Fee Only Advice Avoids Conflict

Does your adviser receive commission for the investment advice they offer you?

It wasn’t that long ago that “fee only” financial advisers were a novelty. Most were perceived as idealists who would never make it in the “real word” of investing, but things have since changed.

The old brokerage model is gradually being replaced by fee only advice, which makes sense. Everything works best when the person you’re working for is the person who pays you. It avoids a conflict of interest and provides objectivity.

Fee only advice aligns the interest of the adviser and the client, so the adviser has no reason not to offer their best advice – advice that is in the best interests of the client.

Financial advisers and share brokers that receive commission are sometimes working in a high turnover environment – trying to “time the market” through buying and selling stocks in an effort to secure assets with high returns. However this approach is flawed – no one (not even the experts) can accurately pick stocks with any consistent degree of success and every time a portfolio is traded the client incurs costs.

Instead, a better approach is to focus “advising” the client – understanding where the client wants to be in the future, what their long term goals are and then designing a portfolio to achieve those goals. The client pays for that advice through a fee only approach – without any commissions or hidden agendas.

Another strong influencing factor is that fees are a claimable tax item whereas brokerage is not. Therefore on a ‘like for like’ comparison, the net cost of brokerage is far greater than a straight, transparent fee.

Regulation changes are progressively being introduced to the financial adviser industry from 1 December 2010, which includes minimum standards of education, adviser registration (and in some cases authorisation), belonging to an independent disputes resolution scheme and abiding with a Code of Professional Conduct.

The Code defines minimum standards of competence, knowledge and skills, ethical behaviour and client care, including “placing the interest of the client first”. Advisers that offer fee only advice already do this as part of their normal business practice.

A crucial aspect of the new regulations is that anyone offering full financial advice will have to (by law) disclose their remuneration whether asked by their client or not.

Another key aspect is that Authorised Financial Advisers may not call themselves independent if they receive payment from someone other than the client, unless those benefits are transferred to the client. For example, an adviser who receives commission or brokerage as payment for investments or insurance products cannot claim to be an “independent” adviser unless the commission or brokerage received is passed onto the client.

These regulatory changes are being introduced by the Securities Commission to encourage public confidence in the professionalism and integrity of financial advisers.

Historically the New Zealand market has been lightly regulated, however the introduction of a regulatory framework is a move in the right direction to make the industry more professional and in line with the rest of the world. The pace of change is swift but well needed.

In early 2011 the ‘super regulator’ for financial markets, the Financial Markets Authority, will be operative and has wide sweeping powers that haven't been seen before, including overseeing all the current regulators.

Over time we hope to see more advisers move to a “fee only” model as this is the most effective way of encouraging public confidence - offering advice that is objective, without conflict and is truly in the best interests of the client.