In last week’s Tactical Tuesday webinar we interviewed Daniel Brammall, President of the Profession of Independent Financial Advisers (PIFA), about ‘all things independence’ in financial planning, including…
- what it means to be independent and how this is defined at law
- the benefits and obligations associated with becoming independent
- the new legislation that requires advisers to disclose their independence
- the purpose of PIFA and how it came to be
- how PIFA is at the pointy end of professionalising financial advice
Here’s a snippet of some of the key points from the session …
There’s a lot of confusion around independence – what does it actually mean?
“There’s a section in the Corporations Act called 923A which lists a series of conditions that restrict financial planners from describing themselves as independent, impartial or unbiased. It’s a fairly convoluted piece of law but in a nutshell it says:
- no commissions (unless you rebate them in full to the client)
- no fees calculated as a percentage of volume of business placed with an issuer of a financial product
- no benefits from product issuers that might influence advice
- the adviser operates free from restrictions relating to the products they advise on
- no conflicts of interest arising from associations with product issuers
There’s also the ‘one bad apple spoils the bunch’ rule in there that says if you as an individual meet the criteria but your AFSL permits any of its advisers to breach the criteria then you’re excluded too.”
Why be independent?
“PIFA conducted a survey last year in which 75,000 phone numbers were dialled that belonged to people aged 40-55 living in Sydney, Melbourne and Brisbane. The survey found that not only do more than 80% of people prefer to physically pay for financial planning advice, nearly as many again are more likely to enter into an ongoing relationship with an adviser who works this way. That survey is available here: https://pifa.org.au/
australia-wants-impartial- advice/“
What’s the latest with the new laws about disclosing independence?
“The legislation was originally drafted earlier this year and circulated for public consultation. That process is now over and Treasury has told us that the legislation will be ready to be introduced into parliament by June 30. Subsequently the government has announced that parliament won’t be sitting again until August and that because of Covid it will delay the introduction of this legislation by 6 months. PIFA’s best guess is that it’ll be in by Christmas this year.”
How will we have to disclose our independence or lack thereof?
“Hayne said that the disclosure was more important than the existing disclosures that are contained in the FSG – and so this disclosure needs to be delivered before any advice is provided and it needs to be prominent. Treasury circulated a proposal that the disclosure be made in the FSG and we’ve yet to see what decision was made because we expected it to be a completely separate disclosure document but if that doesn’t happen and it will be included in the FSG it’s clear it’s going to have to be on the front page and pretty prominently presented.”
In a nutshell, we’ll have more clarity on this when the legislation is released.
So what’s the problem with asset-based fees?
“Commissions have been specifically called out as a conflict of interest and we all understand why – the adviser receives a benefit if the client follows the advice which means the adviser is incentivised, which means the adviser can’t be impartial – there’s the conflict of interest.
Asset-based fees work the same way. The main counter-argument attempting to defend asset-based fees is that they’re different from commissions because the product provider pays the commission whereas the asset-based fee is authorised by the client to be deducted from the product or platform. While this is quite true, it doesn’t change the nature of the remuneration – it’s still an incentive. When an adviser who is selling advice is paid only when the client implements the advice, that’s where a conflict exists. Consider this …
Imagine your doctor announces that the $85 consultation fee doesn’t apply any more, and they’ll just bill you as a percentage of the medicine they prescribe. Doesn’t make sense because it presumes that medicine is called for – you want your doctor to be free to tell you just to get a good night’s sleep and a day off work rather than have to think about how they can best be paid.
And that’s just what advice is – it’s supposed to be impartial. In our world of financial planning it may be true that a client needs to contribute to superannuation and increase their insurance coverage, but there are a bunch of other things that we recommend day in, day out – get your wills in order, fix up that budget, increase your debt reduction payments, go back to your bank and negotiate a discount, etc. If your remuneration model means that you can only charge for your advice based on the assets you manage, you’re effectively not paid for giving those other elements of advice… and for the independent adviser, financial products are just another one of those things.”
So to be clear, charging asset-based fees does not automatically preclude you from meeting the legal definition of independence,it would depend on the broader circumstances of your advice. You could still be an Associate Member of PIFA, but you’ll need to have removed any Asset-Based fees to meet the Gold Standard of Independence, and be a full member of PIFA.
To become independent what are my licensing options?
“To become independent your AFSL needs to be able to declare independence. Your first option is to go and talk to your current AFSL about ‘changing their stripes’. Better to stay where you are and change the environment if possible. If no joy then your options are to move to another AFSL that is independent or apply for your own license.
Self-licensing is possible but running an AFSL is a different business model requiring a different skillset to being a financial adviser. If you decide to start hunting for a genuinely independent AFSL to be licensed through then the best place to start is www.pifa.org.au and browse through the individuals who have their own license.”
Why isn’t financial planning a profession?
“The traditional professions – like medicine, law, accounting, engineering – are recognised as professions because they meet the legal definition of a profession. Their prime motivator to be in the profession is to act in the public interest. In return they get all the benefits of a legal limit on liability, the elevated status and esteem that the public holds them in, and most professions earn above average incomes.
Although it’s true that most financial planners conduct themselves very professionally, they aren’t recognised as a traditional profession but PIFA is looking to change all that.
There is a body called the Professional Standards Council (PSC) which endorses, monitors, audits and enforces the running of what’s called ‘Professional Standards Schemes’. PIFA has lodged an application to professionalise financial planning and is working closely with the PSC to make that a reality this year.More information about the path to professionalism can be found here: https://pifa.org.au/
path-to-professionalism/“
What shift will advisers have to make in their business?
“It’s probably trite but that doesn’t change the fact: advisers will make the most progress by taking a close look at their mindset – what are your unquestioned beliefs about how you think financial planning should be done? This is best done as a facilitated exercise at least, if not in addition to some introspection, so talk to your coach. But looking at your mindset will provide clarity and direction on who you should be dealing with, how you price your services, what those services actually look like, what you should deliver in that process. In turn this will impact on the value your clients get from the relationship they have with you.”
Where can we get more information about membership in PIFA?
“In the first instance go to www.pifa.org.au/members. If you have additional questions and want to explore your own situation then book a phone conversation here: https://
pifastrategysession.as.me/ schedule.php“
View the recording below of the webinar in which Sue Viskovic and Daniel Brammall discuss Adviser Independence.