Here are six key attributes of independent advice that show why it is such a valuable service.
1. Independent advice puts the interests of the client first
Expert independent advice is the cornerstone of a prudent financial decision. Independent financial advice is free from bias, not tainted by share holdings or other interests, nor influenced by incentives.
2. Independent advice is free from any conflicts of interests and recommends the most suitable product
Independent advice should not tie an employer to one benefits provider or product without considering various options. There are consultants who claim to be independent advisers, but who are, in essence advising on their own administration, investment, actuarial and risk benefit products. The advice offered by these so-called independents guides the decision to the purchase of their products.
3. Advice that is independent recognises the importance of costs, clearly discloses all costs and fees in a way that allows for comparisons and encourages informed decision making
A key aspect of independent advice is that it must clearly state the advantages and disadvantages of products; and all costs and fees.
Investment costs and fees have received a lot of attention in our retirement reform process – correctly so because they affect investment returns. But there is no clarity on how these should be disclosed, fees are opaque, and comparing different products from different product providers is extremely difficult because costs have become so complex.
4. Independent consultants will separate services when it is in the best interests of the client
There are risks when you receive and act upon advice that is not independent. A client may overpay for benefits or administration services, and there could be a selection of an inappropriate investment strategy that compromises members and employers. The selection of one provider for all benefits could also pose a problem if there is another provider who can offer a particular risk benefit at a more suitable price with more suitable options. An independent adviser is able to recommend the most suitable package of benefits – from one or many providers.
5. An independent consultant will advise and assist in the formulation of an investment policy statement
An independent consultant can offer advice on the investment policy statement. The Regulator guides the industry via Pension Fund Circular 130 and requires all funds to have an investment policy statement: it must meet the needs of the majority of members and cater for outliers (a member whose investment requirement differs markedly from the majority of the members in the fund, for example, a solitary older member who has two years until retirement). Using one investment strategy that coincides with the prevailing view or approach of the provider for all members is risky when the members include 20 year olds, 40 year olds and 60 year olds – all with very different investment needs.
6. An independent adviser will value their services, make recommendations and charge a fee for the services they offer
How do you determine if advice is independent? Look at the shareholding of the consultant, where the key individuals (decision-makers) are registered and the disclosure letter. If there are just a few names on this letter, you need to ask if the consultant is truly independent.
Good independent consultants will make recommendations and charge a fee for their services. This is going to be increasingly important as an independent charge for services rendered should remove any potential for fees to be taken from investment profits.
TCF (Treating Customers Fairly) has set Outcomes: the consultant should be familiar with this regulation and there should be evidence that the principles are embedded in the ethos of the business.