With our lives getting busier with mounting pressure from multiple sources such as family and work, more and more people are seeking the help of financial advisers and financial planners to help navigate the multitude of options available to them. Given this, the financial planning industry is growing strongly, however it has also received the attention of many other people such as the media, the government and big business.
The Australian Government has been putting more and more resources into regulating the financial planning industry. There are both positives and negatives to this – the positives being that more regulation will typically set a higher benchmark for the industry through minimum education standards and better disclosures. The negatives to this is that it results in higher costs for the provision of advice, as there is typically more work to be done to provide advice in a way that meets all the regulations.
The media is a double edged sword, it is a major source of information and has a long history of informing the community about important events and information that is essential to know. However, given the speed at which the media operates, its quite common that they will not represent a situation fully – quick, sharp and accurate information is the norm, however not all the information is always made available.
Finally, big business is definitely involved in the financial planning industry in Australia, with more than 90% of financial planners now linked in one way or another to a financial product and a very high percentage actually being directly or indirectly linked to one of the major banks or financial institutions. This means independent financial advice is hard to find.
All financial planners have to be licenced under an Australian Financial Services License (AFSL). The AFSL is the body that will set most of the rules that the financial planner must follow when dealing with clients. Examples of this are the types of investments and products that can and cannot be recommended.
The AFSL will also set standards with regards to documentation, and even billing and charging practices
Given that financial planners must abide by the rules of the AFSL under which they operate, it makes sense to do some research into finding out who are the people behind the AFSL. If the AFSL is owned or controlled by a bank or major financial institution, then it stands to reason that the shareholders interest will be a factor in the rules of how the AFSL is going to operate. Accordingly, it’s often quite normal to find a link between the ultimate owner or major shareholder of an AFSL and the products and investments which are ultimately recommended by the financial planners.
A common example of this is direct real estate or property investment. Generally speaking, the bulk of financial planners in Australia tend to recommend property managed funds rather than direct property. Additionally, many of them will not be able to offer a full spread of cash accounts and term deposits.
In the same way as you would expect to buy a Toyota car from a Toyota dealership, you would expect to be buying a banks products from a financial planner that is connected to a bank. However, a major difference in this scenario is that unlike a car dealership, a financial planners office is not always going to be clearly labelled who is ultimately behind the AFSL. It is the legal responsibility of the financial planning firm to disclose who the AFSL is, however there is no legal requirement to advertise who the shareholders are.
So what are consumers to do? There are some simple questions that consumers and potential clients should be asking their financial planners to ascertain who is dictating the advice that they’re getting. Ideally, you would want to ask:
- Who is the AFSL?
- Who owns the AFSL?
- Do the AFSL or Financial Planners firm have any financial interest in a financial product?
- How is the Financial Planner remunerated and do they receive any commissions?
- How are the Financial Planners fees calculated, and is there any link between the amount of money invested and the size of the fee?
There are no set answers to the above questions that are ideal in every situation – however they are very important things to ask and to know. If all you want is a bank’s financial product to put your money into, then the most efficient way of doing that is to walk into the bank and talk to their financial planner. If you’re after holistic advice without bias, the answers that you will receive from above will be very different.
The majority of financial planners are going to do their best to look after you and like any professional, they are going to have tools available to them to help them provide the best possible outcome that they can. The tools that a financial planner has will be dictated by the AFSL that they are licensed through, and that AFSL is going to be meeting the needs of its shareholders as all businesses do. Accordingly, an independent financial planner is likely to have either more tools, or more appropriate tools to look after the needs of their clients.
An independent financial planner should have no interests in any financial products and will only charge their clients a fee for the service that they are providing. Their purpose is to provide independent financial advice that is in best interests of their clients – through the use of the best possible set of tools to deliver the best possible outcome.
Taking all this into consideration, it’s easy to see how an independent financial advice from a financial planner will, in certain circumstances, be a better option for you. Our Choosing a Financial Planner eBook has more information on financial planners, what they can do for you and how to go about choosing the right financial planner for your needs.