Hang on, how can someone using the ‘independent’ banner be so unethical? Let me explain.
s923A has become a label – a marketing label – that assumes financial advice is homogeneous and quality is only differentiated by which side of s923A an adviser occupies. Independence has become a word game to win more business from understandably confused consumers.
To be able to use “independent” in any marketing material you need to comply with how it was defined in 2001. If you can contort your business (or the perception of your business) to fit the definition – FASEA Ethical Standard 1 anyone? – you can leverage the consumer confusion. The contortion is only done out of commercial self-interest under the guise of consumer interest. Unfortunately, ASIC has sat on the sidelines just watching these tricky word games.
Back in 2001 an adviser couldn’t easily create a financial product by piecemeal; they could only use a pre-packaged option from a financial institution. In 2020, an adviser can quite easily create a financial structure by piecemeal. The platform (portfolio administration) can be created in-house and the investment management can be managed in-house. Putting the two together creates a structure that is technically a financial product.
But it shouldn’t be this way. Subsection 923A(2)(e) prevents an adviser from using the independent label where they have a conflict of interest with an issuer of a financial product. Quite clearly, if an adviser provides advice to set up such a structure and then derives ongoing fees from the management of that structure, the advice is conflicted and the adviser does not satisfy s923A (notwithstanding their licensing, ownership or remuneration business model).
Unfortunately, ASIC seems to only enforce s923A in the context of pre-packaged financial products issued by financial institutions, as if technology and business hasn’t evolved since 2001. This regulatory void creates the incentive for those unethical and unscrupulous advisers to leverage not just advice fees but also ongoing administration and investment management fees, while also leveraging the independent marketing label. Cha-ching! A significantly high percentage of the so-called independent advisers create these structures as a means to manipulate the definition.
One such structure is self-managed superannuation funds. Another is the use of a managed discretionary accounts (MDA). The latter is an investment platform that requires the MDA operator to hold an Australian Financial Service Licence. This is because an MDA operator not only takes on responsibility of the investments but also controls the custody of the assets.
But surely an adviser that uses an MDA service (or derives fees from the use of an MDA) is conflicted? MDAs are essentially in-house products, and as a result, advisers who recommend them to clients will generally receive a direct or indirect benefit. This creates a conflict of interest. In itself, this conflict of interest may be a breach of the Standard 3 of the FASEA Code of Ethics where “advisers must not advise, refer or act in any other manner where you have a conflict of interest or duty”. It’s black and white.
Surely ASIC cannot ignore so-called Independent Advisers using an MDA? Well they do despite their own industry guidance. Take a look at paragraph 16 of Regulatory Guide 179 Managed Discretionary Accounts, where ASIC states “where you enter into a contract with a client to provide an MDA service you are treated as the issuer of a financial product”. So then why doesn’t ASIC draw a conflict of interest link between an MDA contract issuer and an advice business, where they are the one and the same?
This is a relevant point that ASIC refuses to address. There are a number of very high profile, self-licensed, employee-owned businesses that operate under a fee-for-service (no commission) model, that use “independent” in their business name while also contracting with clients to use a MDA service. They fail the s923A definition, but ASIC continues to turn a blind eye? Why?
How did we get here and how do we fix s923A? What is the solution that addresses advances in technology and complicated investment platforms, and the unethical practitioners that use tricky word games to confuse consumers for their own commercial gain?
What exactly are we trying to ban? Conflicts? Impossible. Conflicts can’t always be avoided; they only need to be managed with the client put first. Every adviser is conflicted in some manner as we all want consumers to use their services where they are appropriately qualified and knowledgeable to provide them (instead of using their competitor’s services). Every fee model is also conflicted. Every adviser has a “restricted” APL in some manner (as PI insurers do not provider cover if there are literally no constraints on the investment product universe).
It could be argued that an adviser who provides a conflicted service whilst claiming to be Independent may also be in breach of other Standards within the FASEA Code of Ethics including Standard 1 where they are attempting to circumvent the law; Standard 9 where the advice is misleading or deceptive due to the use of Independent; and Standard 12 where they are not upholding the ethical standards of advisers under their AFS licensee.
ASIC shook their head at the suggestion of being a Code Monitoring Body whilst Senator Hume has put the new Single Disciplinary Body on the backburner for at least 2 years from the start of the Code of Ethics actually came into force. Am I missing something here?
It’s great having the most fantastic education and ethical standards in play – but if no regulator is there to monitor advisers against these standards and regulations, let alone subsequently discipline them then why are we even bothering going through the biggest overhaul in the history of the financial planning profession in Australia? Poor Kenneth Hayne must be shaking his head over his cup of tea every morning asking “why did I even bother?”
It should be noted that the severe penalties that this type of practice could attract. Using the term Independent in contravention to the obligations under s923A is considered a continuing contravention ($2,220 penalty per day). When this statement is incorrectly used in a public document, such as an FSG or an SOA, it is a breach of s952D(2)(a)(ii) as making of a defective disclosure. Each defective disclosure offence carries a maximum penalty in the local court of 12 months’ imprisonment or a fine not exceeding 60 penalty units. Or both. The practice is could also likely to be considered dishonest conduct under s1041G which carries a maximum penalty in the local court of two years’ imprisonment and/or a fine not exceeding 120 penalty units.
The solution is not simple but we need to start somewhere. A good start would be to amend the law so that unethical advisers can no longer hide behind tricky word games. If we cannot amend the independent definition because it would literally capture everyone, then perhaps this highlights that the independent marketing label is a redundant concept in 2020.
This is such a topical issue, with the new legislation (coming out of a royal commission recommendation) to force all advisers to disclose why they fail to meet the Independence definition. Do they fail to meet it because they are not interested in word games? Maybe in the year 2020 with a best interest duty and code of ethics it no longer has much meaning, except to confuse consumers.
Instead of focusing on tricky marketing labels to confuse consumers, the barometer of good quality advice should be measured through the prism of education, experience and the Code of Ethics that the adviser subscribes to.
Everything else is just marketing.
Adrian Raftery, principal, Mr Taxman
definition for all us UBER Drivers
free from outside control; not subject to another’s authority.
not depending on another for livelihood or subsistence.
capable of thinking or acting for oneself.
not connected with another or with each other; separate.
noun: independent; plural noun: independents
I agree that if you offer an MDA, you are not Independent and shouldn’t be able to call yourself Independent under s923A. But strongly disagree that we should throw this term out altogether. Client’s do care about Independence, it is important for Financial Advisers to move towards unconflicted advice. If you are receiving trail commissions or asset based fees your advice is conflicted, even if it is legacy trail. Don’t kid yourself, clients do care about this, they should care about this. The sooner advisers realise they need to move towards an unconflicted model the better off everyone will be.
If you are recommending your own services as opposed to your competitor’s services, you are conflicted not withstanding your licensing, ownership or fee methodology. This is the point of the article. All fee methodologies are conflicted, with both advantages and disadvantages under each methodology. Using bespoke IMA/SMA to minimise the Adviser’s regulatory burden is also a conflict, not withstanding your licensing, ownership or fee methodology. Setting up a SMSF or MDA that you later provide investment recommendations on is also conflicted. Everyone is conflicted. The Independent label is simply used for commercial advantage to leverage consumer confusion. The label is about marketing and nothing else. It has lost all meaning and is no longer relevant in 2020. Perhaps it meant something in 2001 when ‘products’ couldn’t be packaged up by an Adviser outside of a financial institution. The Independent label should be banned across the board so all consumers know that everyone is conflicted. All consumers need to know is that everyone is subject to the same statutory best interest duty. We should not compete based on marketing labels, we should compete based on education, experience and the code of ethics we subscribe to.
Vertically integrated SMA’s run by an in house team are no different to the Industry and Retail Super Funds, they are a conflict and yet nothing said about them by regulators.
Will the FPA discipline member firms/members who are doing this? I bet $502k no.
On the money, as usual, Adrian. I’ve always found 923a a joke, only to become moreso when I have to start trying to explain to clients that I can’t call myself independent because there’s some legacy revenue in the business linked to product. Ironically, the people this is designed to protect, the clients (remember them?), don’t really care how (or how much, for that matter) we get paid as long as they perceive they’re getting value for money. And THAT, or course, is a very subjective assessment.
Wow, a great article. Well considered and argued. Where is ASIC?
Is this the Adrian Raftery who was pushing Deakins financial planning diplomas?
Yes
nice one Adrian, well said.
Hi Adrian,
I broadly agree with and support all the points you have made in your well written article – except for one, which I will refer to in a moment.
However, that me first deal with the problem of insurance. Since the introduction of FSR in 2002, enforcement of Section 923A has been used by ASIC to prevent small, privately owned AFSL’s, who follow a completely different advice model to the (now discredited, thanks to Hayne) vertically integrated advice model of the Big Banks, to prevent these otherwise independent AFSL’s from promoting their biggest and most important difference in their advice offering – usually because insurance (risk) products were sold on an upfront and ongoing service commission basis.
It is still permitted to receive remuneration for the placement of risk business, through the receipt of commission. However, once the intended legislation (deferred from June to December) is passed, we will be required to say in our FSG (and presumably other advice documents) that “WE ARE NOT INDEPENDENT” if we receive a single dollar of commission payment in any form. We receive a quite small amount of ongoing risk insurance servicing commission, for a small number of clients ($15 – $20K). It is our intention to either a) get rid of this risk business or b) rewrite the business without commissions, if this can be done in the client’s best interest . In the short term, we will rebate the commissions to the client – until we can implement a) or b). It is absurd that we have to burden our business with this administrative nightmare, just to be able to say we are “independent”. Our business has been independent to its bootstraps for the last 25 years, in that we our AFSL is privately owned, we do not sell any such any products of our own and have no ownership association with any institutions or financial product providers. It is unfortunate, but it is no longer viable for us to provide risk insurance advice to to smaller “mum and dad” clients. God knows where they are going to turn to for help. Risk business is a completely different business and requires a different skill set and mindset to investment advising. I believe the greatest mistake of FSR, was to bring the Life business into the same regulatory system and treated the same as investment business. But that is history.
To the second point. For 10 years now, we have operated a limited MDA service for our clients. We do not charge the clients for this service. In other words, it is a “free” service to the clients – however, it is not free to us. We face increased PI costs and significant additional regulatory requirements. However, it enables off to offer a far higher standard of service to our clients, to act almost immediately across the whole range of our client portfolios, without having to write and prepare 90 or 100 personalised ROA’s, just to sell an investment we are no longer happy with, in order to replace it with another we feel will do a better job for our clients. Let me repeat – we receive no additional remuneration for this service – in fact it costs us money. However, both our business and our clients benefit from a far more efficient portfolio updating facility. Is this conflicted? I think not. I do agree, that there are many firms who charge a fee for the investment management services they provide through the use of either a limited MDA facility or a full MDA facility. I agree that if this is the case, they are conflicted. However, not every AFSL who offers a client service under a limited MDA facility, is automatically breaching FASEA standards 1, 3, 9 or 12.
That’s the end of my rant – thank you.
You say, “Risk business is a completely different business and requires a different skill set and mindset to investment advising.I believe the greatest mistake of FSR, was to bring the Life business into the same regulatory system and treated the same as investment business. But that is history.”
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– I agree wholeheartedly however not that it is history. It is still very much a bad part of FARCE-IA and the scattergun qualifications the poor hapless risk adviser has to achieve in order to simply help mums and dads with even basic term, trauma and income protection insurance advice. It is beyond ludicrous that a risk adviser must do the same comprehensive uni courses/degrees as a full service adviser investment in order to apply his quite different craft. The qualifications are, in the main, irrelevant to a riskie. As you state, it is a different knowledge and skill set.
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These degrees are an abject waste of time and money for a riskie and a separate qualification and degree should have been put into place years ago. I am a riskie of 34 years and I am leaving the industry in Dec 2021 directly due to this farce. So much for client best interest on the part of authorities responsible for this mess as none of my loyal long term clients think it is in their best interests to see me leave them.
Fair comment. However s923A refers to a conflict that MIGHT arise. Doesn’t even require for a conflict to actually arise. Tricky word games just got even trickier.
Not sure what the issue is. If the only thing stopping you from calling yourself ‘independent’ or ‘independently owned’ is to rebate the insurance commissions back to the client then that’s what you have to do.
Either that or you work with the insurer to lower the cost insurance by the amount of the commission. Don’t say it can’t happen/too difficult because this model already exists with term deposits for instance – a bank will quote an all up rate, say 1%pa for a 6 month TD, and brokers (who are not independent) take their cut if they want to while the client gets less while independent advisors give the all up rate.
Funny how some businesses are allowed to be more equal than others. Adrian shows it with ‘independent firms’ with MDAs, then there are industry funds with in-house advice (hugely conflicted and restricted in their advice).
But then the genesis of the restrictions of the word ‘independent’ is from the fact that the restrictions benefit the banks. As product providers they were never independent but if they could make it impossible for all but a tiny niche of advisers to use that label then they don’t have to fear anything from those who are not as egregiously conflicted but who accept insurance commissions.
The restrictions of the word independent are deeply intertwined with product providers having ‘commercial salesforce(s)’ (De Ferrari, 2020). It is hilarious that Ken Hayne allowed the one conflict that is at the root of almost all trouble to explicitly continue so we will have another Royal Commission in, perhaps, 2028?
Adrian, great article. It always surprises me that a firm can be considered independent yet set up a SMSF so another part of the business can generate a fee (not suggesting this is not appropriate at times but there is a conflict there). Secondly there is a high profile Melbourne firm that advertises a fair bit on radio who has set up their own portfolios, where they receive a fee from. I can’t fathom how this could be considered independent.