What it takes to become independent

Whenever a public scandal is to be investigated, invariably an independent inquiry or an independent commission is set up to do the sleuthing. Why? Because if it’s independent we can rely on there being a strong process, that we’ll get to the bottom of the matter, as ugly as it might be, and the truth will be outed, with neither fear nor favour.

Independent = trustworthy

What is independence?

Last month, Roy Morgan Research surveyed 40,000 people on the perceived independence of their financial planner. The survey showed a disturbing number are totally confused on the subject. But as it turns out, many financial planners are confused on the subject too…

“XYZ Financial Planning is truly independent in the sense that we have no institutional shareholders and no investors such as banks or investment groups. Independence means no product of our own.”

Just because your business card doesn’t display the logo of a bank or insurance company doesn’t mean you can use the term ‘independent’ to describe your services.

Exactly when are we able to use this word and others just like it, such as ‘impartial’ or ‘unbiased’?

The Independence Law

To be independent, Section 923A of the Corporations Act says that as financial advisers we …

• must not receive commissions from a product issuer [s923A(2)(a)(i)]

• must not charge asset fees to a client [s923A(2)(a)(ii)]

• must not accept gifts from a product issuer that might influence them [s923A(2)(a)(iii)]

Why not? Commissions, asset fees and gifts are incentives. Incentives are the working tools of product manufacturers and their salespeople, not advisers. Incentives are what you use to sell phone plans and gym memberships, not financial advice.

Section 923A goes further though. It says that the individual adviser is deemed to be in breach if his or her AFSL permits any other representatives to pocket incentives [s923A(2)(b)].

Why not? When we give advice we do so effectively as agents of our AFSL. The party responsible for the individual planner’s conduct is the AFSL therefore if it allows incentives then the individual may too, whether or not they choose to.

But the Independence Law goes further still. Financial advisers …

• must not have any additional product restrictions imposed on them by their Licensee [s923A(2)(d)]

• must not have any association with either a financial product or a financial product issuer [s923A(2)(e)]

Why not? To be independent is to have professional freedom within the bounds of the law, and limitations result in dependence, not independence.

Insofar as the law is concerned, the effect of Section 923A’s rules entitles the public to a high level of confidence that their adviser is free from any conflicts of interest that really matter.

Objections to the Independence Law

Funnily enough, it’s not the public who’s complaining; just financial planners who don’t satisfy the law. The most common objections I’ve heard lately seem to be:

• You can’t eliminate all conflicts so it makes no sense to prohibit independently-owned financial planners from using the term (i.e. the ‘throw out the baby with the bathwater’ reaction).

• I run my own licence and am not affiliated with a bank or insurance company and therefore I should be able to call myself independent (i.e. the ‘I’m halfway there so spot me the difference’ objection).

• Charging asset fees on a wrap platform doesn’t actually breach the law (actually, it does).

• Hardly any financial planners satisfy this law so it should be changed (umm …what?)

At the heart of these objections lies a desire to have one’s cake and eat it too: I want to be called ‘independent’ but I won’t change my business model to do so. To put it another way: ‘I’m not going to step up, you lower the bar’.
Bit harsh? Maybe. The bottom line is this: if you want to call yourself independent and you currently don’t satisfy the Independence Law then you have two options. Either

1. Change the Law, or

2. Change your business model.


As for the first option, good luck with that. As for the second option, the notion of turning independent conjures up a host of imagery and fears – many of them unfounded, I am pleased to report. The real question is how to actually accomplish independence and the good news is there is now a way.

The Independent Financial Advisers Association of Australia (IFAAA) is hosting its inaugural IFAAA National Symposium next month in Sydney on this very subject. You don’t have to be a member to attend – it is open to anyone who wants to know how to practice the Gold Standard of Independence.

If independence is important to you then don’t waste your time trying to lower the bar. Instead, change your business model to get over that bar. The grass is genuinely rich and green on this side of the fence. There is a new level of professional and personal satisfaction you’ll enjoy, not to mention the positive referrals from your clients, plus you’ll create a stronger business in the process.

Join us on 7 November and find out how.

Registrations for the inaugural IFAAA National Symposium close Friday 31 October.

Daniel Brammall is president of the Independent Financial Advisers Association of Australia (IFAAA). He is also a director of Brocktons Independent Advisory in the ACT.