I have always been in favour of financial advisers linking up to work together, whether in broker companies, partnerships or networks.
I favour such affiliations because most financial advisers who operate as single entities, do not have sufficient knowledge or time to stay on top of all the developments in the financial services industry. Independent advisers need to be backed up by specialists, such as asset managers and lawyers, on whose expertise they can draw.
The requirements of the Financial Advisory and Intermediary Services (FAIS) Act will make life even more complicated for the independent financial adviser operating alone. FAIS aims to protect you, the consumer, from crooked advisers and inappropriate advice.
When the Act becomes fully effective on October 1, financial advisers will have many additional responsibilities. To cope with these extra responsibilities, it may be more time and cost-effective if advisers worked together.
This is not to say that adviser groupings are the answer to all problems. But if advisers team up to bring you, the client, better service and better advice, adviser networks are a good thing.
The problem lies in how some groups of advisers are recruiting members and then using their weight to serve their own interests, to the detriment of yours.
On the back of large volumes of business they merely want to garner higher commissions/fees and other income for advisers or the owners of the group.
Some broker companies or networks are promising independent advisers that they will earn more money if they sign up.
They generate extra income by threatening providers of financial products and asset managers that they will take their business elsewhere if they do not receive kickbacks.
In most cases, various methods are used to ensure that you, the client, are kept in the dark about these kickbacks. When you ask about the commissions and fees, you are told that what you see is what the adviser group gets. But in most cases the additional money is being paid through another structure, such as a separate company.
It all goes back to the dreadful conflicts of interest that exist in the financial services industry, with kickbacks being paid in all sorts of different ways. The kickbacks range from luxurious trips abroad and excessive entertainment for financial advisers to linked investment product companies demanding kickbacks (what they like to call rebates) from unit trust and asset management companies to list their funds as part of the offerings of the linked investment product company.
No matter how they are structured, these kickbacks all work against your interests.
You may only be offered products or services on which a kickback is paid. You may have no need for the product or service you are being sold, or there may be another product or service that would suit you better, but it is not offered to you because the product or service provider hasn't paid a kickback for it to be offered to you.
Many companies are prepared to pay up and keep the deal secret. Furthermore, some companies will pay bigger kickbacks than others, causing another conflict-of-interest situation.
The bad news for advisers who join groupings for this reason is that once FAIS is fully in force, they are going to have to prove that they researched the product or service they advised you to use and be able to show that the advice they gave you was appropriate and in your best interests. If they fail to do so, they can be banned from the industry.
Broker bodies should be putting pressure on product and service providers to bring down costs in your best interests.
I agree with the statements made by Dave Foord of Foord Asset Management in our front page report today, rejecting industry claims that we as consumers are the victims of own financial follies.
Personal Finance is inundated with complaints of poor investment performance. Apart from poor asset management, a major reason for these poor returns are the high costs charged by product providers, ripping the heart out of any performance.
Product and service providers must reduce costs.
About 10 days ago, Old Mutual launched a new broker network structure called Masthead. With the rush of the launch, the full structure and services and many of the details are still very hazy.
Masthead's main selling point is that membership and services will be provided to independent advisers for free.
Old Mutual denies that Masthead has been created in an effort to counter those brokers groupings that are putting pressure on companies such as itself to pay kickbacks.
Rose Keanly, the head of Masthead, says Masthead is there to ensure the survival of independent financial advisers and to provide you, the end client, with better service and advice. I am not yet sure whether Masthead will or will not improve your position as a client of a Masthead adviser. More detail is needed.
Most important is the code of conduct that is proposed for adviser members. If the code is not drawn up (this is being left to the members to decide) or is as fuzzy as some other codes of conduct, then it should get the thumbs down.
It concerns me that Masthead says it will stand by the advice that its members give to you, but then adds the rider that it will only do so if the adviser has met these three conditions: Followed the recommended advice process; only advised products on which Masthead has checked out; and only used approved planning tools.
My question is, how do you, the client, know that the adviser has met these conditions?
Masthead will provide advisers with various services, including helping advisers meet licensing requirements for FAIS, checking on financial products to be sold to ensure they are safe, providing training, providing technology and recommending advice processes. It will also set up a structure to which you can take any complaints about member advisers.
- Many readers have asked what Personal Finance thinks of a company called Investigro, which is offering returns of 60 percent a year in newspaper advertisements. Don't put your money anywhere near it. I will explain my reasons next week.