Say you walk into a large bank.
You're seeking advice about investment solutions.
The bank teller you meet offers you their bank products as options to consider or may suggest your current situation is okay for now.
The banker's discussion has been today's reality in Australia, and thanks to the last year's Australian Royal Commission, Australian banks now believe paying bonuses to their tellers was conflicted advice.
Australian banks appear to now believe by removing any perceived or real incentive from their front-line customer service employees will allow them to give advice without conflict.
So too NAB's former CEO, Andrew Thorburn.
Last year he acknowledged the financial incentive systems within Australian banks have encouraged poor behaviours and needed better "guard rails" to avoid conflicted behaviours and advice.
Are incentives the big villain driving conflicted advice and behaviours?
When trying to identify conflicts of interest or conflicts of advice, perception is often the reality.
In determining conflicted positions, whether it is how bank tellers are paid or whether Chinese firms are undertaking espionage on behalf of their government, there seems to be a missing element.
Transparency.
There are many parts to conflict, some transparent, others, usually the more insidious ones, not so transparent.
Do we walk into a Toyota showroom expecting to purchase a Toyota? Is the Toyota salesperson conflicted?
One would expect the Toyota person to be professional – that is, if they genuinely do not have a range of vehicle that suits someone's needs, they direct the potential purchaser to where the more suitable might be found. Their bias, or "conflict", is transparent.
So, if an investment adviser has an inherent bias towards active investment management, and have built their career pursuing their bias, is their advice considered conflicted because most of their investment clients are placed in active funds?
Similarly, is an adviser whose bias in the opposite passive investment camp any more unconflicted, different, better or future-proof than their active investment colleague?
Is this the conflict we seek to eliminate? Elimination of conflict is fundamentally about transparency.
When we obtain advice from a financial adviser, the fee charged should be equally transparent, and the fee in transparent dollar amounts is for the advice received, not for a product.
How are financial advisers paid?
A fee-compensated adviser collects a pre-stated fee for the services provided. That can be a flat fee or an hourly rate for investment advice. If the adviser actively buys and sells investments for your account, the fee is likely to be made up of a percentage for assets under management and may include brokerage charged for the purchase and sale of directly held assets.
In contrast, a commission-based adviser's income is earned entirely on the products they sell. Products for commission-based advisers include financial instruments such as insurance packages and mutual funds.
Fee-only advisers have a fiduciary duty to their clients over any duty to a broker, dealer or other institution. This means a legal liability; they must always put the client's best interests first, and cannot sell their client an investment product that runs contrary to their needs and objectives.
Commission-based advisers can be fiduciaries. But they don't have to be.
A well-known and trusted New Zealand personal financial journalist recently said: "My reservation about the 'new and improved' financial adviser regime is that advisers are still permitted to receive commissions or other incentives from a financial product provider as a reward for putting clients' money into that provider's products. This practice is being phased out in other countries, and I hope we follow suit. There's too big an incentive for advisers to recommend products just because they pay higher commissions."
"Clients sometimes say they are happy with this, as they may be charged low or no fees, because the adviser receives enough commission income. But the quality of the advice they receive must suffer. Ask yourself: would you be happy if your doctor prescribed Drug A, even though Drug B was better, because the makers of A gave the doctor a bigger reward?"
• Glen Trillo is an Authorised Financial Adviser at Stewart Group – a Hawke's Bay-based independent, fee-only financial advisory firm. Stewart Group introduced a "no soft commission" policy in 2003, which means we work for our clients' interest, not those of a dealer, insurer or product provider.
• The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from an Authorised Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961.
