What is the difference between a non-aligned and an aligned financial planner?

Watch below as Steven Rowley and Dianne Rutherford discuss the differences between non-aligned and aligned financial planners.

In short, a non-aligned financial planner works more independently than an aligned planner.

A non-aligned planner (also known as an independent financial planner) will generally manage their own business or independent organisation. That is, their business is not owned by a bank, fund manager, product provider or similar. Therefore a non-aligned planner can choose which products and services to offer clients based on substantial research into financial trends and forecasts – all considered in relation to their client’s specific situation.

An aligned financial planner, on the other hand, is generally employed by – or has responsibilities towards – one of the large and powerful industry participants such as the banks, industry funds, insurance companies or fund managers. They generally have a product range tied to their employer organisation and are required, or encouraged, to promote these products to their clients.

The result could be that the aligned financial planner offers advice, products or services that are not specifically selected to suit the client’s particular situation, but rather to meet the expectations of their employer.

What should I consider when choosing between an aligned and non-aligned adviser?

It is important to know if your adviser is aligned or non-aligned (also called an independent financial planner) and what that means to you. Often the decision comes down to personal choice.

Many feel they are better off dealing with a non-aligned adviser because they’ll receive uncompromised advice that won’t automatically lead to a ‘product’ based solution. Other times clients prefer to be associated with an aligned adviser as it makes them feel more secure if any problems arise. They feel that being with a large institution will provide them with some comfort should the worst happen.

Of course, there are many other things you should also be interested in. You should be satisfied that the adviser, whether they are aligned or not, has the required experience and knowledge to understand your specific circumstances and needs. You should not hesitate to ask how long the adviser has been in that role, what areas they are specialised in, their training and their experience. You should also ask if the adviser is limited in what they can assist you with, both from a strategy and product viewpoint.

Any professional financial planner will understand that clients can feel insecure in the face of large financial decisions and the adviser, therefore, should be willing to honestly and openly answer all questions and concerns you might have.

When is it better to choose an aligned vs a non-aligned adviser?

Everyone’s financial situation is unique. This cannot be emphasised enough. This means that there simply is no right answer as to whether you should choose an aligned or non-aligned planner, or whether one is better than the other.

However, there are some points to consider before making a decision:

An aligned financial planner is employed by – or has responsibilities towards – large industry organisations such as banks, industry funds, insurance companies or fund managers. This means that the services they recommend may not take your particular situation into consideration. For example, there are times when direction, guidance and support are the only services required at that point in time – no product needed. This situation does not suit the business models of many of the large aligned financial providers.

As a rule of thumb, if you have a very specific requirement that doesn’t rely on independent advice and it is easy for you to compare the product benefits versus the costs, that is, apples for apples, you could use an aligned adviser. In almost all other cases we would recommend using a non-aligned adviser. This is because non-aligned advisers are generally smaller professional organisations building long term, often intergenerational relationships with their clients. In contrast, some large aligned advisory businesses often have high staff turnover, resulting in the need for clients to establish relationships with multiple advisers.

How are advisers paid?

There are several ways that advisers can be paid, whether aligned or non-aligned.

While some advisers are paid by a fund manager or a product provider, it is more common that non-aligned advisers are paid directly by clients in a fee for service arrangement. They may charge by the hour, by using a set fee (for specific or ongoing advice), some may receive a commission, or there may be a combination of all of these.

The main difference between the payment structure for aligned and non-aligned advisory firms is that when the basis for payment is a client fee for service, there is little incentive for the adviser to promote a particular product. Conversely, many of the large financial institutions are paid when a client uses their investment, insurance or platform product(s). In this case, there is great incentive for advisers to promote these products in order to reach their budgets and ensure their ongoing tenure. To say that advisers are paid a salary and are therefore not incentivised to sell particular products is not accurate.

As a client, the most important thing is to ensure that your adviser’s fees are fully disclosed – as required by Australian law – and free of product bias.

How do clients pay?

There are a number of ways that a client may pay for a financial service or product.

Firstly, you may pay a single or ongoing fee for a specific service that has been agreed to in writing prior to the service being provided.

Secondly, you may pay a single or ongoing payment for the provision of a financial product directly to the adviser or their employer organisation, or alternatively, your payment for the financial product and/or service may be taken from the financial product itself in the form of (increased) management fees.

Generally, advisers conduct an initial ‘get to know you’ meeting free of charge. This allows advisers and their potential clients to get a feel for one another, discuss the client’s circumstances and needs and determine whether the adviser can offer a beneficial service to address the client’s requirements.

Again, the most important thing is to ensure that all costs are disclosed in a manner that is open and unambiguous. It is important to make sure that you understand all the details about the payment structure and to speak up if you are uncertain about any aspect.

How do non-aligned advisers decide what products or services to recommend to their clients?

Non-aligned advisers can be more open regarding the strategies, services, products or solutions they recommend because they are not expected to promote a specific product or service. Rather, a non-aligned adviser will make recommendations based on the specific requirements of the client.

Once these requirements are mapped out, the adviser will look at the various options available in terms of products and services. These will then be combined into a solution that meets the client’s needs, now and into the future.

While all advisers have an approved product list provided by the licensee, non-aligned advisers will almost certainly have a wider product range than their institutionally aligned counterparts.

What type of adviser is likely to give me the best financial outcome?

There is no universally correct answer to this question. However, one thing to keep in mind when thinking about outcome is that the financial outcome – although very important – is not the only consideration when choosing an adviser.

Other criteria to consider are: trust, peace of mind, ongoing flexibility, a genuine understanding of your circumstances, clear goal setting, your tolerance to risk and passing ‘the sleep test’. These are all very important to your financial outcome.

Remember, the best advice is always that which is tailored to your specific circumstances.

In the case of an emergency, like the Global Financial Crisis (GFC), isn’t it safer to be with one of the big financial institutions?

In short, no.

The truth is that investors are only ever as safe as the underlying investments and strategies in place. Strategies promoted by advisers working for the big industry bodies are not necessarily better than the strategies presented by the smaller, independent advisory businesses. In fact, the opposite may be true. Aligned advisers often have a more limited range of products and services on offer, with tight performance budgets to achieve. This can limit the time they have available to work with the individual to identify and implement a tailored plan – clients can run a greater risk of being presented with a solution that doesn’t suit their long-term goals.

In the case of an emergency, like the Global Financial Crisis, there is a risk that aligned advisers working for the big financial organisations with large numbers of clients to service will have divided loyalties and heavy time constraints in addressing clients’ fears and concerns. Non-aligned advisers don’t have this conflict of interest and are more likely to be able to give clients prompt and unbiased information in the event of a crisis, such as the GFC.

What is FoFA and how does it affect financial advisers?

The FOFA (Future of Financial Advice) reform was made mandatory on 1 July 2013 and aims to make the financial planning industry more transparent and accountable and to improve the quality of financial advice offered in Australia.

FOFA has led to the introduction of new fee disclosure and opt-in requirements, enhanced ASIC’s (Australian Securities and Investments Commission) enforcement powers, made it obligatory for financial advisers to act in their clients’ best interests and imposed a ban on conflicted remunerations.

The changes were placed on the industry largely as a reaction to the poor advice and practises employed by certain divisions of some of the big institutions. This problem seems to be ongoing with a number of the larger industry participants (particularly the banks) facing enforceable undertakings in relation to the quality of advice provided to clients by their salaried planners. Of course, for any financial planning business that operates with integrity first and foremost, a ‘client’s best interests’ is a given and it’s business as usual.

What is the future of non-aligned financial planning?

Non-aligned financial advisers represent a small percentage – approximately 10-15 per cent – of the financial planning industry in Australia today. However, as clients are becoming increasingly informed about their options, non-aligned advisers are becoming a more popular alternative to the big institutions.

This change comes from clients who, more and more, are valuing the personalised, long term and stable advice relationship established with smaller, non-aligned advisers.