[The Wrap] Advisers will need to earn their trail commission
If there's a buzz phrase in the financial advice world at the moment, it's hard to go past ones about putting the customer at the centre of everything an adviser does. But what does it mean?
Friday, November 9th 2018, 5:31PM 
3 Comments
It is the right thing to do, but the question which deserves lots more attention is what does that look like in a practical sense for advisers? My guess is that advisers have, by and large, being putting clients first for a long time.
Indeed that is arguably the key value proposition advisers have over their large corporate competitors, aka banks. Whatever you think of the current regulation changes, there is an emerging view that it is a good opportunity for advisers to grow their businesses.
However, that mightn't be able to be done in the same way as before, especially for risk advisers.
Buying books of business to bulk up revenue and trail commission could be more difficult.
There is a growing view that advisers will have to provide an, as yet, unspecified level of on-going service to "earn" this on-going commission.
This isn't just coming from just the regulators. There is little doubt it's something the product providers are giving serious thought too.
One of the interesting topics of discussion at the moment is what does an adviser have to do earn trail commissions from providers?
The Good Returns' stories on an Insurance & Financial Services Ombudsman Scheme (IFSO) decision regarding trail commission has been one of the most read on the site this year. It created so much debate that the IFSO, this week ran a webinar for advisers to explain its decision.
Unfortunately they banned Good Returns from listening and reporting on the webinar. Likewise, Murray Weatherston, who was instrumental in discussing this case was not allowed to listen as he belonged to a different scheme.
Dispute resolution schemes which make potentially precedent setting decisions which impact all advisers, arguably, should have an obligation to all the industry to explain their decisions. After all that's what normally happens in the formal judicial system.
See:
Client ignored for 20 years; Adviser whacked
Ombudsman clarifies adviser serving requirements
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Comments from our readers
There's ethics and perception, then there's the reality of the legal contract an agency represents.
The IFSO decision over steps its authority and imposes their view retrospective to the practice of the time, we have legal president that restricts this approach.
The decision was poor, to exclude GR and Murray is also incredibly childish and unacceptable from our ombudsman. This might be a DSR issue, at the same time they are also the ombudsman too.
There's argument that IFSO should operate as separate entities for the DRS and IFO functions. This attitude and situation reinforces separation.
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Many long-standing NZ agency agreements impose no servicing obligations on the adviser and simply state that an amount of commission will be paid on completion and further amounts paid monthly after the first anniversary date - no mention of service commission or even, in some cases, renewal commission.
The build-up of these residual incomes forms the basis for valuation of many advisers' businesses and failing to honour the contracts by applying contemporary preferred practices retrospectively would be controversial.
These are legal contracts - agreements set up with the intention of providing long-term financial benefits for advisers.
Furthermore, some agreements contain 'vesting rights' - even 'guaranteed vesting rights - for the adviser, providing for an ongoing payment as long as the insurance policy remains in force.
The contracts were struck between the product providers and the advisers - the client was not - nor were they ever intended to be - a party to the contract.
Of course, a product provider can unilaterally decide to change or even terminate an agency contract, and back in the day, this occurred quite frequently - usually with cause.
Then, the value of adviser businesses was relatively modest. Fast forward 20+ years and I suspect that the accrued value of these businesses is worth litigating over should product providers choose to act arbitrarily.
The ensuing publicity attaching would likely cause some loss of new business market share, and may even result in existing business being re-examined with a view to replacement.
Sorry, but the IFSO decision was just plain daft - 'nuff said.
And suffice to say that there are bigger issues at play than just the 'fee-for-service' mantra now being trotted out by some stakeholders in light of development across the Tasman.