A group of financial planners claiming to be independent has been instructed by the ASIC to change its name. Why the hoo-ha?

The Independent Advice Association was directed in April this year by ASIC injunction to abandon the name, for breaching the law that specifies use of the term ‘independence’.

The law is very clear about what is required for advisers to claim they offer a truly impartial advice service. Section 923A of the Corporations Act closely guards the use of terms like ‘independent’, ‘impartial’, or unbiased’.

Why is the law so protective about these words?

If you head down to the local Ford dealer, you don’t expect the sales guy to whisper in your ear “hey, the Holden model this year is actually better here, here and here”. Of course he’s going to sell you a Ford – there is a Ford logo on his pay cheque.

Some 80% of financial planners are owned by a product manufacturer. They have a conflict and can’t call themselves independent. Instead they call themselves ‘independently owned’. However this term is not a substitute for ‘no conflicts of interest’, even though that’s what it’s pretending. It’s faking independence.

Removing ownership ties is a good first step, but there are two problems to overcome. ‘Commissions’ is problem number two. Planners who rely on a commission have a limited range of products they can offer; plus, the more you invest or borrow, the more money they make.

Would it make sense to let your lawyer negotiate your transactions when they’re ‘on the take’ from the other side? Planners who accept commissions are horribly conflicted: the content of their recommendations has a direct impact on how much they earn.

Anyone who receives a commission has a conflict and relying on conflicted advice is dangerous. Problem number three is ‘asset based fees’, which are the most popular method for financial planners to charge for their services. Asset based-fees are commissions by another name.

Consider this: it would be absurd to pay judges based on the number of convictions they give. Likewise it wouldn’t make sense for your accountant to charge you a percentage of your taxable income. Yet this is precisely the way most financial planners expect you to pay for their services - by calculating their fees on some arbitrary percentage of your investments.

As practising professionals we are more than happy to reveal there is no necessary link between the amount of money you invest and the level of advice and care you need. Advisers who receive an incentive can’t be impartial. Asset-based fees are simply commissions by another name.

So next time you’re considering getting advice, make sure you avoid those three problems, or you’re taking a terrible gamble.

If your current source of advice is affiliated with product manufacturers, offers a commission option, or charges an asset based fee then beware: it is laden with conflicts.

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