Being an “independent” financial planner by the strict legal definition of the term is not one-way ticket to poverty, says Daniel Brammall, director of Brocktons Independent Advisory and founder and president of the Independent Financial Advisers Association of Australia (IFAAA).
Brammall says a majority of financial planning businesses are wedded to asset-based fees, which he says are as conflicted as the discredited commission payments they are designed to replace.
Business owners are therefore terrified about what would happen if they moved to a remuneration model that abandoned volume-based remuneration and put them onto a truly independent footing, where the product they sell is advice and they set and charge fees accordingly.
Independent ≠ life of poverty
There’s a belief that if you are independent you will lead a life of poverty,” he says.
“Not true. There’s a small but growing group of advisers who are committed to the idea. Having looked over the fence, it’s not so bad.”
Brammall says the difficultly the financial planners have is that they “have a moniker out front that says ‘adviser’, but they are remunerated in a way that’s anything but [as an adviser]”.
A truly independent adviser is remunerated directly by the client, in a way that enables the adviser to consider any option that might be in the client’s best interests, he says.
But remuneration based on assets or volume of business means “you have got this whole series of options on the table that you are precluded [from recommending] because you are relying on funds under management”.
Look over the fence
The IFAAA is inviting financial planning practitioners to a symposium in November to have a look over the fence and hear from members of the IFAAA about the practicalities and benefits of running a genuinely independent advice business.
There are currently only nine practices and 13 financial advisers that are members of the IFAA, but Brammall says the association’s objective is simply to “change the face of financial planning”.
The term “independent” is defined in section 923A of the Corporations Act. It says, simply, that a person can’t describe themselves as “independent” if they receive commission (unless the commission is rebated in full to the client), if they receive any form of remuneration based on the volume of business placed with the issuer of a financial product, or if they receive “other gifts or benefits” which could be could “reasonably be expected to influence the person”.
Two out of three IS bad
In practice, a significant number of planning businesses can pass the first and third tests but fail at the second, because financial planners who charge an asset-based fee cannot meet the definition of independent.
Brammall says there is a widespread misunderstanding of the term “financial product” as it relates to platforms and an investor-directed portfolio services (IDPS).
He says many advisers believe that a platform is not a financial product, and therefore fees calculated on the basis of funds placed with a platform escape the Corporations Act definition.
Brammall says “this is sloppy thinking”. Australian Securities and Investments Commission (ASIC) Regulatory Guide 148 says, at paragraph 171, that “the client’s rights in a platform are a financial product”.
“Therefore opinions or recommendations intended to influence, or that could reasonably be regarded as intended to influence, a decision about using a platform will be financial product advice,” the guide says.
Brammall says this means volume-based payments from a platform put an adviser in breach of the corporations Act definition of “independent”.
Conflicted remuneration
In addition, section 963L of the Corporations Act states explicitly that a benefit wholly or partly dependent on “the total value of financial products of a particular class, or particular classes” is conflicted remuneration.
“The symposium is designed to lift the lid on these issues, dispel the myths and to show advisers who are struggling with these issues that there is a path forward,” Brammall says.
He says the symposium is aimed at any financial planning practitioner curious about the issues of independence.
“Anyone can attend – anyone who has any interest in independence at all,” he says. “See what we’re doing, see what the real issues are, and get another world view.”
IFAA members:
Daniel Brammall, Susannah Kulincevic
Brocktons Independent Advisory (Isaacs, ACT)
Phil Thompson
Rise Financial (Monash, ACT)
Matthew Ross
Roskow Independent Advisory (Hawthorn, Vic)
Adriano Donato
Rooskow Independent Advisory
Neil Salkow
Roskow Independent Advisory (Stones Corner, Qld)
Trent Alexander
Financial Planning Expert (Caulfield North, Vic)
Chris Thoms
Super-Focus (Geelong, Vic)
Fergus Hardingham
FM Financial Solutions (Pyrmont, NSW)
Michael Radalj
Your Private Advisers (Brookvale, NSW)
Bill Raffle
Bennelong Private Wealth (Sydney, NSW)
Ben Smythe
Smythe Financial Management (Brookvale, NSW)
