So what is the point of independent advisers? This question was thrown to me in a three way discussion with an executive at a large fund manager and a legal/regulatory expert. Their views can be paraphrased as follows:

“Small independent advisers will not exist in the future.  They tell investors they review all available product and choose the best, but don’t have the resource to do that – that misleads investors.  Every adviser should be tied to one provider so investors know exactly what they are getting.  That is the future of advice.”

Have we really moved on from the need for independent advisers?  If not, what is their function in the market?

First place to start is to define what we mean by “independent” advisers.  To me this means non-aligned – they are free to choose any product provider.  They have no quotas, targets or business arrangements that sway them towards a particular provider.  They can continually look at what is available in the market and choose what they see as best for their clients.  This article focuses on small independent adviser businesses but we also need to acknowledge there are many larger firms that can be called independent.

The benefits of independents
Here’s how I see it.  In general, small independent operators are nimble and focused on their investor relationships.  But more than that, their business model enhances the investment landscape by avoiding conflicts of interest and offering real choice.  Some larger institutions do tick these boxes – but many larger or tied firms don’t tick them all.  Let’s look at each of these in turn:

• Nimble: Small independent advisers can consider and react to new ideas. They are not bound by layers of committees which can lead to inertia. 
• Customer focused:  Small advisers are intensely loyal to clients and typically have long and deep relationships.  Advisers make great efforts to retain their client base as their clients are hard-earned.  Independents also provide a level of staffing continuity that can be harder to find in large firms.  
• Avoiding conflicts of interest:  When advisers are paid commissions or have sales quotas there is a conflict of interest when providing advice.  Whether quotas / commissions actually influence behaviour is not the point - the point is whether a perception of possible conflict exists.  The same conflict exists if an adviser business is also a manufacturer of fund product or if an adviser business pays its staff bonuses linked to new product sales. By contrast these conflicts of interest do not exist if an adviser is not tied to a product manufacturer and does not accept commissions - they can choose what they see as the best of breed product.  A provider of a wide range of in-house funds cannot sensibly regard all their offering as best of breed (if this were the case then the market would only need one provider!)
• Offer real choice:  Not everyone wants product dominated by a single large provider.  A local delicatessen or grocer often provides better quality product, better service and a better experience than your local supermarket.  There may not even be a price difference.  Small independent advisers can be similar to the delicatessen by offering a unique or bespoke service.  More choice for investors is good – particularly where small independents can be flexible and avoid a “one size fits all” approach. 

Do independents have shortcomings?
The New Zealand economy relies heavily on SMEs.  Financial services are no exception with small adviser businesses being an important component of the industry.  But with any business model, there can be shortcomings.  These may not necessarily arise from the adviser being independent, but rather from the fact that they are likely to be a small business. In other words, regardless of adviser type (tied or independent adviser), small businesses may well share the same problems, such as:

Depth of pockets:  When things do go wrong, large players have deeper pockets to put it right.  Although not always willing larger firms can write a cheque (think Credit Sails and DYF).  On the other hand, an errant small independent adviser may not have the resources to do this.  The first line of defence (before relying on the depth of pockets) is to have effective regulatory oversight such as rules protecting client assets and rules stopping “unsuitable” individuals becoming advisers in the first place. 

Economies of scale:  Increased regulatory oversight is a good thing for confidence in NZ markets – but it comes at a cost for financial businesses.  While large corporates can achieve cost efficiencies through scale, smaller advisors face a comparatively heavier burden.  In fact from what we have seen compliance has the potential to overwhelm an under-resourced independent – for many small businesses regulation is fast becoming a case of “death by a thousand cuts”. 

Research and training resources:  Small advisers are unlikely to have the depth of internal research or training that large players do.  Research is, however, something that can to some extent be outsourced.  The PIA (Professional Investment Associates) network of independently owned and operated firms is a fine example of collaboration by independents – this now comprises 10 non-aligned advisory firms through the country.  The group has achieved synergies by developing common compliance processes and an independent research process.  In the new world every adviser business whether large or small, independent or tied, must have a research process that is objective, defensible, robust and (most importantly) applied in practice.

Final thoughts – independents are important
Financial markets would be less dynamic and offer investors less choice if all adviser businesses were either large firms or small aligned firms tied to one product provider.  Small and independent locally owned adviser businesses make an important contribution to our industry. 

One fact illustrates that industry participants know investors like independent advisers.  It is this – more often than not on the website of a tied adviser it can be hard to find references to them using only one main product provider.  If they are “tied” why not advertise it prominently and proudly….? 

In summary, size is no indicator of quality.  While Mitre 10 Mega take the view “big is good,” when it comes to financial advisers small can be even better.  

John Berry
Executive Director
Pathfinder Asset Management Limited

Pathfinder is a fund manager and does not give financial advice. Seek professional investment and tax advice before making investment decisions.