Independent Financial Advice
In financial advice, the words independent, impartial and unbiased are only to be used by advisers that meet this standard. And rightly so. To meet these standards independent advisers and their affiliations can’t receive commissions or any other remuneration and they can’t have relationships with product providers e.g. investment managers or insurance companies. This ensures that conflicts of interests are reduced e.g. there’s no incentive for an adviser to recommend you take out a higher level of insurance so they get a larger commission or for them to recommend a product that the company they work for will benefit from. Basically, they work for you.
Only a small percentage of advisers in Australia meet this definition and in the past non-independent advisers haven’t needed to bring this to the attention of their clients. This could change on the back of the Banking Royal Commission yesterday recommending that all non-independent advisers provide a written statement to clients explaining why they’re not independent, impartial and unbiased.
I obviously see this as a good recommendation and together with other recommendations like the removal of investment commissions, the eventual removal of insurance commissions and annual renewal of ongoing arrangements will hopefully push more advisers to become independent.
A common way to charge in the financial adviser industry is as a percent of assets e.g. the adviser may charge 1% so if the client has $100,000 for them to manage the investments of they will charge $1,000. I and other members of the IFAAA see this as a conflict of interest as it incentivises the adviser to manage an investment portfolio where that portfolio may not be the best option for the client e.g. paying down their mortgage or buying an investment property may be better alternatives. There was some speculation that the Royal Commission could recommend banning this form of charging however didn’t go this far even though it was suggested that they’re an attempt to replicate banned trail commissions.
There are many good advisers in Australia that are not independent or do charge based on percent of assets however I recognise that it’s difficult for consumers to determine who’s good and who’s not. A referral from a trusted family member or friend can be a good place to start and then try and get an understanding of the adviser experience, education and importantly the connections they and their business have and how they charge and think about how these may affect the advice they give to you.
If you’re finding it difficult to find a personal referral SuperGuide (who don’t have a dog in the fight) have compiled a list here. Fortunately, most advisers will meet with you initially at no cost so I think it’s a good idea to chat to a few different advisers to get a better idea about your options.