No strings attached

Last year I attempted to identify those advisers across Australia who were able to claim ‘independence’ without breaking the law (the Independent Advice project).

I found five.

Out of an adviser population of somewhere around 15,000, just five were able to tell the public they were ‘independent’, ‘impartial’ and ‘unbiased’ without falling foul of the AustralianSecurities and InvestmentsCommission (ASIC).

What is wrong with this picture?

Best estimates are that about 3,000 of the 15,000 work in ‘independently owned’ Australian Financial Services Licensee businesses, although this fluctuates as distribution houses, for example, take up or step away from strategic stakes in various businesses.

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So what does the public make of this situation?

Research I’ve seen indicates that independence is a ‘top 10’ issue when people go shopping for an adviser, and that independence is inextricably tied to the notion of trust — the number one issue.

But what sort of independence do these people seek?

I think they are looking for someone who can provide advice without an agenda.

They seek someone who can recommend product and strategy without having to consider more than the suitability of that product to the client’s situation.

But according to ASIC, since March 11, 2002, independence, impartiality and lack of bias can only be claimed if you either receive no commissions or you rebate them to your clients the instant you receive them (see ASIC’s QFS38 for what they mean by ‘rebate’).

So advisers who receive, for example, monthly commission streams (including old legacy streams) but don’t instantly remit these amounts to their clients cannot claim independence.

How times change

Before Financial Services Reform (FSR) the rule was that so long as you:

(i) avoided commissions and other benefits from product providers that might tend to create a ‘product bias’;

(ii) were free from any direct or indirect restrictions relating to securities recommended; and

(iii) operated without any conflicts of interest tied to ownership links to product providers you could claim independence.

I have looked but cannot find any clues to explain the heavy-handed approach taken by FSR.

It seems obvious to me that the effect of the change has been to deny many small, independently owned businesses a key point of differentiation from their institutional competitors.

Witness the ‘fee-for-service’ offerings now cropping up within the vertically integrated financial services sector — anyone would think they’d invented the idea of fee-for-service.

The revelation that some clients might prefer to link payment to service may have come as a surprise to some, but many advisers in the non-aligned sector have been doing just that for ages.

So now as the fee-for-service space is being appropriated by institutional ‘born agains’, it seems fitting that we crank up the debate about what ‘independence’ means and why advisers who are not aligned to product houses offer a different kind of service to that offered by the rest.

A different mind-set

If I am not owned or controlled by a product issuer I have no need to worry about meeting sales targets to maintain the support of my employer/owner. So an obvious potential conflict of interest is avoided if I am non-aligned.

On the subject of conflicts of interest, I simply don’t agree with the simplistic argument that a commission equates to a conflict of interest.

All this hand wringing about commissions is, in my humble opinion, a bit pointless.

Even industry funds are now toying with the idea of funding advice out of superannuation balances.

What really matters (apart from basic competence, integrity, business acumen and an interest in helping people navigate their way to a better lifestyle) is that an adviser is able to agree with their client on a transparent ‘I get paid X for doing Y for you’ arrangement.

If you can do this and be a part of a financial services conglomerate then good luck — you don’t need my help.

But if you are not owned or controlled by a product house and still want to be an adviser you really need to ask how you will differentiate yourself from the big end of town, especially when they come to market using a term like fee-for-service to ‘re-introduce’ themselves to their target markets?

How indeed.

Because ASIC has made it damn near impossible for you to tell anyone about your lack of relationship with any of the institutions you might recommend from time to time if you receive commissions.

(As an aside, ‘commission’ is a term not defined anywhere in the Corporations Act. Even the dictionaries get the term mixed up with ‘fee’. So ‘commission’ is a term of art that catches payments that flow from financial product transactions and holdings, excluding — I suppose — things that are classified as ‘fees’.)

Anyway, given the problems created by confusion over what a commission actually is — and the inherent difficulties stopping them at the source — I think we should simply agree that most advisers get paid by commission and are therefore not permitted to claim independence, impartiality or lack of bias unless they can construct a system of rebates that enables them to achieve the ASIC goal of instantaneous credit to client account (or similar).

So why bother being non-aligned, if not 100 per cent independent?

Well, about 20 per cent of the adviser market thinks it’s worth it — are they all a bit mad? Or is there something more to the idea.

I run my own business and have done so since 1998. I like the freedom to work to my own agenda and recognise that the trade off for this freedom is sometimes not being able to operate on the same level as my larger competitors in the compliance and risk management markets.

But I’m not about to give up the freedom, and I would confidently say that’s one factor influencing the 20 per cent of advisers who want to remain non-aligned.

Apart from the freedom, there is the obvious desire to maintain control of one’s destiny, and, in most cases, I would confidently say that the non-aligned are (on average) operating higher value businesses than the aligned.

As a business matures, it seems more likely than not that in some way, shape or form the principal will want more and more control of their destiny, and this is often where they part company philosophically with a dealer group that cannot give up control.

How is this good for consumers?

What value do non-aligned advisers add for consumers out there looking for advice?

I think it’s a rhetorical question given the current debate about conflicts of interest and separation of sales from advice.

There is increasing consumer awareness of this market that sells something called ‘financial advice’.

And the average person in the street would surely look at this industry and say, ‘This is where I can get advice to help me achieve my goals’.

But when conflicts of interest consume so much media space (AMP Financial Planning, Westpoint, shelf space fees and so on), it is easy to imagine consumers becoming more interested in finding advisers who are not aligned to product issuers.

That is not to say non-aligned advisers are always scrupulous avoiders of conflicts of interest themselves.

Westpoint is an example of a product no institution (to my knowledge) would touch let alone permit their advisers to recommend.

Learning from Westpoint

From a public relations perspective, I think how non-aligned advisers respond to Westpoint will be critical to their ongoing acceptance by the public.

If non-aligned businesses learn anything from Westpoint I hope it is that a robust and transparent product due diligence process is just as valuable as a robust and transparent conflict of interest disclosure system.

I have read several times in the press that the personal indemnity (PI) cover held by some of the advisers accused over Westpoint will never come close to covering the losses suffered.

I doubt more PI cover would be a popular option (many advisers consider it another form of business taxation anyway and have little confidence underwriters would be of much help if the chips were ever really down), so I see the only real alternative in terms of good risk management to be a commitment to independently researched recommendations or obtaining informed client consent to proceeding without said research (that is, making the client aware of the risks they face in proceeding with a product not generally researched or rated by any reputable and independent research house).

Conclusion

All of which is a very long-winded way of saying this: non-aligned advisers are positioned to thrive despite what ASIC thinks of rebates and what the law says about independence, impartiality and lack of bias.

Why?

Because I think consumers are waking up to the obvious potential conflicts that confront most advisers and will want to deal with people who are able to give them the comfort they seek when they go looking for a trusted professional.

What the non-aligned movement lacks is a quick and easy way for consumers to find them as well as learn more about the difference between ASIC ‘independence’ and real world ‘independence’.

But we’re working on that.

Brett Walker is a principal of the Independent Advice Portal.