The increased public focus on vertical integration and the dangers of institutional advice has, understandably, driven an increasing focus on independent advice.
In the wake of a succession of “scandals” involving CBA, NAB, Macquarie and IOOF the focus on alternative models seems to have been replaced with the unqualified promotion of independent advice; a perception promoted by the media and controversially endorsed by the regulator.
The challenge, for consumers, licensees and advisers, is that “independence” is neither consistently nor effectively defined.
The Law provides a partial solution by restricting the term “independent” (and impartial and unbiased) to advisers (or their employers and associates) that do not receive commissions (apart from commissions that are rebated in full to the person’s clients), volume bonuses or other gifts or benefits that may reasonably be expected to influence them.
This remuneration link is generally well understood, but “independence” also requires the adviser to operate free from direct or indirect restrictions relating to the financial products in respect of which they provide financial services and without any conflicts of interest that might arise from their associations or relationships with issuers of financial products that might reasonably be expected to influence the person in carrying on the business or providing the services.
ASIC’s position on independence is clear; for them “genuine independence is characterised by an absence of “links to product manufacturers …. commissions and … asset fees”. However the law does allow advisers and Licensees to describe themselves as ‘independent’, ‘impartial’ and ‘unbiased’ if they forgo commissions, volume-based payments or other gifts that could reasonably be expected to influence them.
So “Independence” and “institutional ownership”, though seemingly at odds, can co-exist if remuneration and other conflicts are appropriately addressed. This apparent incongruity was highlighted by the recent launch of a “breakaway practice” that promoted its “independent focus” while maintaining its link with the vertically integrated group from whom it broke away. The ferocious industry response to the subsequently amended article rejected the adviser’s apparent reconciliation of independent thinking and institutional alignment.
But neither the adviser nor the practice could properly be described as iconoclasts; they were not attacking the cherished belief of independence but, like many others, simply recognising that independence from external influence can be achieved without eschewing institutional alignment. It’s a pragmatic and popular solution because “independence” and “institutional support” is a compelling proposition for many advisers. Unfortunately, in some groups, the conflict between independence and influence is not always easily or effectively reconciled.
Ownership and influence
Barry Martin, co-founder of Millennium3 Financial Services believes that “It used to be possible to run a licensee independent of institutional influence, but since the GFC, institutional ownership means institutional control. The real challenge for advisers is how much control they’re prepared to surrender to the institutional parent. And if you’ve any doubts about the level of institutional control, look to the management team and ask whose interests are principally benefitted by their decisions.“
Martin’s point is well made, but it’s not impossible for institutional licensees to effectively manage these conflict; while short-term incentives and product distribution concerns may subvert some licensees’ advice focus, the amount of institutional influence and control varies according to the strategy, skill and sophistication of the institutional licensee itself. Culture matters.
While they’re often critical of institutional advice, independent licensees seldom openly acknowledge their own limitations; including lack of access to additional capital, lack of scalability, limited organisational capacity, key person dependence, insularity and generally low investment in compliance, governance and risk.
The unspoken truth about the financial planning profession is that all commercial advice models are conflicted; they only vary by degree, scale and impact of those conflicts. In reality, independence is not the absence of conflict, but the promise of professionalism, expertise, advocacy and care. While independent ownership removes some of the pressures, compromises and embedded conflicts created by vertical integration, it would be incredibly naïve not to recognise that it simply replaces one set of conflicts and limitations with another.
The challenge and opportunity for the emerging advice profession is to abandon a definition of independence based on structure and remuneration in favour of one based on values and outcomes. Principles-based definitions may be difficult to operationalise and enforce, but outcomes based definitions implicitly acknowledge that advice professionals routinely think and act ‘independently’ to achieve the best outcomes for their client.
Independence is ultimately proved by one’s conduct. An adviser that can, in theory, recommend non-group products, but does not, in reality, ever do so, is not independent. Likewise an institutional adviser who routinely recommends non-group products, or recommends that her clients see another adviser entirely, demonstrates both her independence and the inherent limitations of a structural definition.
This recognition seems to underpin the position adopted by Financial Conduct Authority (UK) who define independence by reference to the unrestricted range of the adviser’s inquiries, the nature of their consideration and their open and unbiased engagement. This is not just pragmatism or politics. Assessing independence should indeed focus on what people actually “do” rather than on how they are paid; and appropriate consequences should result when genuine independence can not be demonstrated.
An independent advice business is one that is structured to maximize their advisers’ moral agency while minimizing the conflicts and entanglements that would frustrate their advisers’ capacity to improve their clients’ circumstances.
When the various distractions of ownership and remuneration are stripped away, the real and compelling promise of independent advice is that an independent adviser will unhesitatingly act in their clients’ best interests and provide considered and impartial advice unencumbered by personal, financial or organisational conflicts.
This expectation imposes a heavy burden on advisers particularly those with institutional alignment; but it’s a burden that truly independent advice professionals bear with justifiable pride.