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ISCOVER
A financial adviser walks into a bar. The barman says “Hey! Wipe your feet. You’re trailing commissions everywhere.”
A bad joke, but it does portray a typical scene being played out in offices across Australia: when it comes to the common question of whether to invest or pay off a mortgage, are clients' best interests being put first by advisers? And if they aren’t, how can we better restore confidence in a multi-billion dollar industry?
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Rick Horvat from Horvat Financial Advisors sees some problems with the current structure.
“Are advisers providing the best advice on behalf of the client, or are they jeopardising that advice so that they themselves benefit?” he says. “That doubt is the issue, and there should never be any doubt when receiving advice from a professional adviser who you pay for [their] services.”
As we know, every individual’s financial situation is different. But too often we see what I like to call ‘the Tetris effect’. As the blocks (here being the client’s hard-earned money) move down the screen, advisers are building a strong financial foundation by making each block fit neatly into place, right? Not really.
Appearances can be deceiving. In essence, the game is rigged. Advisers have predetermined what they’ll do with those blocks (the ones with commissions attached to them). Yes, sometimes it really is a win-win situation. There are many examples where maintaining a small mortgage and investing funds elsewhere provides a client with solid returns and financial flexibility. Not concentrating wealth in a single asset is nothing new.
But that to me is still a far cry from treating every block on its merits – there’s a big difference between legitimately spreading risk and investing in shares, and an adviser receiving what are essentially kickbacks for making that call. It’s impossible to disentangle the two, and that’s where the conflict of interest lies.
“It’s not that those planners who receive a commission or a percentage-based fee are bad advisers,” Mr Horvat says. “They may be very good advisers. It just raises the question. Consumers need clarity around the differences between independent advice and sales advice. If you want advice and direction on how to plan for your financial future, see an independent financial adviser. If you want to buy a financial product, go and see a product salesperson.”
So the question here isn’t really about investing or paying down your mortgage – the question is: what does truly independent financial advice look like? Clients need to have absolute confidence that their interests are being put first.
Full disclosure is a rare commodity in the finance industry, but we are starting to see moves in the right direction. The establishment of the Independent Financial Advisers Association of Australia means consumers can now find advisers who operate without incentive and without conflict.
Genuine financial advice with no strings attached? That should quieten down even the most opinionated barman.
