Impartial Financial Advice
The Cambridge dictionary defines the word “impartial” as being able to judge or consider something fairly without allowing your own interest to influence you. Words similar to impartial include unbiased, neutral, objective, open-minded, equitable, even-handed, fair, and just.
Putting this into context, impartial financial advice means providing people with considered advice that doesn’t allow the financial adviser’s own interests to influence the advice provided. This seems simple enough and most people would agree financial advisers should put the interests of their clients first, right?
In practice this doesn’t always happen and the root cause is often a conflict of interest. Conflicts of interest can exist for any number of reasons but ultimately it comes down to divided loyalty, in other words whose interests come first; the client’s? the adviser’s? the adviser’s employer or business? or perhaps some other party?
Why should you care?
You deserve to pay for and receive financial advice that is most suited to your financial circumstances and needs. You should be able to receive advice in the knowledge the motivation is to do the right thing by you and without any ulterior motives or conflicts of interest. You deserve to receive impartial advice. Anything else comes at the risk of a sub-optimal outcome.
One of the most common conflicts of interest relates to financial incentives. The February 2019 report from the Australian Royal Commission looking into misconduct in the banking, superannuation and financial services industry in Australia was pretty damning in this regard. Of particular note the Royal Commission observed in almost every instance of misconduct, “the conduct at issue was driven not only by the relevant entity’s pursuit of profit, but also by individuals’ pursuit of gain, relegating customer service to second place”.
Examples of financial incentives which can create a conflict of interest leading to poor conduct include:
- Commissions, payments or incentives received by financial advisers from product providers
- Bonuses and incentives paid to financial advisers directly relating to sales or advice given to clients, and
- Revenue earned by financial advisers from the activity of buying or selling investments; this can be brokerage or other transaction charges.
If a financial adviser or their business is paid by a fund manager for recommending the manager’s products but other fund managers don’t pay commissions, how might this influence the adviser’s recommendations to clients? Similarly if one fund manager pays more commission than another, which manager is the adviser likely to recommend?
If a financial adviser is incentivised for bringing on new clients, how does this influence their behavior or advice provided? Does it cause the adviser to put pressure on clients to invest more than is needed to achieve their goals? What if the financial adviser receives a direct financial benefit each time an investment is bought or sold? Are the adviser’s recommendations to buy or sell influenced by the benefit they will receive from their recommendation? How do clients know if the level of trading is in their best interests? Would a “buy and hold” approach be more suitable?
There are other conflicts of interest that are not directly related to financial incentives. For example, the preference for “in-house” managed funds and investment solutions. These may or may not be superior to solutions able to be sourced externally by the financial adviser. These sorts of conflicts are commonplace in what are sometimes referred to as “vertically integrated” businesses, such as banks, where both the manufacture of investment products and distribution/advice of these product takes place under the same roof.
How we provide impartial financial advice
At Saturn Advice, we believe by far the best way of managing conflicts of interest is to remove or avoid them entirely. That way, we can provide clients with impartial financial advice.
Back in 2011, we redesigned our business model. Our goal was to design a business where we could open the door to our families and point to our financial advisers and say “choose who you would like to work with” in the knowledge any of our advisers would do the right thing by our families. When you set that as your standard, you need to be confident on delivering!
In our view, being an impartial financial advice business requires;
- Having our clients on a fee-only business model, where the people paying us are our clients. Where possible we don’t accept commissions or payments from fund managers[1], brokers or other 3rd party service providers associated with our clients’ investment portfolios.
- Paying our staff a fixed remuneration and not incentivising them based on the business or revenue they generate. When our staff work with both new and existing clients, they are focused on outcomes for our clients and not on how much they can earn from our clients.
- Not having any financial interest in the investments we recommend, and
- Giving advice focused on what’s best for our clients
We have hard wired this ethos in to our business and believe clients stand to achieve a better outcome as a result, thereby helping them create a richer life.
[1] Saturn Advice’s parent company owns and operates a Managed Investment Scheme specifically designed for UK Pension transfers. This scheme follows our impartial model having no financial interest in the investments available through the scheme. A portion of the scheme fees are shared with Saturn Advice for the advisory services it provides to investors.