With the Banking Royal Commission in full swing, there’s been a renewed focus on the separation of advice from businesses that manufacture financial products.
People are rightly concerned at the seemingly never-ending cases of poor advice given by banks who recommend the products they make and call it “financial advice”.
Former ACCC chairman Allan Fels weighed into the debate recently. “There’s just a deep conflict of interest between creating financial products and then giving independent, or so-called independent, impartial advice,” he said.
But, does removing vertical integration lead to independent advice?
Not by itself.
Here are 3 requirements I believe need to be met before advice can be considered “independent”:
- No Ownership or Association
Many advisers in Australia own their own businesses but are licensed through a company owned by a bank or institution that makes financial products, such as insurance, mortgages, super or investments.
These licensees can indirectly influence the advice given by their advisers in many ways, including determining access to training and restricting the list of products advisers can recommend.
80% of the advisers in Australia work for financial advice firms who are owned or associated with financial institutions who create financial products.
- No Commissions
Companies create incentives for non-related advisers to recommend their financial products. The most effective form of incentive is a commission payment linked to the level of your debt or the cost of your insurance.
When your adviser is paid more money as your debt increases or costs of your insurance go up, your interests are in direct conflict with this monetary incentive.
Commissions can lead to a recommendation for debt or insurance you don’t need. Such advice can cost you tens of thousands of dollars. Or, in the case of a Melbourne nurse who emotionally recounted her experience at the Royal Commission recently, the family home.
Product manufacturers also offer large volume bonuses to advice firms who reach certain targets of products “sold”. These volume bonuses often end up determining the individual bonuses of your financial adviser. And, they can influence the advice you receive.
Over 99% of the financial advisers in Australia can accept commission or other incentives such as volume bonuses and gifts.
- No Asset Based Fees
An ongoing advice fee that is based on the balance of your investment is an asset based fee. These % fees are often arbitrary and not based on the advice given or service or value provided.
More concerning, is that asset based fees can negatively impact an advisers impartiality by skewing advice towards say investment, rather than debt reduction – regardless of what’s in your best interests.
The catastrophic advice given by Storm Financial showed how asset based fees can create a strong incentive for your adviser to recommend you invest borrowed funds so that their fees increase with your higher investment balance.
How do you find an adviser who meets each of these requirements?
Start with an Independent adviser, who:
- Has no ownership links or association with any product manufacturers; and
- Receives no commission or incentives from product manufacturers
But watch out for fake ‘Independent’ advisers, particularly those calling themselves ‘Independently Owned’. The use of the word Independence is restricted under section 923A of the Corporations Act and, since 1 January 2018, it’s been illegal to use ‘independent’ or similar terms unless you satisfy the requirements of s923A. But many advisers continue to use the term Independent (or Unbiased or Impartial, which are also restricted terms).
To check if your adviser is technically Independent, review their Financial Services Guide and do a word search for “commission” and “volume bonus”. Check if they are owned by, or have any affiliation with, any bank or financial institution that creates products such as loans, insurance, superannuation or investments.
In addition, ask your adviser if they charge an asset based fee.
If your adviser works for, or is paid by, anyone other than you, then be prepared for advice that suits someone else’s interests and not your own.
