Commission ban would hurt consumers

New Zealand should avoid banning commissions for financial advice because it would have “unintended consequences”, Mint Asset Management chief executive Rebecca Thomas says.

Thursday, December 8th 2011, 6:38AM 5 Comments

by Niko Kloeten

The warning comes as superannuation groups across the Tasman call for the ban on commissions for financial planners in Australia to be extended to existing clients.

Although it is considered unlikely the Aussie commission ban will be copied here, there is a possibility it could be looked at during later rounds of the on-going process of regulating New Zealand's financial markets.

Thomas, who is on the board of the Financial Markets Authority, told Good Returns that in her personal opinion as a fund manager, banning commissions would probably do more harm than good.

"In my view banning commissions in New Zealand would remove a number of smaller, independent players from the market," she said.

This would be bad news for consumers, as it would make it more difficult and expensive to get financial advice.

"I think the unintended consequence would be that no-one would have anywhere to go for financial advice. It would be totally counter-productive to go down that particular path."

It would also make it harder for smaller, boutique fund managers to distribute their products and would give a big advantage to large organisations with tied adviser forces, Thomas said.

Instead of banning commissions, she said there needed to be a focus on two key aspects of commissions: firstly, disclosure and secondly, hidden incentives that she said bias advisers away from clients' best interests.

"Lots of people don't mind the fact their adviser is taking a commission as long as they know what it is and who it is paid by.

"In the UK I have an adviser who is paid on commission - I had a choice between a fee and commission and I chose commission. I know what the commission is, where it's going and what it's paying for."

Niko Kloeten can be contacted at niko@goodreturns.co.nz

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Comments from our readers

On 8 December 2011 at 8:33 am Independent Observer said:

It’s refreshing to read this common sense from a Regulatory disciple.

The fees v commissions’ discussions are a red herring to the real issue – being that of full disclosure.

Ultimately how a consumer chooses to pay should be determined by that consumer when they are in full possession of all details to make a decision (aka disclosure).

On 8 December 2011 at 8:53 am MPT Heretic said:

I am glad Rebecca's comments are from the perspective of her day job rather than the FMA. There are plenty small, independent financial advisers coping very well without the need for opaque commission structures and we haven't required these for many years thanks. And no it doesn't stop us supporting those local fund managers we think can add value for our clients.

The real issue here is the affordability of quality advice and the harsh reality is that many people who need help, wont be able to or don't want to pay a fair price for it. KiwiSaver is a classic example.

On 8 December 2011 at 9:58 am Fred said:

Agree entirely with Independent Observer.
The important issue is disclosure and transparency of costs fees and imposts, rather than the form of remuneration.
Commission remuneration is fully accepted in other professions, including real estate and banking.
If we must follow Australia's mistakes and ban Commissions, NZ could start with the expensive, opaque and largely useless Retirement Commission.

On 8 December 2011 at 11:54 am Kimble said:

"Commission remuneration is fully accepted in other professions, including real estate and banking."

Funny you should say that, http://www.freakonomics.com/2006/01/03/more-bad-news-for-real-estate-agents/

On 9 December 2011 at 3:08 pm Barry Milner said:

The biggest losers, should commissions ever be banned on risk business as the "purists" would have it , would be the insurance companies. The vast majority of the general public would certainly resist any attempt to charge fees for service in arranging personal risk insurance and an already seriously under insured nation would slip yet further down the world table of life premiums per capita. I trust the companies have the ear of the regulators on this subject.