Is your investment adviser / distributor truly "independent"?
Let's consider the term "independent" in the context of investment advisers / distributors(Note). An average investor may think that independent investment advisers / distributors are independent from product issuers and will provide unbiased advice and make recommendations that are in the investor's best interest.
But this is not necessarily the case in reality. Indeed, many investment advisers / distributors marketing themselves as independent may not be truly independent because they receive commission from product issuers. Such remuneration methods could undermine independence and objectivity, and give rise to conflicts of interest.
New measures restricting the use of the term "Independent"
Starting from 17 August 2018, not all investment advisers / distributors can refer to themselves as being "independent". Under the SFC's new requirements, investment advisers / distributors under SFC's regulatory regime are restricted from representing themselves as being "independent" or using any other terms with similar inference (e.g. "independent financial advisers", "IFA", "impartial", "neutral", "objective", or "unbiased") when distributing an investment product if monetary benefits from other parties including product issuers are received. Additionally, such investment advisers / distributors have to provide clear disclosures to investors on whether or not they are independent and explain the reason.
Under the new SFC requirements, when distributing an investment product, where an investment adviser / distributor under SFC's regulatory regime represents itself as being "independent", that means it will not receive fees, commissions, or any monetary benefits paid or provided by any party in the distribution of an investment product to clients. Also, it must not have any close links or other legal or economic relationships with product issuers, or receive any non-monetary benefits from any party, which are likely to impair its independence to favour a particular investment product, a class of investment products or a product issuer.
Examples of being non-independent:
- An investment adviser / distributors is remunerated for selling a particular issuer's products or for meeting a specified sales target set by the product issuer.
- An investment adviser / distributor has a parent company and subsidiary relationship with a product issuer.
- An investment adviser / distributor has a contractual agreement with a product issuer whereby the investment adviser / distributor is confined to distributing that issuer's investment products only.
What questions should I ask if an adviser says that it is not independent?
For non-independent investment advisers / distributors, it is important to know (1) their relationship with the product issuers and (2) the commission they will receive from selling the products to clients. The information can help clients better assess and consider the advice offered by the investment advisers / distributors. Learn more about sale-related information disclosures by investment advisers / distributors.
Different meanings under different regulatory contexts
Investors should note that these requirements are only applicable under SFC's regulatory regime. This means that not all investment advisers / distributors selling investment products in Hong Kong are subject to these requirements. Hence, when purchasing investment products from investment advisers / distributors to whom the requirements do not apply (e.g. when purchasing investment-linked assurance scheme (ILAS) from insurance intermediaries), investors should bear in mind that the word "independence" may have different meanings under different regulatory contexts. Where an investment adviser / distributor represents itself as being "independent", you should ask the investment adviser / distributor to know more about what it means when representing itself as being "independent" and whether it receives monetary benefits for selling such investment products to you.
Note: Investment adviser is a broad term. In Hong Kong, it generally refers to intermediaries (individuals or companies) selling or advising on different types of investment products.
13 August 2018