One of the most important decisions that financial advisors have to make is whether to be independent or to opt for tying themselves to one or more suppliers of investment products. I am quite convinced that there are compelling arguments for taking the independent route.
Tying your fortunes to a specific company or group of companies might seem like a safe choice at the time, but over the long term, it may not be to your advantage—or that of your clients.
Tied advisors immediately find themselves at a disadvantage when taking on a new client because they are only permitted to advise clients who have investments or risk policies in the company to which they are tied. That means that the client’s existing investments, and sometimes risk policies, have to be shifted to the tied company, which could expose the client to penalties for early redemption.
In general, tied advisors do not have total freedom to choose the right investment for a particular client. A word of caution here: some advisors use investment platforms that are apparently independent but are in fact limited to a small group of investment product suppliers, something that still reduces their ability to create the optimal portfolio for clients.
By contrast, a truly independent financial advisor is totally free to choose any product or fund that meets a client’s individual investment needs. This ability to choose and manage investments in any fund gives independent investors a real edge in three broad areas:
· Compliance with new and proposed regulations. The Financial Services Board’s Retail Distribution Review, which was released for comment in late 2014, proposes significant changes to the regulatory framework for distributing financial products. It aims to improve the quality of the service offered to customers. The many proposals within the Review will take some time to digest, but basically independent advisors will be much better positioned to treat customers fairly, which will be the foundation of new regulations.
· Ability to build a better business much more quickly. One of the main consequences of the new proposals will be the phasing out of large initial commissions paid by the product suppliers to their tied agents.
Because they can no longer rely on these large upfront payments, advisors will inevitably shift focus to building annuity income derived from fees. Unlike commissions, these fees are paid by the client, and thus have to be earned by offering sound advice, and exercising due care and caution as they oversee clients’ investments over long periods, typically into retirement or beyond. The ability to take on clients with existing investments, without having to move them onto a specific platform, will be critical in bringing new clients on board. And, clearly, building long-term relationships will depend on the advisor’s ability to offer the best possible advice based on the client’s needs, not on what a particular supplier of investment products can offer.
It’s also worth pointing out that independent advisors generally save a great deal of time because while it’s relatively quick to change advisors on an existing investment, it’s extremely time-consuming to change from one investment platform to another. Time is the one thing we are all short of, after all—we each have a finite amount of it!
Independence also contributes to an advisor’s ability to grow his or her business because it supports a highly entrepreneurial approach. The advisor can and must keep up with the latest developments in the industry, rather than being confined to the investment products offered by a small number suppliers or just one. This allows the advisor to provide unbiased and professional financial advice that treats the customer fairly—good foundations for a solid business.
· Business protection. Independence also offers an advisor some real advantages when it comes to defending his or her clients from competitors. Because an independent advisor can advise and manage any investment, there’s no scope for a competitor to pitch alternatives to his or her clients. Equally important, an independent advisor’s clients usually belong to him or her, whereas a tied advisor’s clients always remain the company’s.
In conclusion, it is worth adding that we at GCI believe the benefits of independence are so compelling—both for advisors and clients—that we decided our model would be to support independent agents by offering them the resources they need to use that independence to the fullest extent.
The proof of the pudding, in other words…
Alex Cook, CEO, GCI Wealth