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The cost of sales or just an easy way to get to the Costa de Sol?

Monday, November 12th 2001, 7:29AM

Sovereign's plan to giveaway more than $1 million to a small group of advisers who write business for the company highlights the significant amount of money financial services companies spend on advisers each year.

While the company says that only half of one percent of its income goes into sales promotion, that is clearly a large sum of money. All companies, particularly those that sell insurance products, run sales promotion schemes that run into the millions of dollars each year. These 'sales promotions' generally involve offshore trips to places such as Bali, Egypt, the ski fields of North America and Alaskan cruises.

Considering the number of advisers is quite low in New Zealand this must translate into a pretty big sum per adviser.

What's clear is that this $1 million is only the tip of the iceberg. Sovereign's 'concept plan' was positive in that it bought a murky issue out into the open and it needs to be discussed.

The actual 'concept' was flawed in several respects. Firstly it highlighted the large amounts companies spend on sales promotion initiatives. Secondly, when the money was used for offshore trips all the advisers stood to benefit, under this scheme just a handful would get all the loot, and thirdly it was a major turn-off for consumers.

People were saying that if an adviser approached them selling a Sovereign product, and they knew the sale would help put the adviser in the draw for $1 million, they wouldn't buy the product. (It's probably a fair bet to say most shareholders in the listed financial services companies are not too happy to find out about these handouts either).

Because the consumer feels so strongly about issues like this it is incumbent on the industry that advisers disclose all these perks and gifts to their clients/potential clients.

The trouble is that this doesn't happen. How many disclosure documents are out there that clearly says insurance company X took me to exotic location Y for selling its products? Bugger all, it any at all.

There is an urgent need for advisers to more clearly disclose gifts/incentives they receive from financial services companies, or for companies to stop spending so much on these 'sales promotions'.

The disclosure should be clear and precise, rather than being some little coded reference in a disclosure statement that only becomes apparent if you read between the lines while holding the document sideways.

It's time that this area was strengthened up and advisers itemised everything worth, say, more than $500 that they have received from product providers in the past three years.

New Zealand's securities law is based on full, frank and timely disclosure. It's about time that started happening in the advisory industry.

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