Do commissions damage customer trust?
Debate over whether financial advisers can be impartial when they receive commissions is not confined to New Zealand, says the Institute of Financial Advisers president, Nigel Tate.
Friday, April 26th 2013, 6:00AM 
12 Comments
by Susan Edmunds
Tate, who is in Hong Kong at a Financial Planning Standards Board meeting, says the question about whether commission was a sustainable remuneration structure for the future is being discussed by delegates.
“One of the things that has been highlighted here is that if you remove commission, you harm the lower net worth individuals who can’t afford to pay the fee. Commission means consumers more broadly can take financial advice.”
Columnist Martin Hawes wrote over the weekend that real estate agents and financial advisers were not trusted because of the perceptions of self-interest associated with their industries.
“An individual or professional group who appear to be only in it for the money, are among the least trusted of people. … we tend to not trust people who are remunerated by commission - they have a very high self-interest factor because they only get paid if they persuade us to do something.”
He said the public would not believe that financial advisers were putting clients’ interests first until they stopped receiving commissions.
“Most of us remember that the industry used to be almost exclusively people who were basically selling investments on commission - and that many financial advisers happily banked the commissions that they received from selling people into dud finance companies.”
Tate said he did not personal disagree with Hawes’ view but there ways for it to be implemented with benefits for the customers, encouraging more people to take advice.
He said that relied on the professionalism of the practitioners. “Like any industry, we’ll always get people who ride the fringes and consumers who don’t understand why they are paying for. But if it’s fully disclosed I don’t think there’s anything wrong with taking a brokerage or fees.”
Tate said that for insurance products, there was only about a 5% difference in commission between the various products available.
The IFA does not take a view on whether commissions or fees are better but requires that advisers use an agreement that sets out everything that is being charged. “We all know the client pays no matter what path is taken, whether it’s from the client’s bank account to the adviser’s bank account, or from the client, to the fund manager or insurer, to the practitioner.”
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Comments from our readers
On 26 April 2013 at 10:37 am Peter Urbani said:
Commissions lead to a potential conflict of interest and encourage portfolio churn. They should have been banned a long time ago.
The argument that lower net worth customers will be disadvantaged is specious and could easily be addressed by pro bono services being offered at a certain percentage 20% or below a certain wealth threshold as is the case in other professions.
On 26 April 2013 at 12:13 pm David Whyte said:
It's important to reinforce Stan's point in this discussion, and to avoid making across the board generalisations and sweeping statements about commission. It's widely accepted that product provider commission on investment products is a negative influence for all the reasons detailed in Martin Hawes' article. But in their haste to claim the high ground, commentators have an unfortunate tendency to be imprecise on the aspect of definition - and this gives rise to spurious headlines - as per this item. It's INVESTMENT product commissions which damage customer trust.
LIMRA consumer research concluded years ago, that buyers of risk insurance products are not concerned about commission payments to advisers - nor about product provider publicity material, incidentally. It's probable that this research could do with updating, but the impact of commission on risk products structures is significantly less on investment products, where returns to the client are directly impacted by lower investment allocations to fund such commissions.
However, it's critical that commentators, media, and advisers place the debate in its proper context and preface all such statements, questions, and opinions with specific reference to INVESTMENT product commissions.
On 26 April 2013 at 1:12 pm btw said:
There is no difference between investment and insurance in this context. The issue of "product provider commission" arises from the relationship between the advisor and the client - nothing to do with the product. This is basic stuff people - stop kidding yourselves, and more importantly stop trying to kid your clients. On 26 April 2013 at 6:12 pm Mike Cole said:
Advisers will not be trusted if they take commission - not trusted by whom? Such an easy statement to make but where is the evidence of that?
Also pray tell what the difference is between a client digging in his back pocket to pay a fee and allowing the provider to pay the adviser either from the product [insurance] premium or investment sum? Surely same money, different sourcing!
As someone said......both fees AND commissions get disclosed so where is the issue.
Sounds like talking heads wanting to grab headlines.
Personally I would suggest this is a choice for the client to make n'est pas?
On 27 April 2013 at 9:23 am BayMan said:
A simple solution to the insurance commission debate would be to change the mix.
On genuine new business, or increases in coverage, the status quo remains.
On replacement business only offer servicing commission. Similarly, when taking over as servicing adviser, why does the new adviser not receive renewal commission? If a client chooses a new adviser irrespective of obtaining increased cover etc, then surely the new adviser should be remunerated for the on going servicing of said client?
On 28 April 2013 at 12:01 pm Barry Read said:
Make no mistake, there is a difference between receiving a commission for selling a financial product and being compensated for financial advice by commission from a product sale.
Most consumers, and some people in the industry, would struggle to identify the difference unfortunately.
Advice struggles to be without conflict if the remuneration is linked to the sale of a new product or service.
There is nothing wrong with consultative ethical selling of financial products like insurance, just don't pretend that it is 'independent' or 'unbiased' advice, because it isn't.
On 29 April 2013 at 12:18 pm Graeme said:
I am intrigued by Barry's comment "There is nothing wrong with consultative ethical selling of financial products like insurance, just don't pretend that it is 'independent' or 'unbiased' advice, because it isn't."
If I offer a range of products, from multiple suppliers to meet a need how is my advice not unbiased and independent? What are his definitions of unbiased and independent?
On 29 April 2013 at 1:04 pm Barry Read said:
Hi Graeme
Depends.
If your proposition is "I can sell you some products and I have a selection of carriers so my product selection will be unbiased" then no issue.
If you say I am going to review your needs and see what you need/want and make recommendations and it will be unbiased because I have multiple carriers then there is an issue.
If the only way you will be paid for your advice is the placement of a financial product, from one or many providers doesn't really matter, then your advice is not independent. You have could be perceived to have a bias to recommending new products.
If you were paid for your advice and it didn't matter if a client took a new product or not, then your advice would be unbiased or less conflicted.
The fact that you have multiple carriers means that your product selection may be unbiased, but the fact that you won't get paid unless you sell a product is the issue.
Lets go to the video ref;
The code of conduct for AFAs states you are not independent if;
the AFA or a related person of the AFA will or may directly or indirectly
receive a benefit from a person other than the client for providing the
services or from the client’s acquisition of a financial product or products.
That's my humble opinion on the debate, for what it is worth.
On 29 April 2013 at 5:56 pm Giles Thorman said:
Not sure I follow Barry here.
Whether it is "product" or "advise" that you are selling, according to the definition given by the code of conduct for AFA's, as you are not being paid directly by the client you are not independent and according to Barry you are not unbiased either.
According to this then 99% of all Life Assurance advise is given by biased non-independent individuals or companies; the same applies to 99% of the Fire and General market as well.
According to the Code of Conduct and Barry then it makes no difference whether you are a tied agent to one company or whether you offer a choice of several carriers (perhaps the choice is made on the colour of the insurers brochures???) you are still biased and not independent.
You could charge the client a fee and still send all of your business to one company because you get on with the BDM and the brochures are a nice colour and according to this criteria you are independent and unbiased.
Go figure.
On 29 April 2013 at 9:08 pm For goodness sake said:
Investments or Risk - Rest assured if we do not receive commission a fee would have to be charged and could be higher as needs to take into account time spent interviewing, writing reports, analysing products etc whether Inv or Risk does not matter as long as the client is informed and signs off that they are this continual scaremoungering within the industry by so called journalist who can hide behind that title and give advice without screeds of paper together with the comments above by specialists who have not done the job of trying to assist clients - enough is enough let us get on with seeing and helping clients. On 30 April 2013 at 3:28 pm Dirty Harry said:
oh dear I just read to the bottom of the thread. Funny thing Giles and Barry: YOU ARE BOTH RIGHT! It's like watching team mates fighting over the ball...
Conflict arises in both cases; commission induces sales, or I don’t get paid. That’s not “independent”. And it’s perfectly acceptable that the Act, on behalf of consumers, adopts this stance.
Soft dollars, relationships, bias/preference, incentives etc can all affect the placement of business. If your definition of “independent” revolves around freedom of selection/placement, (this appears to be the stance Tate is taking in the article) it still doesn’t fit the new definition of “independent” provided by the Act.
It is inconvenient that the new Act has re-purposed an old industry word. There were “tied agents”, and there were “independent” advisers. Now “independent” has a defined meaning. Get used to it.
In the investment world commissions are deservedly getting a bad wrap, for reasons to do with both of the above. The future there is fees only. In fact, that future is already here.
In the insurance world if the products you have set yourself up to choose from, either as a non-tied, “wide range” (FAA language here), or QFE adviser, are all arguably fit for purpose, and there is adequate supporting documentation and full disclosure, then it is less of an issue.
Fee-for-advice in mainstream insurance is unlikely to work best on balance. I don’t think the BDM’s shouting lunch and the trips and stuff will stop, and they probably don’t have to. Insurance is sold, and incentives are needed to keep bridging the underinsurance gap.
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Insurance is different to investment, no issue with commission there in the main.