It’s official – commissions to be banned
The Investment Savings and Insurance Association (ISI) said yesterday that it is finalising an announcement that will result in a voluntary policy to discontinue the payment of commissions on investment products, including KiwiSaver. Meanwhile the Australian government has said commissions are to be banned on investment products in Australia.
Monday, April 26th 2010, 10:43PM 
21 Comments
by Jenha White
The Rudd Government announced that it will legislate to ban conflicted remuneration structures including commissions and volume based payments, in relation to the distribution and advice of retail investment products including managed investments, superannuation and margin loans. The measures will come into force from July, 2012.
Financial Services Minister Chris Bowen says the reforms are designed to tackle conflicts of interest that have threatened the quality of financial advice that has been provided to Australian investors, and the mis‑selling of financial products that culminated in high profile corporate collapses.
"These reforms will see Australian investors receive financial advice that is in their best interests, rather than being directed to products as a result of incentives or commissions offered to the financial adviser."
Institute of Financial Advisers (IFA) president Lyn McMorran says no question about it, the banning of commissions will also happen in New Zealand.
"Advisers would be wise to look at alternative remuneration models for investment advice," she says.
The proposed ISI policy will include the discontinuance of volume-based performance bonuses or commission and ongoing renewal commissions.
ISI chief executive Vance Arkinstall says a paper has been put to the board which will be meeting at the end of next week.
"We're going to give investors the opportunity to negotiate a separate fee for the level of service they receive - hopefully that will engender confidence," he says.
Labour Party commerce spokeswoman Lianne Dalziel says she thinks Australia's move to ban commissions is great and it is good that the ISI are also creating a voluntary policy, but she believes it would be better if the government stepped in.
"At the moment our Select Committee is actually having an inquiry into the outstanding matters which are not being addressed by the government arising from financial failures - the banning of commissions is one of the items in the terms of reference."
Commerce Minister Simon Power was not available for comment.
SiFA chairman Murray Weatherston wonders whether the ISI has asked its members, given that a fair amount of product is based on the commission model and questions how it will implement the voluntary Code.
He says an unintended consequence will be that some low-income earners will no longer be able to afford advice.
Professional Advisers Association (PAA) chief executive Edward Richards says he does not think there is anything intrinsically wrong with commissions on investments provided that there is disclosure given clearly to customers at the time advice is given.
"There is no magic bullet, banning commissions doesn't mean a solution has been found, it's much more complex than that."
McMorran says there is a perception that commissions influence adviser investment decisions and there is not any point trying to fight it.
"We don't have to follow the lead of Australia but what are we waiting for?
"The banning of commissions is happening everywhere including in Australia and the United Kingdom, most regulators feel it is the way to go."
She says New Zealand is trying to create an environment where people will feel comfortable about investment and the government will have to look at the banning of commissions.
Jenha is a TPL staff reporter. jenha@tarawera.co.nz
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Comments from our readers
Once again it is the heavy hand of stupidity stepping in at huge cost to limit the actions of a select few, ultimately further reducing the already poor financial literacy within our country.
Nothing but extreme short sightedness.
1. Isn't IFA selling down the river those of its investment adviser members who currently work on a commission basis?
2.Is IFA also opposed to commissions on insurance products? If not, why not? What is the difference between insurance products and investment products?
None of these people will pay to get advice and these are the people that need it.
No commissions = no advisers and this all adds up to less kiwis saving for retirement and more kiwis under insured, "Recipe for disaster"
Bring on regulation to get rid of the cowboys and then make sure brokers disclose what they get paid (i already do this)
If commissions are banned then all they will be doing is throwing the baby out with the bath water
As advisers, we will get what we deserve.
1. It needs pointing out that this policy has come from the Insurance and Savings Industry Association (ISI) announced by their CEO, Vance Arkinstall, not the Institute of Financial Advisers (IFA) of which I am the President. The IFA's policy with regard to commission is clearly covered in our Codes of Ethics and Practice Standards. Our first principle is that the clients' interests should come first and we are also very clear on the need for transparency in terms of any potential conflicts of interest that may influence the advice an adviser might provide and that the client must be fully aware of the way in which the adviser is being remunerated for their services. If a situation arises where an adviser might receive commission from a product provider, we believe that the adviser must be totally transparent with their client about this and must also justify their recommendations in terms of their suitability for the client's needs. We are absolutely committed to ensuring that consumers have confidence in seeking financial advice which is why we have always been very supportive of regulation of the profession. This means that we have always been concerned to ensure that access to advice remains within reach of the average consumer and does not become the privilege only of the wealthy. Having said that, however, we are supportive of ISI's initiative. The trend worldwide is to move to a fee-based model for investment advice and we will be looking to work with ISI and the product providers to determine ways in which our members can continue to be adequately rewarded and remunerated for the valuable work they do.
2. Again I believe Adam has confused the ISI with the IFA. The IFA is not opposed to commissions on investment or insurance products per se. We are opposed to remuneration creating situations where advisers are conflicted by their remuneration model in terms of the advice they provide and where they may therefore not provide advice to their clients that puts the clients' interests first. What we do promote is the value of advice and the need for all consumers to have access to good, affordable advice.
In years to come, the financial services industry will come to recognise that the payment system was not the rogue that caused so much financial hurt throughout the noughties (albeit that it was closely associated with many of the villains involved), it was the lack of financial regulation combined with an unworkable rules-based-approach that help industry & consumer greed and naivety to flourish.
The reason that the big financial institutions are applauding this latest regulatory fiasco is that it will once again (for those who were around in the eighties) permit them to openly flog their products through tied-agency arrangements, involving a variety of business development initiatives that avoid scrutiny. The victims (again) will be the consumers who will have limited choice or ability to pay for it, and those fragmented financial advisors who will be forced to gravitate towards a big brother.
As I have remarked in the past, the next decade will demonstrate the futility of the fees versus commissions debate, and will end up focusing on the real issue of principles-based-approach in favour of a rules-based-approach. For the time being, we live in a era of regulatory ignorance that will ultimately cost us all dearly.
There is no such thing as free advice. Even if the money investors pay for the advice is channelled through a 3rd party, like a product provider, they are still paying for it.
It may be useful for the IFA to clarify their process for arriving at the decision to support fees over commissions.
For the record: the billing process is not the issue - as discussed previously
Currently most fee only advisors rebate all upfront, trail and renewal commissions back to their clients. This option will no longer be available as a 'selling point' as there will be nothing to rebate.
If, as is proposed, there will be no commissions payable,are we to see a massive reduction in the management fees etc or is this seen by their members as an opportunity to increase their 'bottom line'?
The media is quick to attack advisors commission payments, yet these commissions are paid for out of the fees and charges imposed by the product providers.
We are continually told that commission based advisors have a vested interest in continuing to be paid commissions. I put it to you that now the boot is on the other foot. Unless the product providers reduce their fees and management charges, they have a vested interest in suporting a ban on commissions.
Do fund managers use the management fee to pay commissions or do they use the entry fee?
Captcha: administration droopy
Surely the key issue for the client is that they are aware of the charges and that these charges will inevitably impact on returns.
If the industry is forced to change to a fee only basis then an awful lot of people will never get any financial advice because they will be either unwilling or unable to pay for it.
Could it be that Vance has suprised them also??.One national sales manager I emailed was scrabling for a reply to advisors....yet to be received!!
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