The value of independence in consulting

Good consulting requires – as explained in Flash 9 – both independence and competence on the part of the advisor. You either have independence or you do not. Competence, however, can be developed or acquired, although when delegating or purchasing expertise it is important that independence is preserved.

From the perspective of the person receiving advice, the benefit of independence is twofold:

• Strategic decisions that protect your interests: Over the course of life, private individuals face many strategic decisions regarding retirement planning, investments and financing. Should I buy equities, bonds or Bitcoin? Should I build a house or rent one? Should I withdraw a lump sum or take a pension at retirement? An advisor who offers their own financial or insurance products, or who receives commissions from third parties, is unlikely to recommend a pension even if it would be the best decision for you.
• Implementation decisions that protect your interests: Once strategic decisions have been made, the appropriate financial products and services must be selected. An interest-protecting implementation means that this selection is made transparently and under competitive market conditions. Advisors with their own product or service offerings are unlikely to guide you into the broader market but will instead recommend the products and services from which they earn commissions.

Recently, the question of whether pension funds should actively offer advisory services has been widely debated, even though this is not fundamentally part of their statutory mandate. In an article, Hofmann and Ulrich argue that pension funds are not inherently more independent than other financial service providers. This claim is not correct. Pension funds are legally structured as non-profit financial institutions. Precisely because of this legally anchored non-profit structure, pension funds are well positioned to provide independent and therefore valuable advice.

The authors’ reference to so-called retirement losses is basically correct. These may make financing a pension more expensive for a pension fund than paying out a lump sum. However, the broad reduction of conversion rates and adjustments in pension benefit structures have ensured that such retirement losses today represent only a marginal issue in the second pillar.