Commission ban deferred but Ripoll effect to hit NZ

As is the case in Australia, the Regulators and Commentators on this topic are missing an essential point.

The issue of fees v commissions is a billing or payments discussion - which ultimately should be determined by the consumer in consultation with their intermediary.

The issue that lies at the heart of this debate is one of 'disclosure'. In other words, if the consumer has been presented with sufficient information to enable them to make an informed buying decision (ie: inclusive of risk appraisal, performance attributes, how the portfolio will/won't meet their expectations, remuneration to the intermediary etc), then the method of payment is a secondary consideration.

If all has been disclosed (in dollar terms NOT percentages) then the consumer can determine the most convenient method of payment for them. This also provides them with a price-point to compare value propositions.

Where the system has been abused, is that many financial intermediaries have a feeble value proposition, thereby leaving them with little confidence in disclosing their remuneration. The easier option has been an absence of disclosure coupled with veiled payments directly from manufacturers.

Whatever is the outcome (as this will ultimately be determined by the Regulators rather than the industry), all financial intermediaries will need to arm themselves with a robust value proposition (that is preferably not overly homogeneous) to retain & attract consumers.

I disagree - the issue is about the inherent conflict of interest of a fiduciary receiving payments from 3rd parties, compounded where those payments are in the form of a commission. A fiduciary's primary duty to avoid that conflict, so 3rd party payments are prima-facie unacceptable. Disclosure is not a duty in itself, at best it's a last resort solution to resolving a conflict. Remember, the primary duty is to avoid the conflict - disclosing the conflict or accepting "reasonable fees" isn't enough if the conflict can otherwise be avoided, which it can be by not accepting 3rd party payments.

It looks as though there is a good debate brewing on this topic.

Unfortunately the view expressed by Interested Party does not take into account the market mechanism: as the financial services industry matures from 'adolescence' consumers will be more inquiring about value for money. To see this transition in action - reflect on consumer's attitude to risk now compared to a few years ago. In other words - under a regime of full disclosure, the market will determine what is a reasonable price for a service, and the consumer will determine the appropriate billing mechanism.

I thought I might add to the debate with some practical observations. In a previous life I built commissioned products, now I provide independent fee based advice.

I think there is a need to distinguish between the type and drivers for commission payments. It can be argued that a regular payment made from a product for ongoing advice is no different to recieving an annual fee directly from the client. The real issue is does the client know the $ they are paying and are they actually recieving the advice.

Where commissions are a conflict of interest is where they are paid purely for continued adviser support of the product manufacturer.

Unfortunately this leads invariably to grey areas. While banning commissions is one answer it leaves the door open for other more inventive payment structures which are still hidden. My preference would be to require all AFA's to show clients the total $ cost of using their services. This should include the gross cost of advice, trading, platforms, products, etc recommended even if they dont get remuneration from them. We have done this for potential clients since 2003.

This will at least provide a level playing field for clients and advisers alike, even if it wont necessarily allow clients to determine what is value for money. The reality is we are not selling a black Model T where success can be measured by getting from A to B. Individual investor preferences such as timeframe, risk and return profiles make comparison difficult and often not possible until it is to late.

Many members of the public are just not able to distinguish between one type of adviser and another, so are likely to miss the significant influence that commission arrangements can have.
Q: How many failed finance company investments would have been recommended by advisers if there was no commission to accept - or rebate? A: Fewer.
And more importantly:
Q: How many unhappy clients would now be seeking redress from their advisers now, rather than pursuing the directors, management and trustees of those companies? Answer: Far fewer.

I intuitively support the view proposed by "Independent Observer" above, lets face it the payments are in fact coming from the client not at all from the provider of any product.

Bernie Ripoll MP presented to us last week at the FPA Conference as a member of a panel discussion around the "future of financial planning..." and wasn't that convincing that he fully understood the issues at all, also Joe Hockley MP who initiated FSR over there stated that the opposition party would not support any ban on commission as he felt it was a "disclosure issue" rather than a commission issue (This view opposes that held by the FPA.

I can't but help feel that there is a Political ground swell, some may say agenda, here that seems to be coming from the Securities Commission that there is a great need here to ban commissions or any other payment that is coming from any "3rd party" when in fact it is quite appropriately coming from the client via the so called 3rd party and if this is how the client would like to make their payment for the financial adviser service what has that got to do with the government.

Another clear indication is in the latest Code Committee paper on Ethical Behavior and Client Care where it is proposed that to be "Independent" AFA advisers will need to not have any payment from any entity other than the client, this is looking very much like the start of Commission banning, no matter what the client chooses. How are advisers expected to transition if this is to be the standard?

...the circus just keeps moving on doesn't it?

Reality: humans are never free from bias.

We all become opinionated, and influenced by the sum of our life experiences and learning. When giving advice, we then lean upon that store of knowledge and reasoning to determine what we individually (and quite subjectively) consider to be the "right" advice to a consumer.

This business is not a science. It is not made up of absolutes, or utterly certain and predictable outcomes for consumes -despite our best intentions and efforts as advisers. It is an entirely subjective, opinionated and emotion-laden buying process.

The arguments floated by the anit-commission brigade always neatly objuscate on key points like giving the customer a solution in the manner they they want. Rule 1 in selling anything in any business isn't it?

Ethical commitment number 1 too. Put the clients interests first! That doesn't just mean give objective analytical solutions to their financial woes - it means having empathy for the human on the other side of the table and trying to help them in a way that they prefer as well.

Simon H and I are I think friends, and agree on many many things, but we are poles apart on this issue. How many consumers would have had super, or mkiwisaver, or life insurance, or trauma insurance, or investment properties - or any number of other wealth-creating and estate-preserving financial products if it hadn't been for commissioned-advisers taking the risk of working for nothing to try and educate and persuade these same consumers to engage in the beginnings of a financial plan for a better life?

Didn't you and I start there as advisers Simon? Didn't we all?

A good person will try to do good regardless of the remuneration system. A bad person will do bad things regardless of the remuneration system.

You're a fool if you think good and bad behaviour by advisers is the fault of any particular remuneration system. it is a human failing. No more, no less.

At the moment all this debate about commissions = sin; fee's = sainthood looks to be little more than various constituencies campaigning for their personal (commercial) idealogy. The zealots of either camp are trying to convince the middleround that the only way is their way. It is nauseating to watch.

It doesn't help the industry one iota. it doesn't help the consumer one iota.

Who the hell does it help?

Think about and debate that.

Commentators often have many vested interests, particularly those who have fee bases that are worth many thousands of dollars to sell today that maybe worth nothing if commissions banned. It is obvious what they will have to say. If you take out the high front end effect of commission out of the insurance premium calculation what will be the effect on premiums? With some firms offering up to 200% plus commission the cost-benefit of advise would be hard to justify. How do you change something dramatically overnight will be extremely difficult but it will happen. Next on the list will be real estate commissions which would be harder still to justify as to cost being related to value of investment as opposed to input of time from salesman.

Tony I fully agree - we are all being tarred by the lowest common denominator those advisers who do not do the right thing - and by reading some of the comments above some people are foolish enough to believe that charging a fee will fix the problem.
It will not!!
Those who intentionally do wrong by a client will continue and no doubt earn a higher amount by charging a fee rather than by taking commission
We have an under insurance issue in NZ and it is clear that NZ'ers are not in the main prepared to pay a fee
What fee will be acceptable - for many clients who take a large number of appts, letters, emails, phone calls the charge is going to be far higher than the commission.
Are you all naive to think that the premiums charged by the Insurer are going to be reduced by the amount paid in commission if we take fees?????
Would any of these proposed changes stopped Finance company, Bluechip, Hanover recommendations - I doubt it - will it make those that advise in that product range do more research now - I doubt it!!!!!

Finally, if you buy a tyre do you get told how much commission or what trips the tyre company/owner can qualify for for recommending bridgestone above the others - NO and yet the trips are far more over the top than the Insurance Industry ones, the commissions paid by the tyre companies are significantly different between companies, tyres I would suggest are as important get the wrong one and the consequences could be huge. Would you be prepared to pay a fee for their advice over the top of the cost of the tyre!

Jane Diplock and supporters need to understand the issues more carefully and look at all the issues in Australia where the system is not working well.

thanks. Firstly I apologise for my earlier apalling typing effort. Also, these views are my own alone, not representative of any organisation I have affiliations with.

As was pointed out earlier by another commentator, I too believe that the central issues are:
1. Comprehensive and consumer-friendly disclosure of all remuneration and conflicts of interest prior to the engagement of the adviser. Put simply, they need to understand your bias as an adviser, where there may be the perception of undue influence in their own minds, and then be able to decide as logically as possible whether to engage you as the adviser or not.
2. Remuneration is ok in any way - subject to rule 1 above. That means in my mind it is absolutely ok to charge a client a commission that's a percentage of FUM (and call it a "fee" if it makes you feel better), or a commission on successful placement of business, or be on a salary from a single product provider, or tell them your fee is a ferrari to be handed over when you hand over their plan. Whatever the method of currency or value-exchange chosen by the adviser and consumer together is actually irrelevant to the provision of advice. As long as there are no secrets about it and they can make an informed decision.

If the remuneration model was critical to the fair and professional representation of the consumers desires, then ambulance-chasing lawyers and "success-fee" based employment law grievance-mongers business models would be banned also. Wouldn't they? Should there be some sort of cap on consultants and business coaches deriving income as a proportion of the benefits attained by their clients? Should an estate agent be able to earn $50k from the sale of one fantastic property, even though it took less work to market and sell than the property that pay's $5k?

You get the drift, the commercial world is full of success-based remuneration models that are all apparently just fine with the various authorities, media and consumers alike.

This debate in our industry is categorically NOT about the consumer as far as I can see. It is idealogy alone for some participants. It is simply a means to the end of selling more advertising and tabloid-style stories for others. For some it simply suits their agenda to scare the bejeesus out of advisers so that they can be the great white knight riding to their commercial rescue.

But that is the way the world has always been, so it is no suprise that it is so now. Did I mention that humans are inherently biased?

Strangely enough, journalists, consumer advocates, regulators, lawmakers, consumers themselves are all humans with their own bias. As am I and every other participant in this business.

It saddens me though to watch so many industry participants gnawing on their own limbs in a frenzy of righteousness and indignation though.