What does independence mean to you?
Definition of advice – Collins dictionary
If you give someone advice, you tell them what you think they should do in a particular situation.
Definition of Independent
An independent inquiry or opinion is one that involves people who are not connected with a particular situation, and should therefore be fair.
We often get asked in initial meetings with potential clients, ‘Are you an independent financial planning practice?’
It appears that they are asking if we, as an advice business, have any ties (financial or otherwise) to a product provider that could skew our advice in some way. Are we free of conflicts of interest?
It seems apparent (to us anyway) that discerning, well informed individuals seek out advice providers that are truly independent of product providers. They believe this is an important attribute when choosing with whom to work.
If you do a search on Google for financial advice practices in South Africa, you will no doubt be inundated with a multitude of practices that will state on the front page of their website that they offer independent financial advice. But what does independent mean? Does it mean they have the choice of where they can implement their advice? Do they need to have a “whole of market” approach with the ability to work with every product provider available to call themselves independent? What about where an advice business is owned by an asset management business?
Can conflicts of interest be managed and advice still be called independent?
These were some of the questions raised by the Financial Sector Conduct Authority (FSCA) over the past few years.
In June 2021 the general code of conduct in the Financial Advisory and Intermediary Services Act was updated and has gone a long way to clarify the position.
The Act has reserved the use of the word ‘independent’ for practices that meet certain requirements. This is the first time that the FSCA has tried to define independence.
Broadly there are three hurdles to clear to be able to claim ‘independence’:
- “Significant owner” – 15% or more ownership between product provider and advisor
Where a product provider is a significant owner of an advice business or vice versa, the advice business will no longer be able to call itself “independent”.
- Any flow of money/value other than advice fees/regulated commissions between a product provider and advisory business. This means that any flow of financial interest (other than the advice fees agreed by the client or regulated commission) between the product provider and the advisory business will mean the advisory business can no longer call itself an “independent” practice.
- Any material conflict of interest, even if successfully managed between a product provider and advisory business, will mean that the advisory business is no longer able to call itself “independent”.
What does this mean?
Simply put, it means that any advisory business can only use the word “independent” when referring to the advice it can provide if all three of the above hurdles are met.
The last hurdle is the most stringent and seems to suggest that any material conflict of interest (even if successfully managed) deems a practice unable to call itself independent according to the Act.
This means that practices can no longer use marketing material that refers to ‘independent’ advice when the hurdles above are not met.
For example, many asset management firms with their own salesforce of advisors or planning practices, that either have their own asset management capacity or have a share in an asset management business and who probably have for years used the word independent to describe their advice businesses may no longer do so.
The ACT also helps consumers to better understand whether or not they are truly dealing with an independent practice.
The new legislation came into effect without much of a stir last year and may catch a few planning practices out.
From Veritas Wealth’s viewpoint, any legislation which strengthens the rights of consumers is a move in the right direction and we, therefore, welcome the new Act.
very interesting and informative.
Currently,I have complete confidence in Veritas, but how would I ascertain if a financial planning business does have ‘connections’ and a conflict of interests with another financial business?