If the government’s plan to make advisers explicitly disclose their lack of independence goes ahead, the combination of managed accounts, insurance commissions and asset-based remuneration will probably mean 99 per cent of advisers have to amend their disclosure documents.
The new legislation, which was introduced earlier this month alongside a Bill proposing annual ongoing fee arrangements, is set to kick in by July 1 if it passes the house and senate. The twin proposal was characterised in this Professional Planner piece as a ‘watershed moment’.
Firms that provide insurance advice via commissions are, according to section 923A of the Corporations Act, not independent. As are providers of managed discretionary accounts, if a fee is attached, and likely anyone that charges their clients on an assets-under-management model.
According to Dan Brammal, the president of the Profession of Independent Financial Advisers (PIFA), there are only a handful of advisers in the country that don’t come under any of these descriptions.
“There’s probably about 250 advisers in the country that meet that standard,” Brammal says.
Brammal – whose group has 60 members and pitches itself as the only conflict free, independent association in the industry – reckons the ‘lack of independence’ disclosure is a long time coming.
“When you have an interest in the product or the transaction then you’ve lost your independence,” he says. “If I’m charging you a fee as a percentage of the assets you protect, then I have an interest in the transaction.”
The assertion, he says, isn’t an attack on advisers.
“You don’t need to be independent for a client to trust you, that’s a furphy,” he says. “It doesn’t mean the adviser is negligent or poor, all it simply means is that it doesn’t entitle the adviser to call themselves impartial, because they’re not.”
The shape of the thing
Just what shape the disclosure will take is unclear, and causing considerable consternation amongst advisers.
Despite the proposed Bill’s implementation date being only four months away, the closest the industry has to a definition of exactly what’s required is the draft legislation’s original demand for written disclosure of an advisers’ lack of independence “in the form prescribed by ASIC”.
ASIC haven’t yet offered any prescriptive guidance, which is understandable given the Bill hasn’t passed yet.
Advisers on the ground are in a bit of a quandary here. “We still don’t know exactly what we’re meant to say,” laments Wayne Leggett, a principal adviser at Paramount Financial in Perth.
Some licensees have already gotten ahead of the game and added catch-all disclosures to their financial services guide – it’s understood MLC is among them. This is admirable, but could mean they have to redo it again in July.
In the end, this disclosure may not even go in the most obvious place. “Frydenberg assumed it was going to be in the FSG,” Brammal says. “We said in our submission that it needs to be more prominent.”
Conflicting views on conflicts
A central question on the ‘lack of independence’ disclosure rule is whether asset-based remuneration is actually considered conflicted. Here, the interpretation of regulators is crucial.
As it stands, ASIC haven’t said that asset-based fees are conflicted; they make it clear in RG 175 that asset-based fees alone don’t preclude advisers from being independent.
“Financial services providers that receive asset-based fees are not prevented from using restricted terms such as ‘independent’ merely because of their receipt of asset-based fees,” the guide states.
The spirit of the proposed legislation, however, is that any conflict should be declared. Further, the Code of Ethics put forward by another regulator, FASEA, suggests that asset-based fees are inherently conflicted.
“You will breach Standard 3 if a disinterested person, in possession of all the facts, might reasonably conclude that the form of variable income (e.g. brokerage fees, asset based fees or commissions) could induce an adviser to act in a manner inconsistent with the best interests of the client or the other provisions of the Code,” FASEA states in its guidance.
Notwithstanding concerns that verbiage like “might reasonably conclude” and “could induce” will leave advisers open to future litigation, it is clear that ASIC and FASEA are not aligned.
Brammal says his group is calling on ASIC and Treasury to clarify their position. ASIC’s interpretation of RG 175 is a “misreading”, he believes.
“We ‘ve had it confirmed by a legal team that you cannot use asset fees and be unconflicted under 923A,” Brammal says. “RG175 is ASIC taking a softer view.”
If the interpretation does encapsulate asset-based fees, and 99 per cent of advisers need to bend to the new legislation, some worry that the scope of it will actually reduce its effectiveness.
“It’s completely meaningless,” says Paramount’s Leggett. “The people that aren’t going to be classified as independent are so few and far between its virtually moot.”
Some great, great comments on this article.
The main issue, as Paul Forbes correctly points out, it that the definition of the word ‘independent’ has been corrupted by what I heard was the successfully implemented intention of the banks and similar institutions.
They made sure to tighten the definition so much that only a tiny fraction of advisers would be able to fulfil the requirements and therefore be able to compete much more successfully with the banks. The definition of ‘independent’ is so tight that hardly any customer benefits from the usage of the word ‘independent’. The Royal Commission and lawmakers fell headlong into the trap of confirming the far-too-tight definition.
Craig, thank you for your research. An adviser should be well qualified, a DFP with or without a grandfathered CFP is the bare minimum and should be augmented by further qualifications over time, especially if they give SMSF advice.
One of the many issues with s923a is the breadth of the section. It infers that if we have a book fo trailing life insurance commissions, we cannot use the restricted terms. However, it is arguable that advice provided to a client that is not subject to any commissions, is unconflicted in respect of this individual client engagement.The section does not address this nuance. Therefore, it appears the only way a practice with a legacy book of life commissions coudl use a restircted term is by selling off the book. The question is then, if this is worth it.
As an aside just because a legal team offers an opinion, doesn’t make it so.
DG
As usual the PIFA and Mr Brammall states that “his version” of interpretation of s933A is correct. He claims that assess based fees are a conflict.
Unfortunately for Mr Brammall who as it stands has limited education within Financial planning, holding only an old Diploma of Financial Planning and the “Wheaties pack” CFP which back in ’99 when he got it required no additional formal studies, hence why FESEA does not provide any credit for RPL (source ASIC adviser register). Yet he claims to be an expert on financial planning. He does not meet even the minimum requirement going forward. It is very interesting that he still proudly states CFP to show he is educated yet this is only a designation (not a qualification) which can only be used when you continue to be a financial member of the FPA. Being a member of the FPA would link him to the very organisations he criticises.
Highlighting his lack of knowledge is his constant attack on assess based fees which he claims is a conflict. Having complete my MFinPlan (AQF9) with my finial research project completed on “conflicts of interest” I have done considerable study of this very area. Mr Brammall should publicly retract this assumption as if he read ASIC media release 17-206MR which is ASIC’s publicly state interpretation of this very issue in the corporations act;
2. Can a financial service provider who receives asset-based fees call themselves ‘independent’?
Financial service providers who receive asset-based fees are not prevented from using restricted terms such as ‘independent’ merely because of their receipt of asset-based fees.
It doesn’t get much clearer than this, the release did go on to say that the assets based fees they consider a conflict is volume based fees, i.e. a platform providing addition remuneration for the volume placed with them. This is clearly different form the clear agreed fee between a client and the adviser. So, Mr Brammall, are you a higher authority then ASIC?
On this area I would say that no form a fee or charge is conflict free or ever can be, anyone that runs a business is conflicted to make money, whether that be an hourly rate, fixed fee or asset based fee. Under all these a business owner (adviser) wants to grow his revenue. That is either charge more hours or increase the hourly rate, index up the fixed fee or get more paying for the fixed fee, or under the asset based fee, grow the level of assets. These are all a conflict in the scheme of things.
I look at this from a client’s perspective as I started in the industry as a client. If everyone has a conflict what conflict best benefits the client, i.e. which adviser conflict would line up with the client’s conflict when considering super, the core type of advice for most advisers.
An adviser charging an hourly rate is interested in charging more hours or raising the rate, this has no bearing on the client’s core conflict, to grow their super (wealth).
An adviser charging a fixed fee is interested in raising this fee, either through indexing, increasing clients onto high service levels (fee) or getting more clients which will dilute the advisers time to service their client.
An adviser charging an agreed asset based fee is interested in growing the size of the asset, the best way to do this is to grow their clients asset/super/wealth. It’s what the client wants and makes the advisers conflict line up with the advisers.
As I said earlier we all have a conflict, it is impossible to avoid unless we all work for free. Let’s open up about the conflict and then work to line up the conflict to benefit both parties that matter, the adviser and the client! Not politicians, super fund providers and other verted interest.
Mr Brammall only wants to scare adviser to do his course for the small fee of only $4,398.90 if you enrol now, it will double shortly! Even for his current members, they too must complete this course to be able to call themselves “Independent”. His website (pifa.org.au) even states that even if you think you are independent, you are not until you do this course. Okay so this is a lot of money and run by what I would assume is Mr Brammall who does not hold an RTO number. So after you complete this course what do you get? I don’t know but without the RTO, you get no formal qualification. This does sound very conflicted doesn’t it?
Why do the media like posting this man’s obscure and incorrect views all the time and make him out to be an expert in the field of “independent financial advice”?
I think we can all applaud the notion of independence. The difficulty with the current definition is that it does not help the consumer differentiate between a non-conflicted adviser and an adviser sitting inside a large financial institution selling products. This is not just banks, this includes industry funds and retail offerings.
A quick review of the ‘independent advisers in this category and I admit I have not looked at all in this group, shows them to be building their own investment portfolios and housing their clients funds within those portfolio’s within self-managed superannuation funds they either recommend or manage.
Perfectly reasonable, however the recent Perth case of an adviser being banned for recommending in-house super admin services without offering alternatives shows how quickly this sort of model can be seen as conflicted.
The definition of independent should be something a client can use to determine whether the person sitting opposite them is incentivised to provide a product recommendation that they or their principal will benefit from and is not as beneficial to the client as some of the alternatives.
Asset based fees for smaller clients are really a flawed approach as the adviser ignores their value and is looking at the clients balance to ascertain what their advice and service is worth. I would argue every practice should have a minimum implementation fee and service packages that are priced appropriately. Wealth management (separately priced) can have an asset based fee as there is incremental risk with larger clients and they tend to look for more personalised and complex solutions. The percentage fee may be lower for large balances but would not necessarily be capped as you must allow for the increasing investment risk.
Insurance commissions are no longer conflicted. If every company pays the same commissions and the adviser can access the ever reducing Life company universe then there is no product advantage. The purists will argue the adviser is incentivised to write large sums insured but this is an issue for the license and the regulator, not 923A. The advice is inappropriate, not conflicted, and we now have the FASEA code to hold advisers and licensees accountable.
In short, ‘independence’ should be a consumer tool, not just a different business model
FASEA is not a Regulator. It is unhelpful, at this early junction of a new landscape to have words thrown around loosely. FASEA is a Standards Setting Authority. We are yet to see the Code Monitoring Body who will be the ‘regulator’.
If the Code is worth its salt, it will be a guide to advisers to make better judgement, it isn’t a new set of laws.
If you charge a client based on the FUA, this should not conflict your advice if, first and foremost, you provide advice that is in the client’s best interest. The Code doesn’t prevent you being remunerated for your advice so the adviser also benefits however, the adviser interest should be secondary to the client’s.
Do we benefit from demarcation with words such as “independent”. Sounds to me that even those in the industry need legal opinion to work this out, so how does it help the consumer? It’s a concept, but in reality, probably is just a furphy.
I find it fascinating how the ‘good guys’ are, on further scrutiny, not turning out to be quite as white as they present themselves. Good financial advice should be available as widely as possible as having an expert on your side is often hugely helpful. Does Dan Brammall’s model fit this requirement?
Brammall makes himself out as the speaker for the most virtuous financial advisers but he consistently avoids answering some important questions:
How do his members handle payments for insurance? Is, as I suspect but do not know, their insurance clientele skewed towards the wealthy or very wealthy end as few mid-market let alone financially challenged people would be ready to pay thousands of dollars for a policy that may not eventuate (due to health or other reasons)? How do they handle renewals where it would be advantageous for the client to switch (to get out of end-of-life insurance for example)? Do they ask for another lump sum?
How do they handle low balance clients, for example 80+ year olds whose super is running out? Do they ask them to leave just when they need advice most or do they charge them fees that are a very high percentage of assets?
What are the demographics of their clients? Are they mixed as they are for many advisers or are they very homogenous? For which type of clients and which type of advisers does their ‘completely independent’ fee model work? For which type or types does it not work?
What are the revenues and profits of their 60 members and all 250 advisers? Do they differ significantly from other advisers?
In other words, can you actually make a living as a ‘completely independent’ financial adviser without heavily restricting your clientele or your earnings? It would be good to know. If it is possible to do so, then they are amazing role models but, as 250 advisers are only 1% of advisers, if they differ significantly from other advisers, why would they feel the need to lecture those that serve different people with different preferences?