Thu 09 August 2018 - Paramount Financial Solutions

Compare the Pear………….or is one an apple?

The findings to date of the Banking Royal Commission have cast very large shadows over much of the financial services industry.

Since no sector has been spared from its scrutiny, it would be reasonable to assume that seekers of financial advice will now be more discerning about where they seek advice.

One area they may choose to focus on is any alignment between the Australian Financial Services Licensee (AFSL) and the country’s major financial institutions.

Pretty straightforward, you would think, right? Sadly, this is not the case.

Australia’s Corporations Act (s923A), spells out the requirements to enable a business to refer to itself in terms such as “independent”, “impartial”, “unbiased” or similar. To do so, a business must not be subject to any “conflict of interest”. In other words, are their business relationships subject to any factors that might influence their recommendations? And this is as it should be.

The problem is, however, that the Australian Securities and Investment Commission (ASIC), in July last year, issued a media release to clarify their position. In their infernal wisdom, they have decided that those similar terms (“of like import” in their language) includes such phrases as “non-aligned” and “non-institutionally owned”.

As a result, unless they meet the afore-mentioned “conflict of interest” requirement, a business that operates under an AFSL that is owned one hundred percent by its advisers and staff (and there are many in this category) is precluded from using terms which are simple statements of fact. This restriction even precludes practices sharing a negotiated product discount with their clients from using such terms.

To give you a sense of how onerous these requirements are, it is estimated that, out of the approximately 25,000 financial advisers in Australia, only 150 or so meet the requirements to call themselves “independent financial advisers”.

So, rather than making it easier for the consumer to determine if the business with whom they are considering engaging is “affiliated” with a financial institution, ASIC’s “interpretation” means the consumer is only able to ascertain by delving very deeply into the fine print of disclosure documents.

If someone can make a contradiction between a business rightly referring to itself as “non-institutionally owned” and sharing a negotiated product cost reduction with clients, I’d be pleased to hear it.

Many of the problems currently surfacing in the Royal Commission stem from the same issue. It may come as a shock to many readers to learn that there is NO regulation of financial advice in Australia……….unless that advice relates to a financial PRODUCT. If the advice makes no reference to any specific financial product, it is not subject to any regulatory or legislative control.

In fact, ASIC’s own definition of “financial adviser”, and thus, who is required to be on their register, is “an individual authorised to provide personal advice in relation to relevant financial products to retail clients”.

If you don’t advise on product, ASIC don’t even retain your name on a register! So, good luck searching for one of the afore-mentioned 150!

Can anyone else see a problem here?

Somewhat ironically, ASIC does not view “asset-based” fees as a “conflict of interest” unless the fee is determined by the amount of funds placed in a specific product or products. I don’t know about you, but I would suggest that someone who recommends that, rather than buying that rental property, you should invest in a share or managed fund portfolio and then charges you a fee based on a percentage of the amount of funds placed in that portfolio is no less conflicted than the real estate agent recommending the rental property.

If the Australian public need anything once the dust of the Banking Royal Commission finally settles, it will be any measure that helps them determine exactly where and from whom they are getting advice. Apart from ascertaining the qualifications of the adviser, the prospective client needs to determine ownership of the business in question, any restrictions on products and services offered, as well as how they charge for services rendered.

Sorting through all of that information is a big enough job without the regulator making it more difficult than it needs to be!


Wayne Leggett CFP JP

Principal, Paramount Financial Solutions.


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