How independent is your financial adviser?

November 2011, Hawke's Bay Business, Hawke's Bay Today

Jumping through hoops is something the financial services industry is now used to – Authorised Financial Advisers (AFAs), in particular, are certainly used to it.

The recent legislative changes to the financial services industry that came into force on 1 July 2011 have meant that financial advisers who provide “investment advice” must be authorised.  The AFA designation is the new accessory for advisers – if your adviser is not an AFA then find one who is!  The reason for using an AFA is that they must adhere to the Code of Professional Conduct – a very comprehensive and prescriptive set of 18 Code Standards which provide minimum standards of competence, knowledge and skills, of ethical behaviour, and of client care. 

Code Standard 3 prescribes that an AFA cannot state or imply that they are “independent” if they are not.  The number of financial advisers that can honestly call themselves independent is dwindling due to regulation and an aging adviser workforce.  

An AFA is not independent if they have a connection to a third party where there is a benefit provided.  For example, an AFA is not independent if they are contractually obliged to recommend a particular financial product or maintain a target in relation to a particular financial product.  An AFA is also not independent if they receive, either directly or indirectly, “a benefit from a person other than the client for providing the services”.  Examples such as a holiday or junket fit this definition.  Therefore, a large proportion of AFAs who are affiliated with banks or large corporates cannot call themselves “independent” because, in the case of a bank employee, they often have to offer their clients the products provided by their employer.  

For clients who want financial advice with some objectivity and impartiality, they need to see an independent adviser who has no affiliations.   The benefit to the client of receiving advice from an independent adviser is that they are given advice which is tailored to their individual needs, to assist them to meet their long-term goals and objectives.  There is clearly no independence if an adviser must recommend a product so that they meet their annual target and consequently receive a reward in the form of a trip to Fiji. 

To a lay person, it might seem like an easy option to become aligned with an investment product provider rather than searching for a truly independent adviser.  Being involved with a large organisation can be more convenient, but can also result in a serious downside.  Those non-independent advisers could be influenced by third parties, resulting in the client’s interests not being put first.
Making mistakes with your personal finances is the most expensive lesson you will ever learn. When you need professional guidance, seek it out and be willing to pay for it.

It is important to understand that commissions and fees for investment products  are generally not charged as a separate line item but are instead hidden or absorbed into the investment.  If you don’t normally write a separate cheque to compensate the adviser, it may seem as if the advice you are getting is free.  Of course, it’s not; the adviser is remunerated in some other way.

The general public are learning that the recent changes to the financial industry mean they can now demand more objectivity and transparency of the advice process.  If overseas market trends are a good indicator, then the focus on fee-only based advice will only increase.

Disclaimer
“The opinions expressed in this article are those of Stewart Group’s advisers and should not be considered as advice. Investors should obtain professional advice regarding their own financial circumstances and objectives before making any investment decision.  Under the Financial Services Act 2008 a copy of our Disclosure Statement is available on request and free of charge."