Rethinking adviser remuneration

In a tiny business, the difference between how the business earns revenue, and how the adviser gets paid isn’t really very relevant.

Tuesday, February 26th 2019, 1:46PM

by Russell Hutchinson

Russell Hutchinson

But in a business where there is some scale, employee advisers, other shareholders, and so on, the question of how your advisers get paid is becoming increasingly important.

The problem, especially in the spotlight right now, is to demonstrate that how the adviser gets paid is not creating an intolerable conflict with the interests of the client.

While most new clients are happy to hear that the product provider is going to pay a commission, meaning that they will not have to pay a fee, their views can change pretty quickly when problems come up. If there is some sort of dispute, or worse, a claim not paid, pretty soon the customer will become very interested in whether or not commission may have had an effect on the advice given. If the idea doesn’t occur to them on their own, someone will surely raise the question for them.

Assuming commission remains part of the landscape for some time, how do you demonstrate that the commission payment did not have a direct effect on the advice given?

It isn’t hard to argue with the obvious. A family with good income, young children, lots of debt, and plenty of future ahead of them probably needs significant cover. Suitability is easy – they need it, let’s explore their needs and choose effective cover. They are buying it anyway, can we remove the last hint that commission is a factor in the selected cover? Probably.

With edge cases the situation becomes sharper. A client writes to you and expresses the desire for you to review their cover. You find differences in benefits that are slight, but in discussion you discover that they had a few bad calls to the admin team about payments. They want to move. If the adviser just gets a share of the commission for switches, this will look really bad… Is it possible to remove this particular incentive? Probably.

What about a client with marginal requirements – they have a low income, low assets, and low debt, but come to you seeking extensive insurance cover. Good amounts of income protection and trauma, and sure, they are entitled. But it costs a significant proportion of their income – 15%, say – which would be very unusual compared to the market. How do you safely choose to meet the need without it looking like commission led you to ignore the question of affordability?

Safeguards and process need to be designed well to allow the adviser more freedom to advise, and less need to worry. But remuneration strategies that disconnect the revenue from a specific situation from the recommendation for the adviser will help too. Maintaining effective incentives to deliver excellent advice and good productivity is a challenge, but with thought, it can be done.

Tags: Commission Opinion Russell Hutchinson