With my new business, Fairhaven Wealth, I make a point to emphasise my independence.
There are a number of factors that go towards being an independent adviser. The only remuneration I receive is from my clients, not from any third party. I'm not affiliated with any product issuers. I am beholden to no one, other than my conscience and my clients.
When I say that Fairhaven Wealth provides "Financial advice that's on your side", I mean it.
At the heart of my business is aligning my interests with the interests of my clients.
I'm independent. I'm impartial. I'm as unbiased and as unconflicted as I possibly can be.
It's impossible to say that I provide the "best" possible advice to my clients, but I can say, hand-on-heart, that there's nothing stopping me from providing what I believe is the best solution for a client.
It's worth clarifying that just because an adviser isn't independent, or impartial, or unbiased, or unconflicted, it doesn't mean they can't provide good quality advice. They can, and I've seen this many times.
But it's harder.
I will never forget the following excerpts from the Jeremy Cooper's 2006 presentation to the Securities & Derivatives Industry Association, titled "Managing conflicts of interest in the Australian financial service industry". (Cooper was Deputy Chairman of ASIC at the time. ASIC is Australia's financial advice regulator and the equivalent to New Zealand's Financial Markets Authority (FMA).):
- "we found that advice that was clearly or probably non-compliant was about six times more common where the adviser had an actual conflict of interest by reason of their remuneration arrangements."
- "Non-compliant advice was three times more likely where the adviser recommended an associated product." (Emphasis added.)
ASIC has tied its tongue a little more recently, but in its 2012 "Shadow shopping study of retirement advice", it did note that "where advice fees were contingent on a product recommendation, there were numerous examples where the advice appeared to be structured towards recommending or selling financial products. In some cases, this was at the expense of optimal strategic advice, and prevented some otherwise adequate advice from being rated as good."
(As an aside, the same report found that over the advice reviewed, 58% was adequate, 39% was poor, and 3% was good quality. For more on what constitutes good quality advice, refer to this article.)
This is topical even as I write this article. ASIC has just released a report titled "Financial advice: Review of how large institutions oversee their advisers".
The report is sobering. In my discussions with many advisers from institutional settings, they often refer to the compliance resources at their disposal and imply that this guarantees high quality advice.
However, ASIC refers to a sample of 160 advice files it reviewed, and how its assessment compared to the internal audits conducted by these large institutions.
The report reads:
- "the audit process was effective in 18% of the sample files—that is, the findings by the licensees’ auditors aligned with our own file review. We observed an effective audit process only on files where no areas of noncompliance were identified by either the licensees’ auditors or our advice reviewers". ASIC expands: "We did not observe an effective audit process for any of the sample files where our reviewers identified areas of non-compliance."
- "the audit process was partially effective in 57% of the sample files— that is, some areas of non-compliance were identified by the licensees’ auditors, but our advice reviewers found additional areas of noncompliance"
- "the audit process was ineffective in 25% of the sample files—that is, no areas of non-compliance were identified by the licensees’ auditors, but our advice reviewers found that there were areas of non-compliance"
Which isn't entirely reassuring.
Now again, great quality advice can and is provided by large financial institutions.
Poor quality advice can and is provided by independent advisers as well. I have seen this too.
But it's easier to provide good quality advice when you're independent. If your institution has an investment product that has management fees of 1.2% when an equivalent option is available with fees of 1%, then the easiest thing is to recommend the 1.2% product.
What's the big deal with 0.2%? Well, it's $1,000 every year for every $500,000 invested. For someone with a portfolio of $1.5 million, that's $3,000 per year, or $60 per week.
If your key performance indicator as an independent adviser is to provide the best quality advice possible, then it's easier to provide great advice compared to when the security of your role relies on having a certain amount of funds under advice, or you need to place a certain amount of clients into a particular product.
Independence is valuable. It doesn't guarantee great advice. But it makes it much easier to provide great advice.