Minimising conflicts of interest in financial advice is a noble aim, but the current definition of ‘independent’ is nonsensical.
“When I use a word,” Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it to mean — neither more nor less.”
Last year, ASIC fined financial services group Findex a total of $21,600 for using the words ‘independent’ and ‘non-aligned’ on its website. Currently, s923A of the Corporations Act prevents financial advice companies from calling themselves ‘independent’, ‘impartial’ or ‘unbiased’ if they are owned or licensed by a product provider and if they accept commissions from product providers. While the term ‘non-aligned’ is not specifically restricted within the law, ASIC is concerned that it could be seen as false or misleading.
But ASIC is now threatening to further narrow their definition of independence by restricting use of the phrase ‘independently-owned’ and reviewing whether those firms that charge asset-linked fees can call themselves independent.
ASIC has done much sterling work of late cleaning up the financial advice industry, but we would argue that its definition of ‘independent’ is way off base. They have requested feedback from industry practitioners on this topic and this is ours.
ASIC deputy chair Peter Kell recently said that “the accurate promotion of financial services, particularly around the issue of independence, is critical in order for consumers to make confident and informed financial decisions”.
Mr Kell is spot on.
He continued, “This action puts the financial services sector on notice that ASIC is serious about tackling the inappropriate use of the term ‘independent’.”
If you are the owner of a financial advice practice and are considering obtaining your own licence, trying to minimise potential conflicts, then this all must sound mighty complicated and bureaucratic to you. It may even prevent you from crossing the Rubicon and obtaining your own AFSL.
Building barriers to independence is surely not the outcome ASIC is seeking. In fact, earlier this week Mr. Kell questioned whether vertically integrated organisations could put the client’s best interests first. So why is ASIC so sensitive to the word ‘independent’?
ASIC says its aim is to ensure consumers are not misled and are able to “make confident and informed financial decisions by removing conflicts of interest”.
This is a noble aim, but also a pipe-dream.
No business operates without any conflicts of interest. Take my recent visit to the surgeon as one example. Surgeons are regarded by the community (and by us) as paragons of virtue. However, my ENT surgeon faced a colossal conflict of interest. Tonsils out or tonsils stay, I inquired? “Out” he said. If I still had my tonsils, he would now be $2,000 worse off – a staggering conflict of interest. I proceeded, incidentally, for two reasons; firstly, because he was referred to me by a doctor that I respect and trust, and secondly, because of his professional qualifications and training.
It is trust that makes the ethical wheels of business go round, not the idealistic pursuit of zero conflict. Removing conflicts is impossible; minimising them and fostering trust should be our industry’s main aim.
There are various lines of defence against conflicts for consumers. The most pernicious is the ownership of an advice practice by a financial product provider. Second, is the ownership of the AFSL by a product provider (less conflicted, but some dealer groups are more ‘hands-on’ than others). Third, is the payment of commissions by financial product providers. These have been outlawed in asset management by FOFA (thank goodness) but the argument to remove them from insurance products is much less clear cut.
It is our strong view that Australia’s chronic under-insurance problem would be further exacerbated by the removal of commissions.
No topic in wealth management so polarises opinion as to whether to charge a fee-for-service or to link fees to assets under management. A fee for service is often a number plucked out of thin air.
Firms that declare themselves as fee-for-service inevitably link their fees to the quantum of the asset management job anyway. But this is only as it should be. The greater the client assets, the greater the risk and the greater the responsibility. It would be absurd to bill the Packers the same as a working class family - not to mention spectacularly regressive. And in any case, the way a private business charges its clients is a matter for itself and its clients - it’s not an opportunity for moral grandstanding.
A fee expressly linked to the job in hand is open, transparent and honest. We cannot understand why ASIC thinks asset-linked fees have any impact on independence and urge them not to pursue this line of thinking.
Stanford Brown is owned by four individuals and we have our own AFSL. We are free to choose from a broad spectrum of managed funds and insurers that meet the high standards of our investment and insurance philosophy.
We disagree with Humpty Dumpty – one cannot simply choose the meaning of a word to suit one’s own agenda.
That we cannot call ourselves ‘independent’ is nonsense, and it’s plainly nonsense. It’s time for the application of some good, old-fashioned common sense.
Jonathan Hoyle is the chief executive of non-aligned firm Stanford Brown
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