What is independent financial advice and why is it important?
Independent financial advice is crucial for anyone seeking guidance on managing their finances. Independent financial advisers are not tied to any specific financial product providers. They do not receive commissions or incentives from selling particular products. As a result, their advice is free from conflicts of interest. When you work with an independent adviser, you can trust that their recommendations are solely based on your best interests.
Over the past decade, particularly since the Financial Services Royal Commission, Australians have witnessed a significant rise in the popularity of independent financial advisers, and for good reason!
In terms of financial advice, ‘Independence’ was once a term that was widely misunderstood. Many people believed that if a business was not owned by a bank or a company that sold financial products, this made them independent. This is incorrect. The terms ‘independent’ or ‘unbiased’ or ‘impartial’ mean so much more than that and in fact, by law, these terms can only be used by a financial services business if they meet strict regulations regarding the way their business is run.
The Australian Securities and Investment Commission (ASIC) is the Australian body that governs the financial planning industry, they set out the laws regarding what is safe and fair for consumers. The Corporations Act stipulates that to legally be able to call yourself an independent financial adviser, you must not receive any commissions, volume-based payments or other gifts or benefits.
These rules have been put in place to give the consumer piece of mind, that when they enlist the services of an independent financial advice business, they are receiving impartial advice that is in their best interest, without any kickbacks for the adviser.
At Braeside Wealth, we’ve taken it a little bit further by not charging any percentage-based fees and by holding our own Australian Financial Services License.
Interestingly, there are roughly 16,000 ASIC-registered financial advisers in Australia. According to SuperGuide it is believed that less than 150 or roughly 1% of these advisers can legally call themselves independent.
Why is Independent Advice important?
Australia is lucky to have lots of brilliant financial advisers working hard to help people achieve their goals. At the same time, we personally know lots of advisers that feel hamstrung working in practices where it is difficult to manage the balance between what is good for the client and what is good for the bottom line of the business.
Let us imagine you are feeling unwell and there are two GPs in the area that you can choose from. The first practice is owned by ACME Drug Manufacturer and whilst it’s cheap to go and visit the doctor there, the doctor gets paid based on how many pills they prescribe and most of the pills they offer are manufactured by ACME Drug Manufacturer.
On the other hand, the other practice is owned by the doctors, they charge a flat fee and aren’t paid any more based on their recommendations and where they do recommend a medication, they offer a wide range of manufacturers.
Which practice would you want to visit? Whilst each practice could have a talented team of professionals working hard to help their patients, we would say the risk of conflict is much higher for the first practice.
From a financial planning point of view, imagine a client comes in and they’ve just inherited a considerable sum of money. They decide to visit two financial advisers. The first adviser charges a fee of 1% based on any assets they manage, such as super or investment accounts.
The other adviser is completely independent and charges a flat dollar fee. Adding money to superannuation or an investment account may be a good strategy for the client, but the client also has a large debt that could be repaid.
The first adviser may be tempted to recommend the money should be invested; with a view they will get paid more. Whilst the independent adviser doesn’t need to worry about that, they’ve agreed on a fee, and they just need to focus on providing the best possible advice to the client. Being independent makes life easier for the adviser and the client can sleep soundly knowing they have someone in their corner they can trust.
In summary, independent financial is crucial for several reasons:
1. It helps people and businesses make informed decisions about their finances, especially in today’s complex financial landscape with various products and investment options.
2. Truly independent advice is free from conflicts of interest. Independent advisers do not accept commissions or gifts from financial product providers. They work solely for their clients, ensuring unbiased recommendations.
3. Objective financial advice allows you to manage your wealth, knowing that your adviser prioritizes your needs over their own. It provides peace of mind and real value for money.
4. Independent, holistic financial advice isn’t just about managing your money, it’s about empowering you to take control of your financial future with confidence and clarity. With unbiased recommendations, personalised solutions and a commitment to your best interests, independent advisers act as your trusted partner on your journey towards financial freedom.
How do you know if an adviser is independent?
In the past, it’s been a bit tricky with advice businesses called one name and being owned or licensed by a big bank or investment manufacturer which has a different name.
Thankfully, it has got a bit easier for people to know if they’re receiving independent advice. You could start by asking your existing or prospective adviser the following questions:
· When you recommend a product, do you receive a commission?
· How do you calculate my fees?
· Who has a financial interest in your business?
· Do you have a list of products you can recommend? If so, can we see it?
If you feel uncomfortable asking these questions directly, you can find out this information from the advisers Financial Services Guide (FSG), this document should be available on their website. A FSG contains information about the business that is providing you with advice and it should explain what financial services they offer, information about their fees, commissions, any conflicts of interest and how to make a complaint.
One recent regulatory change was the introduction of the ‘Statement of Independence’ which must be included in the FSG, this statement explains the reasons a business cannot call themselves independent, from the list set out in Section 923A of the Corporations Act. Having this knowledge allows you to make an informed decision about your choice of financial adviser.
The bottom line
Overall, financial advice in Australia is evolving to become more transparent, professional, and consumer-focused, with an emphasis on higher standards of education, ethics, and accountability. As our collective financial literacy grows, we can all make better, more informed decisions about our own financial wellbeing. In our opinion, independent financial advice is the way to go and in the future, we hope more Australians can enjoy the benefits of truly independent advice.
If you want to access independent advice now, why wait? Take the first step towards financial empowerment today, feel calm and confident about your future, while you live life to the fullest!
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The information in this article is general information and does not take into account any person’s individual situation. You should always do your own research, or seek professional advice to assist you in making an informed decision about what suits your needs.