Meaning of independent: Financial advisers

The terms “independent”, “impartial”, or “unbiased” or similar terms can only be used to describe financial advisory businesses that meet certain conditions under the Corporations Act. Such conditions include not receiving commissions or volume-based payments.

The independence of financial advisers is an important issue for both consumers and investors, and may sway decisions about investments as well as choice of advisers. Therefore, ASIC continually monitors the financial advice industry and take steps to intervene when it discovers false claims.

With all the media coverage around the negative behaviour of many large financial advisory firms and their affiliates, you may be forgiven for wanting to deal with a smaller, perhaps more independent financial adviser in the future, but what exactly does “independent” mean in in terms of financial services?

Consumers misled 

Under the Corporations Act, a person who carries on a financial services business or provides financial advice is prohibited from using the terms “independent”, “impartial”, or “unbiased” or any other term “of like import” in relation to the business or service, except where the person meets certain conditions. This condition is continually monitored by ASIC and it does take steps to intervene when it discovers false claims.

In one recent example, ASIC required four financial advice companies to cease and amend false claims of independence that could mislead consumers. The claims were made on websites and in some cases, in the marketing materials of the companies.

ASIC said it “will continue to publicly name advisers who do not comply with their obligations…and where appropriate, take action to enforce the obligations…and to ensure consumers are not mislead about the nature of the service they are receiving”.

Establishing independence

So, what are the conditions that a financial services business have to satisfy to use terms such as “independent”? Basically, these restricted terms can only be used if the business does not:

  • Receive commissions (other than commissions that are rebated in full);
  • Volume-based payments (ie forms of remuneration calculated on the basis of the volume of business placed by the person with an issuer of a financial product); and
  • Other gifts and benefits from product issuers which may reasonably be expected to have influence.

In addition, the business is expected to operate without any direct or indirect restrictions relating to the financial product and be free from conflicts of interest that may arise from relationships with product issuers (which might reasonably be expected to influence the person).

It is ASIC’s view that words such as “independently owned”, “non-aligned”, “non-institutionally owned”, and other similar expressions must also satisfy those conditions.

If you go to a financial adviser that holds themselves out to the “independent” or the like, you can expect them to not receive commissions, volume-based payments or have conflicts of interest. However, “independent” financial advisers are still able to receive asset-based fees without affecting their ability to use restricted terms.

Independent financial advisers would also be more likely to have an open list of products in their approved product list (APL) and have an easy process to recommend a product that is not on the (APL) should you wish to invest in those particular products. Any restrictions whereby an off-APL process is not easy to access would be considered to be a restriction and therefore, the financial services business would not be permitted to use a restricted term such as independent.

Looking for a financial adviser?

The independence of financial advisers is an important issue and may sway decisions about investments as well as choice of advisers.

If you’re looking for a financial adviser that’s independent, remember to look out for the use of restricted terms. If you’re after some simple financial advice around your super fund or just some general advice, an accountant with a limited AFSL licence may be able to help. Contact us today to find out more.