It’s like a Monty Python sketch: an adviser describes herself to a client as an IFA, but then steadfastly refuses to say what the “I” in IFA stands for. She can’t say it stands for “independent”, because she is not independent, by the definition of the Corporations Act. And she can’t say it stands for “independently owned” for two reasons, one practical and one grammatical: first, the term is essentially meaningless; second, she’d have to describe herself as an IOFA.
There’s going to be a bit of focus on using the term “independent” in coming months, not least because Professional Planner will shortly be publishing an article in which the legitimacy of the licensee-authorised representative structure is questioned.
One of the reasons it’s questionable is because the public can’t always differentiate between a truly independent adviser and one who just calls herself that – and sometimes deliberately, to mislead the consumer. This confusion means the licensee-authorised representative structure might fail what’s called a “cognitive-cultural” test of legitimacy. There’s more on what that means in upcoming articles.
It’s important that the public understand the difference between true independence and all the other claimed forms of the state, so they can be alert to where potential conflicts of interest might lie in the course of a financial planner’s work. It would be ideal, of course, if no conflicts existed in the first place, but they do, and some people just can’t help themselves. In the absence of meaningful penalties or sanctions, they happily refer to themselves as independent or independently owned, oblivious to or not caring about or – at worst – deliberately putting a false spin on the impression that conveys to a client.
A discussion paper by Angela McInnes, a lecturer at Central Queensland University, looks at the legitimacy of the licensing regime and notes that a 2013 Roy Morgan Research report suggested the public is generally unsure as to whether financial planners are aligned or independent.
McInnes’s paper states: “This is evident when the majority [of respondents] incorrectly perceived and claimed, for example, Financial Wisdom (owned by Commonwealth Bank of Australia) or Godfrey Pembroke (National Australian Bank/MLC) or Retireinvest (ANZ) provide independent financial advice.”
McInnes, as part of her current PhD work, has identified instances where “mid-sized licensees and their ARs advertis[e] themselves as ‘independent’ while under the misconception of following the independent advice principles when instead they are selling their own ‘white label’ products recommended from single platforms and/or allow commissions or asset-based fees, thus potentially misinterpreting the requirements in section 923A of the Act.”
We’re not suggesting that all aligned, or non-independent, advisers set out deliberately to mislead. Some are genuinely confused and unsure what “independent” means. But while there’s a big and potentially exploitable grey area, there’s the possibility of consumers not being fully informed, or at worst being misled, and unwittingly receiving conflicted advice.
In acknowledgement that the worst conflicts of interest arise from remuneration structures, the Australian Defence Force has created a panel of advisers who sign a legally enforceable document stating they will not receive conflicted remuneration for the services they provide to ADF personnel.)
It’s not always easy to quantify the cost of conflicted advice. It depends on what action the conflict drives, and in some cases it’s conceivable that conflicted advice could even leave a client better off if, for example, it leads an adviser to recommend an investment product that happens in future to be the best among its peers.
But that is far from a defence of conflicts. It is an illustration of achieving the best client outcome through dumb luck, rather than by skill or by systematically providing advice in the client’s best interests.
But just because it’s difficult to quantify doesn’t mean no one has tried. In the US, two groups – Americans for Financial Reform, and the Consumer Federation of America – have joined forces to dramatically illustrate the cost of conflicted advice to US retirees. And they have come up with a staggering figure of roughly $US530 ($708) a second.
The analysis is based on a 2015 White House Council of Economic Advisers (CEA) estimate of what conflicted advice costs Americans when they roll over money accumulated in 401(k) plans into individual retirement accounts (IRAs).
The CEA reckons an individual who receives conflicted advice earns a return, on average, about 1 percentage point a year less than an individual who receives non-conflicted advice. Given there’s about $US1.7 trillion invested in IRA products that “generally provide payments [to advisers] that generate conflicts of interest”, the CEA estimates the cost of the conflicts is about $US17 billion a year – that’s the $US532 a second. It also estimates that the lower returns would cause a retiree to run out of money five years sooner than if they’d not received conflicted advice.
“The conclusions of this report are based on a careful review of the relevant academic literature but, as with any such analysis, are subject to uncertainty,” the CEA says. “However, this uncertainty should not mask the essential finding of this report: conflicted advice leads to large and economically meaningful costs for Americans’ retirement savings.”
This so-called “retirement rip-off” figure has come into focus in the US as part of a growing movement against attempts to dilute or abolish the Department of Labor’s so-called “fiduciary rule”. The rule would require retirement advisers to explicitly act in their clients’ best interests. Predictably, any institution that uses “advisers” as a way to push product hates the rule and has opposed it vocally.
The rule has been delayed by at least 60 days while a new review is undertaken.
Meanwhile a Retirement Rip-off Counter shows the cost to American retirees since February 3 has already topped $US4 billion. And if you’ve an average reader, in just the four and a bit minutes since you started this article, conflicted advice has cost US investors almost $US140,000.
