Warning: ‘Not Independent’
On 20 August 2019, the Federal Treasurer, Josh Frydenberg, announced music to my ears!
He announced that legislation will be introduced so that financial advisers are not permitted to provide advice to a new client without first declaring whether they are classified as ‘independent’ under the law – and, if not, explaining the reasons why they are not independent.
For a financial adviser to be able to describe their services as ‘independent’, ‘impartial’, or ‘unbiased’ (or even words of a “similar import”, such as ‘independently owned’ or ‘non-aligned’) there are certain conditions that must be met.
These conditions are described in section 923A of Corporations Act, otherwise known as ‘the independence law’, which lists the obstacles that prevent independence, including:
• receipt of commissions,
• conflicted remuneration (such as fees calculated on the volume of business placed, also known as ‘asset fees’), and
• associations with product issuers.
There is already nothing preventing a client from asking a financial adviser if they are independent. However, consumers don’t know what they don’t know and as Alan Kohler said recently, “The trouble is most people don’t know what a percentage means.”
The new legislation will be introduced to Parliament by 30 June next year and will ensure any adviser who does not meet the requirements set out above will – before providing advice – be required to bring that fact to the client’s attention and to explain, prominently, clearly and concisely, why that is so.
What this means is that from 30 June next year, advisers who are not classified as independent under the law will have to explain in writing the reasons why they are not independent.
Why is this so important? It’s because conflicts of interest have been identified as “deep-seated issues” at the heart of the many instances of poor advice uncovered during the Royal Commission.
Commissioner Hayne found the “flawed premise” that conflicts can be managed is, in fact, the real problem.
Under existing laws, an adviser is required to ‘manage’ conflicts of interest and disclose, in general terms, certain information about the advice provider. However, there is no requirement for an adviser to bring to the client’s attention the conflicts that prevent the adviser from being independent under the law.
If I were a consumer, I would want to know these things!
In many cases, people who get financial advice from a conflicted source are not necessarily getting bad advice. Often the strategic advice is spot on, but it’s then compromised by using expensive products or the acceptance of commissions that lead to the cost of implementing that advice being exorbitant and costing the client a fortune more than necessary in the long run!
No system is ever going to be perfect, but if I was looking to someone for financial advice, I’d want that advice to independent… that’s why I practice what I preach!
If you and I think alike, then let’s have a chat.
Cheers,
Daniel
If you’d like to find out more about how INDEPENDENT financial advice could help you manage cash flow, pay off the mortgage faster, get the most out of super and invest wisely, then get in touch on 0411 484 464 or head to wealthtrain.com.au.
Daniel McGregor is the man behind Wealth Train and is a member of the Independent Financial Advisers Association of Australia. This advice may not be suitable to you because it contains general advice which does not take into consideration any of your personal circumstances. All strategies and information provided are general advice only.
Daniel McGregor and Wealth Train are authorised representatives of Independent Financial Advisers Australia AFSL 464629