Code review sparks soft dollar commission debate
Many advisers are not happy that the Code Committee for Financial Advisers is looking at soft commissions as part of its consultation on proposed changes to the Code of Professional Conduct.
Wednesday, August 14th 2013, 6:30AM 
10 Comments
by Susan Edmunds
The consultation paper was released last week. Committee chairman David Ireland said one of the areas that it was concerned with was conflict of interest.
Ireland said the committee did not feel it had the jurisdiction to directly attack conflicted remuneration but it was important to have a clear conflict of interest standard. “We need to clarify what we mean when we say ‘managing conflict of interest’.”
That would partly mean emphasising client first, he said, and clarify that it meant more than just disclosing remuneration. “Soft commission is still a conflict of interest. If I sell an insurance product and get an all-expenses-paid trip to the Gold Coast, I’m getting something out of it and I need to explain that to clients.”
Some commenters said the removal of incentives would be a step in the right direction towards financial advice being recognised as a profession.
But some advisers said it was unfair to pick on the soft commissions they received when other industries also often had bonuses thrown in.
Ginger Group regional manager David Pine said soft dollar incentives would always be a part of the financial services industry. “They are part of the normal course of business for insurance and investment companies. It is one of the ways in which these organisations promote themselves, and have done for about 30 years.”
He said some advisers did not accept them but those who did could still meet the standard of “client first”.
“Doing the right thing for our clients, and accepting soft dollar incentives, need not be mutually exclusive. This is the point that I feel the Code Committee needs to take on board. Their view seems to be that soft dollar incentives, if taken by the adviser, will automatically mean that the client is disadvantaged. In my view this is nonsense.”
He said doctors were often offered incentives by drug manufacturers but people still had faith in their GPs to do the right thing by them. “I have complete faith in my GP's desire to do the right thing by me, whether or not he accepts soft dollar incentives. Personally I don't care if he accepts these incentives. I say good on him. In the same way, there are a large number of high quality financial advisers in New Zealand who always do the right thing by their clients, and who sometimes accept soft dollar incentives.”
Pine said as long as incentives were declared by advisers, there should be no problem. “The Code Committee would in my view being doing a disservice to our profession if they sought to unduly interfere with the rights of these advisers.”
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Comments from our readers
I hope commissions are banned and we can get on with re-building the industry's reputation. This will surely lead to many more people wanting to use our services and doing the right thing for their futures rather than sitting on deposits or property because they fear the alternatives.
Good honest disclosure, transparency, education and choice is the answer, not more restrictive rules forcing clients towards low risk, low fee, below average return products.
Unless they are linked Doctors do not recommend a rectal exam when you ask about your leg or insist on an ac disclaimer when you refuse to allow the $495? full check that AFAs must recommend.
Dentists may notice that you "need" $40,000 worth of caps and may mention it in passing, but will fix your aching tooth without itemising all of the other possible oral health needs and getting sign off when you don't "follow their advice"
Long may this continue. What a shame that when it comes to financial services regulation world wide has removed consumer choice and increased costs.End result more cost than benefit.
Still, the regulators seem to think peoples money $20 a week into Kiwisaver is far more important than their health, so AFAs must live with it.
The issue is about transparency, and giving the consumer a fair go. Any consumer seeking professional services should expect an honest and transparent process, whereby any conflicts of interest are clearly outlined up front. That way, the consumer can decide for themselves whether they want to do business with the provider
Soft-dollar commissions should be banned because they are not transparent and by their very nature create an unacceptable conflict of interest.
Hard commissions (for insurance products) will need to stay for some time to come because the bulk of insurance consumers simply won't pay a fee for advice.
But that doesn't justify upfront commissions. Upfront commissions should be banned along with soft commissions and replaced by more level commission options to help reduce the incentive for churn and create a sustainable industry focused on long-term solutions instead of a quick sale.
I was faced with a conflict of interest this morning - I wanted muesli for breakfast, but Weetbix won me over because Sanitarium had a bigger and better advertising budget tied in with the All Blacks (possibly because the sales execs were given a free trip to Barley!). Was this ever disclosed to me?
With due respect, Mr Ireland - focus on something more constructive and less controversial.
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Challenging commissions without aslo challenging Buyer-of-last-resort arrangements would be perverse.
Captive advisers shoving investors into mediocre funds for a greater multiple buy-out value is not putting their interests first.