There are just 64 real independent financial advisers in Australia according to superguide.com.au – although there may be more out there unknown to the website.
There are three requirements to achieve the Gold standard of independence according to the Independent Financial Advisers Association of Australia (IFAAA):
- No ownership links or affiliations with product manufacturers. Impartiality is impossible where an adviser has links to a product manufacturer. Ownership links create an environment where the adviser resembles, at best, a well-intentioned salesperson.
- No commissions or incentive payments from product manufacturers. Commissions are payments made by product manufacturers to their distribution network. They create a conflict of interest between advisers and their clients.
- No asset-based fees. Asset fees, although are authorised by the client, are calculated precisely the same way a commission is calculated. Asset fees are incentives that prevent an adviser from being impartial and, therefore, create a conflict of interest between adviser and client.
Just 18 advisors have successfully passed all those requirements and are members of the IFAAA, according to Daniel Brammall, president of IFAAA. 51 of the 64 advisors identified by superguide.com.au pass all three requirements, while another 13 advisors pass the first two (which should theoretically mean they aren't independent), but may charge asset-based fees.
That pretty much excludes every advisor from the big four banks Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB) and Westpac Banking Corp (ASX: WBC), Macquarie Group Ltd (ASX: MQG) and AMP Limited (ASX: AMP).
An estimated 80-90% of all advisers are aligned with product manufacturers like the banks and finance companies mentioned above. Of the remainder, a large number still pocket commissions or charge their fees as a percentage of assets.
A member of IFAAA, Matthew Ross told superguide.com.au that charging a fee as a percentage of assets is simply a commission by another name. He doesn't have an issue with the word commission – but says it's the concept of an incentive, "no matter which way you look at it, when you are paid a percentage of anything, there is an incentive. Incentives result in zero independence."
Personally, I'm also against charging fees or commissions as a percentage of assets for the simple reason that the fee becomes larger if your assets increase but may have nothing to do with the advice you receive or performance of your financial adviser.
Interestingly, I read an article not long ago wherein a prominent financial adviser suggested that advisers should also be paid a percentage of the assets they didn't advise on. An example is where someone owns investment property or a share portfolio, but only asks the financial adviser for guidance with their self-managed super fund. In that case, the financial adviser wants his or her fee based on all the client's assets, including the investment property and share portfolio. I'll leave you to make of that what you will.
Foolish takeaway
Until the incentives are removed and financial advisers are truly independent, ordinary Australians can't be certain that they are getting 100% unbiased financial advice. If you are looking for an independent financial advisor, you might want to start at the IFAAA.