Back

Is Providing Independent Financial Advice And Profitability Mutually Exclusive?

Ben Smyth
16th April, 2015

For the majority of the financial services industry the answer is YES!

I read with an interest some time ago a headline saying “independence and profitability are mutually exclusive”. It certainly tweaked my interest, as someone who has taken the deliberate step of establishing a truly independent financial advice business.

Firstly, there is the ongoing debate as to who can call themselves “independent”.  From my reading of the Corporations Act (as a layman!), the definition of independence requires a fixed fee pricing structure (and doesn’t allow for an adviser to call themselves independent if they receive commissions (including insurance commissions), and/or charge a client a % of their funds under management or sometimes referred to an asset based fee.

If you look at the industry as a whole (approximately 16,000 advisers), by my calculation, there are less than 100 advisers who could meet this definition of independence.

So why is there such an enormous disparity?

I would say that for the majority of financial advisers, meeting the definition of independence and maintaining a profitable business would be mutually exclusive for the following reasons:

  • Most existing adviser business models (and profitability) are built on the asset based fee model, and clients see their financial adviser ostensibly as an investment adviser – the profitability of the business is therefore prima facie intrinsically linked to the clients’ funds under management. There are very few advisers who are skilled enough to actually influence the investment performance of their clients’ assets but moving away from an asset based fee structure to say a fixed fee structure might open up questions about the value the adviser is adding if they are not influencing the investment performance.
  • Charging clients a fixed dollar fee (and not charging commissions or charging an asset based fee via a platform) makes the fee being charged incredibly transparent which may lead to increased queries – the adviser needs to be confident that they can justify their fee each and every time the client receives their invoice or sees the direct debit from their account.
  • There is also a close link between the service delivered and the fee charged where a fixed fee structure is used. As any professional who charges a fixed dollar fee for their service, you are effectively providing a client with an agreed scope of service, and they are paying you an agreed fee for that service. Again the adviser needs to be confident that the service their client is paying for is being delivered as agreed.

In summary, there are established (and in most cases) thriving advice businesses in Australia – restructuring their existing business to meet the definition of independence would more than likely jeopardise the profitability of these businesses for the reasons noted above. As such I can’t see the small cohort of truly independent financial advisers growing anytime soon.

Ben Smyth

Ben is a Sydney based financial adviser and a participant in the ADF Financial Advice Referral Program which lists advisers who operate free from remuneration-based conflicts of interest. The content of this article is purely educational and is not to be taken as personal financial advice.

Further details about the ADF Financial Advice Referral Program can be found at http://www.adfconsumer.gov.au/resources/adf-financial-advice-referral-program/

CHECK OUT MORE HELPFUL ARTICLES

VIEW ALL ARTICLES

New Digital Toolkit Can Help You Navigate The Financial Advice Process

Facing major financial decisions can be complex and confusing. However, only about one in five Australians obtain financial advice
Read More

Robo-advice: the pros and cons of financial product advice delivered online

Robo-advice (also known as digital advice) describes financial advice delivered online, via computer, tablet or smartphone.
Read More

Two top tips for dealing with financial stress

It’s been estimated recently that as many as 2 million Australians are experiencing high financial stress – whereby they may have difficulties paying bills and basic living expenses or making their loan repayments.
Read More
lamp

LOOKING FOR FINANCIAL ADVICE?

Find a financial adviser who will act in your best interests.

FIND A FINANCIAL ADVISER

SIGN UP FOR OUR MONTHLY NEWSLETTER

Want to stay up to date with personal financial issues affecting ADF members and their families? Sign up for our monthly e-newsletter with topical articles by a range of expert contributors.

2LT
AB
AC/W
ACM
ADM
AIRCDRE
AIRMSHL
ASLT
AVM
BRIG
CAPT
CDRE
CMDR
COL
CPL
CPL/BDR
CPO
DR
FLGOFF
FLTLT
FSGT
GEN
GPCAPT
LAC/W
LCDR
LCPL/LBDR
LEUT
LS
LT
LTCOL
LTGEN
MAJ
MAJGEN
MIDN
MR
MRS
MS
NCOCDT
OCDT
OFFCDT
PLTOFF
PO
PTE
RADM
RSM-A
SBLT
SQNLDR
SSGT
VADM
WGCDR
WO
WO-N
WO1
WO2
WOFF
WOFF-AF

NEED HELP?

WE ARE HERE TO ASSIST

GET IN TOUCH