Shanks: Consumers don't care how advisers paid
Financial advisers need to turn conversations about remuneration around and shift the focus away from commissions, Financial Advice NZ chief executive Katrina Shanks says.
Wednesday, October 17th 2018, 6:00AM 
11 Comments
Insurance commissions have been under scrutiny since the Financial Markets Authority said it wanted to see change from the industry - and there have been calls for trail commission on KiwiSaver products to be scrapped.
But Shanks said commissions were not the real story.
“I don’t think it’s about commissions, it’s about outcome, what is good financial advice and the best outcome for a consumer. Commission is just a form of remuneration and that’s it.”
The draft version of the new code of conduct for the industry requires that people giving financial advice have processes in place to manage conflicts of interest and adequately control and disclose them.
This is also entrenched in law in the Financial Services Legislation Amendment Bill. Commissions are not addressed directly by the code.
Shanks said an education process was needed with regulators and policy-makers, who seemed more concerned about commission than were consumers.
“Consumers want to generate good financial health and wellbeing. If we do that I don’t think they really mind how that is paid.”
As long as advisers added value along the process, they should have no problems being remunerated for that, she said. "If you're adding value in the value chain, it's our view that you should be remunerated for that.
“I think the public want good financial advice, and a good outcome and financial advisers should focus on getting good financial advice. The conversation has got sidetracked.”
But she said it was important that any potential conflicts were accurately disclosed.
Shanks said suggestions she had appeared at the Finance and Expenditure Select Committee to make a case for commission payments were inaccurate.
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Comments from our readers
On 17 October 2018 at 9:49 am mike6156@gmail.com said:
Good luck in getting consumers to ignore the cost of advice and focusing on outcomes. NZ Growth funds options shows inclusive of Management, Administration, Performance and Adviser Fees a range of 2.8% - 4.4% per annum. Fees making a big difference to investment outcomes since forever. On 17 October 2018 at 11:54 am LNF said:
Commission on investments is paid from the investors money in essence and should be disclosed to them
Commission from an insurance product is paid from the insurance company funds and is none of the insured parties business
I thought MBIE had finalised the topic some time ago
On 17 October 2018 at 12:09 pm MPT Heretic said:
Fees make a big difference to outcomes, so do returns, so does risk in all its forms. All are important... a fact our regulators struggle to appreciate it seems On 18 October 2018 at 2:38 pm comment1 said:
In response to LNF. Who do you think provides the insurance company with its funds? Surely its the policy holders premiums.
I recognise there will be the argument that cutting commissions wont lead to a premium reduction. However it would be interesting to see what would happen to premiums in the industry if instead of 150% or 200% commissions were say 0% or 20%. In theory this should result in a push for significantly lower premiums as long offset by the policy holder having to pay the adviser directly for service (just as people pay lawyers, doctors and accountants) as the adviser still has to make a living. Direct payment would add a greater level of transparency between the adviser and the policy holder just as they do between people and other professionals.
On 20 October 2018 at 9:07 am JPHale said:
Comment1 I take a bit of exception to your point about insurance as either purely from the personal perspective or one not at the coal face with the reality.
Reduced commission does have an impact on reduced premiums, but you've missed the point on the real problem.
People aren't interested in paying a fee for advice here. Primarily because they don't have the funds or inclination to pay fees when they are trying to transfer financial risk they can't cover themselves. They don't have the money for fees.
For the better part of 7 years I have presented the choice of fees and reduced premiums vs commission, and not a single client has taken fees as an option.
The issue with life insurance isn't the commission, everyone knows people have to get paid at some point, and the consumer ultimately pays for this
The issue is the replacement of insurance, commission is the red herring.
The provision of appropriate advice and then professional execution of that advice, particularly when replacing existing benefits, is the real issue.
The minister in charge, the Code Working Group, and the FMA, are not concerned with the method of payment. What they are concerned about is the conduct around giving the advice.
They also see removing commission and imposing a fee regime is likely to result in less advice not more or even better.
Commission for funds management may be frowned on, but it has a place in the placement of mortgage and insurance products, and the regulators have got past that.
The only businesses able to sustain a 0-20% comms rate are the banks, and we already know they are not great with insurance.
So to suggest that removing commission is some panacea of change that fixes all ills is sadly misplaced and likely to create more harm than good.
On 21 October 2018 at 9:34 am LNF said:
In response to comment 1
When you pay your premium it is none of your business what the insurance company does with that money, providing of course that it can meet it's claims obligation.
You have paid for a benefit that will be available in the event of a claim that may arise in the future during the term of the cover When you buy a car or TV, is it any of your business that the sales person received a commission, and of course that commission payment has a bearing on the price that you paid for the item
On 23 October 2018 at 4:07 pm Dirty Harry said:
@comment1
"it would be interesting to see what would happen to premiums in the industry"
If you were actually a client-facing adviser (rather your comment sounds eerily similar to the ill-conceived Citizens Advice submissions) you would already know that reducing commission to zero can be done in a life quote, and the effect it has is to reduce the premium by around 20%.
Now, in Australia they have tried it with regulation.
Have premiums dropped? Nope.
Has replacement/churn dropped? Nope. Arguable got worse, actually.
Were advisers really being paid too much, and was their conduct ever the real problem? See RC results for that one.
And BTW, how many people refuse or can't afford to pay for a lawyer, a doctor or an accountant? How many try to DIY or cost-cut. Think web-MD, think filing their own returns or drafting their own responses in a dispute. Plenty.
The fact is that direct billing is nothing like the panacea or the silver bullet that some think it could be.
On 23 October 2018 at 10:49 pm henry Filth said:
I'm just a mug punter.
I want to deal with a professional adviser, and pay for advice given.
I don't pay my lawyer a commission on the value of property conveyancing, I dont pay my tax accountant commission on the value of the refund, and so on.
Maybe I'll think of financial advisers as professionals when they get paid like professionals.
But in the meantime. . .
On 25 October 2018 at 8:42 am JPHale said:
@Henry, get the Sentiment, and for some they will have the view you have. On the most part when given the choice and explanation they choose commission.
The reality is this is likely more a demonstration of trust. If they trust the adviser they choose commission, if they don't, they choose fee.
Frankly, I've not had anyone in the advice space choose fee. Have on the claims side with those we haven't arranged cover and have come to us for advice, but that's a different conversation.
However, if I do have someone choose fee, I'll be asking what they are concerned about, as the life adviser relationship needs to be built on trust right from the start. If that's not right, then the rest that follows is likely to be problematic at some level, if not catastrophically.
The life insurance advice relationship has a significant number of moving parts that all can impact cover outcomes.
The fee vs commission debate is a minor point of overall professionalism and conduct.
Happy to work on a fee basis, however, that both comes with the likely little difference in actual costs and interesting and potentially unintended consequences when it comes to life insurance for consumers.
On 25 October 2018 at 8:52 am JPHale said:
Henry raises an interesting point.
If life insurance was to be exclusively fee based, there's no commission, upfront or servicing. So does that give the adviser an out on responsibility for not providing on going service if the client refuses to pay the annual fees around servicing, because they are not receiving ongoing income?
The thought raises many considerations that may result in unintended consequences.
Another is where a client has taken cover on fee and then goes to another adviser, does this trigger more fees or the current approach of doing the job on the hope of new business to pay the bills?
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I tend to agree that the commissions v asset-based-fee approach (from an investment perspective) is largely irrelevant to the consumer - as long as they know the exact cost to them, and can measure this against the specific benefits (to them). Transparency is arguably the better discussion to have rather than the payment mechanism.