Independent Advice - What is independent advice?

For most people we think "independent advice" means "advice that is not tainted by a bias in favour of any particular company".

There are a lot of advisers who cannot currently call themselves "independent" due to the way the law is worded. But many of them are "non-aligned" (i.e. not owned or controlled by banks, insurance companies or fund managers) and so are free to advise on any financial product they choose, so long as they always act within the scope of their (government issued) financial adviser licence.

Some choose to get paid by way of pre-agreed fee arrangements; others prefer to get paid by way of commission. Some prefer a mix of the 2.

Some clients like a set fee arrangement, others prefer to have adviser remuneration paid via their portfolio (by the fund manager), usually because the commission is deducted from their investments anyway and either kept by the fund manager or paid to the adviser, so no additional out-of-pocket cost is involved.

So what is going on? Why the confusion about "independence"?

The law changed in 2002 to make it extremely difficult to call yourself "independent, unbiased or impartial" if you were a financial adviser (see below).

We’re not sure why.

Today the change means that there are virtually no advisers (fewer than 10 according to our research) in Australia who can use these terms.

Yet of the 16,000+ advisers in Australia some 20% are not owned or controlled by product issuers like banks, insurance companies or fund managers.

Before 2002 it was OK to use those terms in Australia if you were not biased in favour of any particular financial product provider. No-one ever explained why the change was considered necessary – and we can’t find evidence of anyone using the term to mislead anyone.

In the UK you can be an Independent Financial Adviser and receive a commission, so long as you always offer a fee-for-service alternative.

Common sense

We think the public can comprehend that advisers who aren't owned or controlled by financial product issuers (banks, insurance companies and fund managers) and who can choose products to recommend to their clients without having to ask anyone's permission are able to offer a different type of service to their institutional competitors - even if they can't call themselves "independent", "unbiased" or "impartial" because of the way the law was drafted in 2002.

What the law says

The Law basically states that financial advisers can only call themselves "independent", "unbiased" or "impartial" if they (and their associates) do not receive any of the following:

commissions (apart from commissions that are rebated in full to the person's clients);
forms of remuneration calculated on the basis of the volume of business placed by the person with an issuer of a financial product;
other gifts or benefits from an issuer of a financial product which may reasonably be expected to influence the person;

ASIC's view on rebating is also quite restrictive.

"ASIC considers that the requirement that commissions are 'rebated in full' is satisfied if, as soon as the commission is received, it is rebated to the client without delay by:

rebating an amount equivalent to the commission directly to the client by cash, cheque or other direct means (eg by direct credit to a bank account nominated by the client); or
offsetting any debt owed by the client (ie a debt owed before the commission was received by the licensee) by an amount equivalent to the commission, except in circumstances where the amount of the debt is calculated by reference to commissions expected to be received by the licensee.

ASIC does not consider that the requirement that commissions are 'rebated in full' is satisfied if a client's account with the licensee is credited with the amount of commission received, where funds in the client's account may be used to meet future liabilities of the client to the licensee and the client does not have the right to demand payment to it. This is because the rebate is not immediately available to the client in these circumstances."

(Source ASIC QFS38 Published 10/12/2002; Revised 25/11/2003)

The source of the rule is section 923A of the Corporations Act 2001, viewable at this link:

http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/s923a.html