What price do you put on independence? This was a question answered in the UK several years ago when, from the end of 2012, only two types of Financial Advisor were allowed - independent and restricted. Now, 18 months on, the time is right to see if this has worked and brought much needed trust back into this sector. The answer, as with all advice, is a matter of perspective so the answer can just as easily be yes - or no.
To be clear, I am not saying that UK financial advice system was inherently flawed before this - it wasn't. Rather the issue was that there was no clear and obvious distinction about who was paying the advisor - was it the person receiving the advice or was it the product provider? Without this vital piece of information a client could never really be sure that they were getting truly independent advice nor that the advice was ideal for their own circumstances. All too often in the past an advisor was linked to one of the major providers of financial products and would only ever advise that you 'buy' their products - regardless of whether or not this was in the client's best interest.
The ability of the Financial Conduct Authority (FCA) to regulate an advisor's independence was the vital component that was needed in the UK. This is a good thing, which will enable trust to be built in the UK financial advice sector.
Unfortunately in Australia our financial advice market is still dealing with trust issues, with hidden and trailing commissions, asset based fees and a lack of transparency dogging perceptions of the sector. Examples of poor advice have resulted in people losing their life savings and a range of prosecutions by our own corporate regulator, the Australian Securities and Investments Commission (ASIC). Taken together, it's virtually impossible for clients to know exactly who an advisor is really working for or of any links between the advisor and the financial product being sold.
To this end, our organisation, the not-for-profit CPA Australia, has announced that we will be entering the financial advice market in Australia to provide no commission, independent and transparent advice on a strictly fee-for-service basis. Yes this is a bold move, but our firm view is that we can no longer sit on the sidelines watching and talking about the problems without stepping up in the public interest and making a contribution to rebuilding trust in the financial advice market in Australia.
The Chairman of ASIC Greg Medcraft recently noted that Australians "want to be able to go to an adviser that they know is incented to look after their interest and no-one else's interests." It is noteworthy that Mr Medcraft agreed to join me for the public announcement.
Despite all the good intentions, rules and regulations for UK financial advisors, I have recently watched with interest the suggestions put to UK financial advisors through the media that customers are often unable to clearly see just how much their services are costing them. If this is the case, then quick action is needed by the FCA to address any identified failure. If this is allowed to continue it could well see the undoing of all of the hard work that has been put in and the great results that have been achieved over the past few years.
Assessment, consultation and integration over the coming months of the EU's reworked markets in financial instruments directive, particularly as it relates to the independent advice label, may well have significant implications for advisors and what consumers recognise as independent advice.
I cannot emphasise strongly enough how important trust is when providing advice - especially financial advice.
The need for the FCA to act quickly when concerns are raised is even higher now with the removal of the requirement to buy an annuity at retirement. This announcement means that there are now potentially hundreds of millions of pounds in the UK system which could be looking for a new home and for which financial advisors will be vital in helping people make these life changing decisions.
Now more than ever it is important that people trust the person they go to for advice.
Alex Malley is chief executive of CPA Australia