable question given that accountants’ own Code identifies commissions and referral fees as fundamental threats to professional objectivity. The accounting profession’s position is clear and expressed far more directly than is ASIC’s.
If commissions and referral fees so significantly compromise objective advice, should your accountant ever refer you to an adviser or broker who is paid by commission?
If they do, how can they be acting consistently with their principles and in your best interests?
In my view, referring you to an adviser whose remuneration is tied to the sale of financial products is not in your best interests. Given that accountants recognise that commission “creates a self-interest threat” to you, then knowingly putting you in a conflicted position cannot be consistent with their professional principles, their fiduciary duty or your best interests.
I understand that, historically, accountants had few options. But the emergence of a vibrant, independent advice industry gives them an alternative that better suits their principles.
I appreciate that this conclusion seems driven by self-interest. But I believe it is a true, clear and compelling conclusion. Commissions compromise the objectivity of the person providing you with advice because someone other than you ultimately pays that person. So, in whose interests are they acting?
I’m an independent adviser and receive no commission for the financial service I provide. I recognise the irony in advocating that you avoid self-interested and conflicted financial advice. I may benefit from this seemingly “self-interested” position, but that doesn’t make my conclusion any less true.
I established an independent advice practice because I believe it’s the only professional and right way to provide financial advice. I appreciate that my view alienates a lot of advisers who receive commissions and consider themselves advice professionals. I also appreciate that it isn’t easy removing commission from your business and your referral network, a fact illustrated by the low number of truly independent advisers in Australia (probably less than 70). I acknowledge that it is tough to build an independent and fee based practice in an industry dominated by indirect remuneration models, but it’s absolutely critical if financial advice is to become a profession that acts in its clients’ best interests.
The accountants who refer to me don’t ask for a referral fee because they’re more concerned with ensuring their clients receive professional and objective advice. I believe that by referring their clients to an independent adviser, these accountants are acting in their clients’ best interests. Their willingness to put their clients first is also the reason I unhesitatingly refer my clients back to them.
In some respects, independent advisers are simply trying to emulate the example of independence and professionalism established and preserved by the accounting profession.
Make no mistake, commissions and product fees create self-interest threats to the objectivity and quality of advice.
If you’re a client looking for advice in your best interests, why seek advice from someone who is ultimately remunerated by the manufacturer of the products you’re advised to purchase?
If you are an accountant, why compromise your clients’ quality of advice and your professional reputation by referring to financial advisers and mortgage brokers who can’t meet the same level of professionalism as you practice?
If you’re an accountant aiming to act in accordance with your fiduciary duty, how do you justify referring your clients to someone whose advice is fundamentally compromised by self-interest?
Accountants have obligations. More importantly, they now have options.