Before you hand over your money to a financial planner, make sure you are going to receive independent financial advice. Because if it’s not independent financial advice, then the financial planning advice can’t be considered unbiased or impartial.
So what is independent financial advice, and how do you ensure that you receive conflict-free advice?
What is an Independent Financial Planner?
Fortunately, the terms ‘independent’, ‘impartial’ and ‘unbiased’ are protected, and this means the names carry significance. Section 923A of the Corporations Act states that a person who provides financial services cannot use any of these words unless they meet certain criteria, such as:
- Not receiving :
(i) Commissions, or
(ii) remuneration calculated on the basis of the volume of business placed, or
(iii) gifts or benefits from an issuer of a financial product which may reasonably be expected to influence the person.
- Operating free from direct or indirect restrictions relating to the financial products
- Operates without any conflicts of interest that might arise from their associations or relationships with issuers of financial products
So, in plain English, independent financial advice is when the financial adviser receives no commissions, is not overly restricted in what financial products they can recommend, and is not closely associated with any product providers (such as banks, life insurers and super funds).
Why should I get independent financial advice?
A 2009 Senate inquiry into financial products and services, known as the Ripoll Report, found that “approximately 85% of financial advisers are associated with a product manufacturer, so that many advisers effectively act as a product pipeline”; (page 70). This is how vertical integration operates – the supply chain of a product is controlled by the product manufacturer, and this is apparently what is happening 85% of the time. For example, apart from their in-house financial planners, the following have, at some point in time, been some of the AFSL’s owned by product providers:
NAB: Apogee, Garvan Financial Planning & Godfrey Pembroke;
Westpac: Magnitude & Securitor;
CBA: Financial Wisdom & Count Financial,
AMP: Charter Financial Planning, Genesys Wealth Advisers, IPAC Securities & Hillross.
IOOF: Bridges, Plan B, Ord Minnett, Consultum Financial Advisers, Lonsdale
(The Association of Independently Owned Financial Professionals, of which I am a member, lists the current product manufacturers and their associated financial planning businesses.)
It should be clear that the product providers set up many of these businesses solely to deceive the public into thinking they were not closely associated with the product providers.
These are the murky waters consumers must navigate. And so when you come across independent financial advice, it acts as a beacon of propriety.
Large Approved Product List
Financial Planners can only operate under an Australian Financial Services Licence (AFSL), and the AFSL holder essentially dictates what products can be recommended via the use of an Approved Product List (APL). Ray Miles recently commented in a Professional Planner article that “Last year one prominent institutionally-owned group offered to slash fees by over 90 per cent for practices which agreed to adhere to a limited Approved Product List”. He later concludes, “Sadly, the real cost for the investor is compromised advice.”
I recall moving from Westpac to an accounting firm which was licensed through Count Financial. I wanted my Westpac clients to stay with their existing super fund, but Count Financial instructed me that I had to recommend the clients move to Count’s own product. This is despite the fact that the two products were identical, just with different names … and a different fee structure. Count were trying to make me move my clients to their own branded product because it had a more expensive fee structure and they would make more money. They did this by only listing their own product on the Approved Product List and not allowing me to use the cheaper, but otherwise identical, product.
This was a great example of the conflicts within the financial advice industry. Again, it is independent financial advice which acts as a beacon of propriety.
Since first becoming a Financial Planner in 2004, I always had the ambition to break away from the vertically integrated model that the financial planning industry was based on. Vertically integrated means
In 2013, I secured an Australian Financial Services Licence (AFSL Number 436740) through CWM Perth Financial Planning and was no longer beholden to the big banks, insurance companies or super funds.
Cornish Wealth Management could have aligned themselves with an institutionally owned AFSL and benefited financially, however felt that independent ownership is important to our clients. Being independent financial advisers, we are free to sell advice; not products. And this is a reason why we are able to offer independent one-off financial advice.
Give us a call and have a chat; we’re not big, but we have your best interest at heart.