Independent Financial Advice
Posted on:
Raffi Pailagian
MBA, BSc, DipFP
Financial Planner / Managing Partner
Why Independent Financial Advice Is Important
Since the 2019 Banking Royal Commission the financial services landscape in Australia has changed enormously. The importance of independent financial advice, and the transparency of financial advisers and planners, continues to be a focus of changing legislation. Recently the definition of ‘independent’ has changed in relation to financial advice.
So what does this mean if you are looking for independent financial advice? How do you make sure the advice you are getting is independent and perhaps more importantly transparent?
What Does A Financial Advice Organisation Look Like?
First, let’s take a step back and look at what a financial services organisation looks like.
In order to operate a financial services business of any kind, you require an AFS Licence from ASIC with a designated Licensee. This application can be made by an individual, a partnership, a group of individuals or a company.[i]
For ASIC to grant a licence the applicants must prove they are:
- competent to carry out the work they have indicated
- have sufficient financial resources to undertake the proposed business
- meet any criteria specific to the type of licence they are applying for
- prove they are able to undertake basic standards of training, compliance and insurance and dispute resolution.
Once the licence is granted, the Licensee can employ staff who act as ‘Authorised Representatives’ of the licensee. Anyone holding a license, and anyone working with them as an Authorised Representative, must meet the standards set out by ASIC.
Every financial planner or advisor must either be, or work under, a AFS Licensee.
What Is An Independent Financial Planner Or Advisor?
Until very recently, an Independent Financial Advisor or Planner was defined as someone who does not have any affiliation with an organisation that produces financial services products and must comply with Section 923A of the Corporations Act.[ii]
This legislation ensures use of words like independent, unbiased, or impartial, and phrases like ‘independently-owned’ ‘non-aligned’ and ‘non-institutionally owned’ cannot be used unless they are wholly true.
This definition has now been tightened further to specify an independent planner or advisor must not receive any commission at all on any product sold, regardless of whether this commission is disclosed. Since the vast majority of financial products available still carry a commission component, this is neither practical nor achievable.
For a Financial Services organisation to claim independence, not only the Licensee, but everyone working with them as an Advisor or Planner must comply with this piece of Legislation.
Is Independence Or Transparency More Important?
Lack of independence may mean an advisor or planner is being swayed to give you advice based on their own affiliations. In fact, ASIC estimates that up to 80% of financial planners are affiliated in some way with a bank or insurance company [iii]. During the Banking Royal Commission up to 75% of the files reviewed did not comply with the financial advisor’s duty to act in the best interest of the client, due to affiliation with a financial product issuer.
Yet as we have said, claiming independence under the new rules is virtually impossible. What is perhaps more important than independence, however, is transparency. This is what you should be looking for in a financial advisor or planner.
If your financial planner provides you with clear and transparent information as to their remuneration, you can be assured that the advice you are getting is, in their educated opinion, the right advice for your own personal circumstances. Our article on Banking Royal Commission Findings details more about why this is important, and why having a Financial Planner is worthwhile.
How Do I Know If I’m Getting Transparent ‘Independent’ Advice?
Simply looking at the business card of a Financial Planner and not seeing a bank or insurance company logo is not enough due diligence to ensure transparency and independence. There are a few key questions you should ask when making sure a potential Planner is transparent:
- Who owns this business? And which business owns them? Sometimes there are multiple degrees of separation, so ask the tough questions.
- Do you receive commission on any of the products you sell? If so, what are they and how are they received?
- Do you receive volume-based remuneration from a financial products issuer?
- Finally, do you satisfy all the requirements of Section 923A of the Corporations Act? [iv]
If a Planner can answer these questions to your satisfaction you can be confident they are transparent, and have a high level of independence, although this does not necessarily mean they are sufficiently experienced or trained to successfully handle your financial planning.
Once you have determined their transparency, you will need to assess their skills, experience and suitability. Check out our article on What Makes a Good Wealth Manager for some tips.
The Cost Of Advice
What transparency and independence means in terms of costs is that Financial Advisors and Planners need to charge fees for their service. And the need to charge fees will only increase as more non-commissioned products become available.
Whilst this might seem to be a new impost on getting financial advice, it is in fact just a more transparent method of payment. When advisors or planners were receiving hidden commissions from financial product manufacturers (banks and insurance companies), the client was still paying for the advice. It was just buried in the cost of the product.
As a client, you would not question paying for the professional services of a lawyer or accountant. Paying for financial advice is no different. In fact, if you choose a good, transparent financial planner who is not aligned with a bank or insurance company their advice can pay for itself multiple times over. And you can be confident their advice is as independent as possible, transparent, impartial and unbiased.
One Last Thing
The Australian Financial Services industry is still working through the changes brought about by the Banking Royal Commission. Over the coming years, we will continue to see changes to the way independent financial advice is provided.
The good news is, not only will transparency and independence increase, but the increased requirement for education and qualifications will mean the quality of advice will undoubtedly improve. This can only be a good thing for the hip pockets of all Australians.
If you would like transparent, impartial and unbiased advice on your financial position, Manly Financial Services have the expertise and experience to help you. Please call us on 02 9976 3388 or contact us through the button below, to find out more.
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