I think the general concept of independent advice is well received. We know that if people have a vested interest in something, they are more likely to steer you towards the outcome that most benefits them. It’s the same thinking that tells us to get an independent AA check when buying a car, because we know the salesperson at the yard gets a commission whether they sell us a reliable car or a lemon.
The same rule applies to financial advice. External validation offers you peace of mind that your adviser has your best interests in mind.
When it comes to financial advisers, “independent” is not an empty buzzword. The term carries weight, including a commitment to the best regulatory practices and the highest fiduciary standards.
The value of advice
Contrary to popular belief, not all financial advisers have a requirement to put the client's interests first, and it can be difficult when the adviser works for a company that provides investment products and incentivises the adviser, through commissions, to sell them to clients.
Generally, advisers are paid for advice in two ways:
Directly – via a fee for the service the adviser has provided, or:
Indirectly – the adviser is paid a commission from the providers whose product you sign up to. You pay nothing upfront for this, but you should know this and recognise that you may be offered a limited choice of options from only one provider.[i]
If you are engaging a direct, fees-only adviser, this is one way to ensure that the providers they work with are sourced for the benefit they provide you rather than the kickbacks they provide the firm. This is where you’ll want to look for a fiduciary.
Fiduciaries are financial advisers or firms managing the assets of another person. They stand in a special relationship of trust, confidence and/or legal responsibility – and they can’t collect any commissions from the sale of investment products.
Another benefit of working with a fiduciary is the depth of conversation. The research, understanding and rationale provided by fiduciaries goes beyond the requirements for non-fiduciary professionals. This means not only will your interests be put first, but there is also more likely to be ongoing care and service throughout your investment journey (even after you sign on the dotted line).[ii]
External validation
If commissions are a red flag, CEFEX is a big green banner.
CEFEX certification is the nearest thing we have to a global stamp of approval for trustworthy investment professionals.
CEFEX accredited firms voluntarily undergo annual audits by independent analysts to help foster a culture of continuous improvement.
This annual assessment involves identifying Opportunities for Improvement (OFI) within the investment advisory firm. These OFIs are specifically related to best practice standards, and the firm is expected to take action within 12 months of OFI issuance.
What that means, essentially, is a firm with CEFEX accreditation has chosen to take on a continual commitment to best practice – one which external parties will be making sure they adhere to. It’s not easy to be CEFEX certified due to the rigorous process and high global standards.
Ultimately a verification of an advisory firm by CEFEX, an independent global assessment and certification organization, is the perfect way to prove an advisory firm’s approach is robust and trustworthy.
To date, just over 100 firms across the globe have achieved this certification. There are only eight CEFEX certified firms in New Zealand.
What it means for you
To exercise fiduciary duty means that the adviser must recommend the best product options to clients, even if those products result in reduced or zero compensation for the adviser.
Financial professionals who aren't fiduciaries are held to a set of standards known as the "suitability standard."
Think of it this way, you wouldn’t expect to go to a Toyota dealership and the salesman to say, ‘Now that I’ve gotten to know you, I think a Hyundai might be a better fit for you.’
A fiduciary would be required to tell you about the Hyundai. A nonfiduciary? Not so much.
That said, non-fiduciary advisers are not necessarily looking to take advantage of their clients, and if you have an adviser you like and trust, have an open discussion of fees and commissions with them, and how much those costs are impacting the earnings on your portfolio each year. The real questions are:
· Does an adviser have a documented process that adheres to the industry’s best practices?
· Are the recommendations in writing, setting out what the adviser is recommending and why?
· How are the fees charged? Is there an annual fee or monitoring fee? Does the adviser charge a percentage of the money invested?
· Is my adviser being the best professional? Who is verifying it?
Getting financial advice suitable for your unique situation should give you peace of mind, not keep you up at night. Setting up a chat with an independent, non-aligned fiduciary can help you on that journey.
Nick Stewart is a Financial Adviser and CEO at Stewart Group, a Hawke’s Bay-based CEFEX certified financial planning and advisory firm.
The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. A disclosure statement can be obtained free of charge by calling 0800 878 961 or visit our website, www.stewartgroup.co.nz
[i] https://www.fma.govt.nz/investors/getting-financial-advice/paying-for-financial-advice/
