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Commission disclosure a furphy, PAA says

The Professional Advisers Association (PAA) has called for volume agreements with insurance providers to be the focus of disclosure rather than commission payments.

Wednesday, September 23rd 2009, 5:02AM 4 Comments

In a submission to the Securities Commission on proposed disclosure regulations, the PAA says while remuneration methods should be disclosed, the actual amount insurance advisers get paid was irrelevant to consumers.

In its submission the PAA says "the key point is that an adviser should be required to disclose if they have any restrictions or incentives towards placing business with a certain provider."

"...the PAA has concerns about the ability of 'aligned advisers' to offer diverse options across several product lines when they are accountable to just one insurer/future QFE [Qualifying Financial Entity]. This may prove to be a bigger concern than commissions and fee disclosure," the submission document says.

The adviser industry body also slammed the Securities Commission proposal limiting the use of the terms 'independent' or 'unaligned' to those who do not receive commission, saying this could "potentially mislead customers".

"Just because commission is earned does not mean an adviser is automatically biased towards one provider or product: declaring provider relationships is probably the key point," the PAA paper says. "... Arguably, stand-alone advisers are in a better position to offer diversified advice attuned to customer needs than those who are aligned or 'tied' to one provider, as may well occur with future QFE structures."

The PAA argues, too, that QFEs could hide the true cost of advice in their profit margins by simply disclosing adviser salaries whereas stand-alone advisers would have to declare commission received without deducting their business costs.

"Consumers could mistakenly interpret this as meaning that the QFE's advice is 'better value' and that their adviser is being paid less, when in fact this may not be the case," the PAA submission says.

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Comments from our readers

On 24 September 2009 at 6:37 pm David Chaplin said:
PS: Want to know what a furphy is? According to Wikipedia it is Australian slang for a rumour, or an erroneous or improbable story.
On 25 September 2009 at 11:06 am Majella said:
As a "stand alone" adviser, if I'm required to disclose commission, in $$$ terms, I will certainly also voluntarily disclose my business overheads!
On 25 September 2009 at 11:35 am Graham Hutton said:
We disclose commissions in Australia, and been doing so for quite some time. The reality is that the adviser cares more about it than the consumer. Having said that it is a stupid rule because it has little or no bearing on the actual (net) income the adviser earns.
It has done nothing to improve the lot of the consumer, but it (and other disclosures) has added a significant compliance load to the advice process. The irony of this is that rather than a case for driving comm. rates down, additional compliance (and often staff to deal with it) makes a case for "Increasing" commissions!! After all the amount of time spent in front of clients is reduced and so some advisers become more discriminating and choose to deal with higher net worth individuals, and so the outcome is not helping those in greatest need . BUT then we are dealing with bureaucrats and they have never had to justify their existence to anyone!
On 27 September 2009 at 2:58 pm David Whyte said:
Recent pronouncements on the asset commission isssue in NZ are also high profile in Australia and the UK.

The impact on the returns achieved by clients has long been a touchy subject and it’s about time the issue was given some air-time, other than the emotive hype dedicated to the issue from journalists who only jump on the issue when they run out of cuddly pet stories, sensational sex scandals, or other similar opportunities to display their stinging prowess as investigative journalists.

So let’s attempt to put this issue in perspective.

Advisers receive an ongoing percentage of the funds they direct towards investment product providers, and as a source of passive income, this is a pretty good deal. Opponents of this method of remuneration are heavily critical and insist upon full disclosure so that consumers can make an informed judgement whether they wish to accept this charge against their investment.

Or so the theory goes.

Most investors are not the rational. logical, clinical souls implied by the theory. If this were the case, New Zealander would not have been caught by the promise of above average returns offered by the now collapsed Finance Companies, because everyone knows about the corollary between risk and reward, right?

I don’t think so.

It must follow therefore, that there are other factors at play, and that disclosure is not the complete answer. That’s not to say that the investor shouldn’t be informed about the charges in the recommended product, but surely all charges should be disclosed – or none.

How would a car-buyer react if he/she were given detailed information on the profit margin on a car they fancied buying? Would it change their buying decision?

Why should other product sales relationships not be regulated in the same fashion and likewise required to disclose the margin on the product? Why stop at such major consumer items? Why not have every product on the Supermarket shelves have a prominently displayed “Notice of Margin” ceded to the retailer?

Quite simply, say the pundits, because the financial services industry is more prone to inappropriate behaviour than many others. Well, I remain to be convinced with some evidence of this. This line of fire is mainly aimed at financial advisers, and, on the whole, NZ advisers do a pretty good job. Ask the Australian investors, check with ASIC – the Aussie regulator, and check on the repeated incidence of deliberate malpractice there, or ask the Brits about the institutional collapses in their Banking industry in the last 18 months. The flawed model of the Finance Companies was not immediately apparent to Mum and Dad investors and I concur that more should have been done to alert investors to the nature of the risks involved. But where was the indignant cries of foul play from the media? Keeping pretty quiet as I recall.

Could this have been because these companies paid for advertisements of their products and services in the same publications that now carry accusations of inaction against regulators and advisers?

Irrespective of the self-righteous noise now being trumpeted, there is as usual, a failure to address the core issue. How much should investors pay for access to investment products and suitable advice to pursue a course of action relevant to their circumstances? Consumers need to recognise that there is a cost of access, otherwise we should leave investors at the mercy of the product providers which are driven solely by achieving volume revenue to maximise shareholder returns. Nothing inherently wrong with this function, but it ignores the need of the individual investor to have a range of asset class exposures, across a range of providers and territories. Therefore the adviser is a necessary factor in the equation to prevent even more individual portfolio distortion occasioned by investors accepting the “offer of the week” marketing initiatives promulgated by Funds Managers and Mutual Funds organisations from time to time. For confirmation of this, have a look at the offers online in the US market.

Accepting that there is a cost of access to these products, is the NZ consumer ready to accept a direct fee charge levied by the adviser? There are a number of advisory firms already in this space, and operating quite successfully, thank you. So the withdrawal of trail commissions in NZ is likely only to impact on advisers who are reluctant to acknowledge the shift in the public perception of the adviser away from being a product salesperson to being a source of advice. While I accept that the consumer may not be currently aware of the shift, it’s for sure that the regulatory bodies will seek to heighten that awareness through whatever means possible. Advisers need to be alert to the changing environment and start to develop relationships rather than sales opportunities. Many advisers will claim to be on this track already, but I suspect there may be just as many in denial or as yet disbelieving of the turbulence that lies ahead.



The Laird of North Shore
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