When should a financial adviser say they’re “independent”?

2 July 2018

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I recently had a public brouhaha about a financial advice business that was claiming to be “independent”, even though it was partially owned by a financial product issuer.

I lodged a complaint with the Financial Markets Authority (in line with my commitment to be a bulldog on behalf of Kiwi consumers), because I don’t think any reasonable person would think this is “independent”.

Perhaps unwisely, I mentioned my complaint on a public forum and it became a slightly bigger deal than I expected. I think I made some friends as well as some enemies.

The outcome is that, for whatever reason, the business in question has removed all references to being “independent” from its website. So I’m happy with the outcome.

The whole exercise was interesting to me, from the perspective of what some people think constitutes “independence”. Or at least, what some people think they can get away with when saying they’re independent.

To me, independence relates to being free from any pressures (whether explicit or tacit) to recommend any particular strategy or product to a client.

Being partially owned by a financial product issuer has to have some influence.

“Independence” is defined in some contexts. For example, the Code of Professional Conduct which applies to Authorised Financial Advisers (AFAs) (but not other advisers such as RFAs or QFE representatives), talks about independence: an AFA “must not state or imply that [they’re] independent… if a reasonable person in the position of a client would consider the [AFA is] not independent”. It’s an open-ended definition, and perhaps not very clear.

In Australia, section 923A of the Corporations Act 2001 sets out very strict criteria for when you can use the terms independent (as well as impartial and unbiased), and ASIC has gone into some detail on how it interprets these terms as well.

For the time being, there appear to be shades of grey in New Zealand. The main restriction, as it relates to organisations (as distinct from AFAs) and non-AFA adviser, is general consumer protection legislation that prohibits misleading and deceptive conduct.

Unfortunately, when an adviser says they’re “independent” it might not mean they’re independent in the way you might interpret it.

Another example is that many advisers who say they’re independent receive commission from financial product issuers. Sometimes this relates to KiwiSaver products. Most often it relates to insurance. My inclination is that this is least in a grey area, if not a conflict of interest that detracts from any claim of independence. (No surprise then, that I don’t receive commission.)

It ultimately falls back on the client to determine whether an adviser’s interests sufficiently align with their own. I would encourage all clients to:

  • Read and pay attention to their adviser’s disclosure statements. By law they’re required to disclose how they are paid and any relationships they have with other parties that might influence their advice.
  • Check the adviser’s company’s ownership arrangements on the Companies Register, in case the disclosure statements don’t reveal everything clearly. (And even then, you need to look in a  bit of detail – in the case I complained about, you needed to look at the ownership interests of one of the companies that had an ownership stake in the advice business in question – so it wasn’t directly apparent.)
  • Ask hard questions. The relationship between client and financial adviser is a relationship of trust. A relationship of trust should be earned. I’d ask the adviser about all of the potential ways that their interests aren’t entirely aligned with the clients.

If the adviser says their interests are 100% aligned with yours, then that’s a red flag. Because there isn’t a single business model I am aware of that doesn’t have some small conflict of interest. For example, I charge all clients a fixed fee, and the nature of my advice doesn’t impact any future prospects for revenue. I’ve designed my business model to be as closely aligned with my clients as possible. However, even for me, there’s a conflict – in my instance, because I charge a fixed fee, I could have an incentive to spend less time on a task than I otherwise might compared to if I charged hourly rates. And for any adviser, myself included, there’s an incentive to make my advice more complicated than it might need to be, to justify the fees I charge and perhaps encourage clients to engage me in the future.

If you’re engaging an adviser, and you think incentives influence behaviour, it pays to consider this critically. Once you’ve considered this information, you can be in a position where you can determine for yourself whether their advice is likely to be unduly influenced by the relationships the adviser has in place.


conflicts of interest, financial advice, independence

About the author 

Sonnie Bailey

Sonnie likes telling people that he’s a former Olympic power walker, a lion tamer, or a popular author of erotic, supernatural, mystery novellas. Sometimes he says he was in a band that opened for Robbie Williams. None of these are true.

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