Should planners be classified as being either aligned or non-aligned and how would this affect a practices’ claim of ‘independence’?
Since the FOFA laws came into force on 1 July 2013, advisors now have to abide by the Best Interest Duty from a client perspective. Therefore whether an advisor is aligned with a product provider or not is no longer material any more. If recommending their employer’s product is not in the client’s best interests, then the advisor cannot do so.
Informed members of the public feel they are better off dealing with a non-aligned advisor because they’ll get a less biased product recommendation. The truth is even non-aligned advisors are generally not in the business of recommending any product . This is because administratively it would be a nightmare to use a variety funds and platforms. It would raise the cost of providing a service which the client would ultimately pay full. It would also be difficult to monitor all funds and platforms overtime. Instead, selecting one of the best providers, monitoring performance and fees to ensure ongoing competitiveness is the best outcome for the clients.
Sometimes clients love to be associated with an aligned advisor. Clients feel if there are any serious problems, being with a large institution will provide them with some confidence should the worst happen. We have seen recent examples of this when and advisor has done the wrong thing and the institution has compensated affected clients. Conversely, we have also seen non-aligned practices collapse and their clients have to seek compensation through other alternative means.
Independence would be difficult to claim if model portfolios and preferred platforms we used, unless clients could seek an alternative to these. The other issue facing most non-aligned advisors is the legacy book of clients, many of whom still provide trailing commissions. Therefore claiming to be independent is illegal when these payments are still being received.
The present rules state if an adviser receives trail commissions, they can’t be classified as independent or call themselves independent. Further legislative guidance may be needed in a post FOFA world to state you are a non-aligned planner.