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It’s official – commissions to be banned

The Investment Savings and Insurance Association (ISI) said yesterday that it is finalising an announcement that will result in a voluntary policy to discontinue the payment of commissions on investment products, including KiwiSaver. Meanwhile the Australian government has said commissions are to be banned on investment products in Australia.

Monday, April 26th 2010, 10:43PM 21 Comments

by Jenha White

The Rudd Government announced that it will legislate to ban conflicted remuneration structures including commissions and volume based payments, in relation to the distribution and advice of retail investment products including managed investments, superannuation and margin loans. The measures will come into force from July, 2012.

Financial Services Minister Chris Bowen says the reforms are designed to tackle conflicts of interest that have threatened the quality of financial advice that has been provided to Australian investors, and the mis‑selling of financial products that culminated in high profile corporate collapses.

"These reforms will see Australian investors receive financial advice that is in their best interests, rather than being directed to products as a result of incentives or commissions offered to the financial adviser."

Institute of Financial Advisers (IFA) president Lyn McMorran says no question about it, the banning of commissions will also happen in New Zealand.

"Advisers would be wise to look at alternative remuneration models for investment advice," she says.

The proposed ISI policy will include the discontinuance of volume-based performance bonuses or commission and ongoing renewal commissions.

ISI chief executive Vance Arkinstall says a paper has been put to the board which will be meeting at the end of next week.

"We're going to give investors the opportunity to negotiate a separate fee for the level of service they receive - hopefully that will engender confidence," he says.

Labour Party commerce spokeswoman Lianne Dalziel says she thinks Australia's move to ban commissions is great and it is good that the ISI are also creating a voluntary policy, but she believes it would be better if the government stepped in.

"At the moment our Select Committee is actually having an inquiry into the outstanding matters which are not being addressed by the government arising from financial failures - the banning of commissions is one of the items in the terms of reference."

Commerce Minister Simon Power was not available for comment.

SiFA chairman Murray Weatherston wonders whether the ISI has asked its members, given that a fair amount of product is based on the commission model and questions how it will implement the voluntary Code.

He says an unintended consequence will be that some low-income earners will no longer be able to afford advice.

Professional Advisers Association (PAA) chief executive Edward Richards says he does not think there is anything intrinsically wrong with commissions on investments provided that there is disclosure given clearly to customers at the time advice is given.

"There is no magic bullet, banning commissions doesn't mean a solution has been found, it's much more complex than that."

McMorran says there is a perception that commissions influence adviser investment decisions and there is not any point trying to fight it.

"We don't have to follow the lead of Australia but what are we waiting for?

"The banning of commissions is happening everywhere including in Australia and the United Kingdom, most regulators feel it is the way to go."

She says New Zealand is trying to create an environment where people will feel comfortable about investment and the government will have to look at the banning of commissions.

 

Jenha is a TPL staff reporter. jenha@tarawera.co.nz

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Comments from our readers

On 27 April 2010 at 9:21 am Michelle said:
The idea of banning commissions may come with good intentions, but is the NZ public ready to pay fees to advisors for advice?
On 27 April 2010 at 9:36 am Speros Macris said:
Is the next step banning commssions on Insurance products
On 27 April 2010 at 9:37 am Andy Phillipson said:
There goes publicly accessible investment advice. Just think of the thousands of New Zealanders now who will not get the advice or 'push' that they need to start a retirement or investment plan. Only a very small percentage of people have the intelligence to see the benefit in paying up front for advice - the rest either find commission a more acceptable option, or just can't be bothered (or may be fiscally intelligent enough to do it themselves). I say "may be" because of the number of unadvised investors who lose money in bad investments!
Once again it is the heavy hand of stupidity stepping in at huge cost to limit the actions of a select few, ultimately further reducing the already poor financial literacy within our country.
On 27 April 2010 at 9:43 am Andy Phillipson said:
There goes Investment Advice! Commissions were an easy option for people to pay for investment advice. Make them pay up front and they won't pay. Why would anyone want to give investment advice now, with a lower chance of getting paid and a higher chance of being prosecuted for a finance company collapse?
Nothing but extreme short sightedness.
On 27 April 2010 at 10:00 am adam smith said:
Might I be permitted 2 questions of Lyn McMorran Chair of the IFA.
1. Isn't IFA selling down the river those of its investment adviser members who currently work on a commission basis?
2.Is IFA also opposed to commissions on insurance products? If not, why not? What is the difference between insurance products and investment products?

On 27 April 2010 at 11:09 am Murray Chong said:
The average Person that is now not in kiwisaver is because they haven't bothered to find out the benefits themselves, or even bothered to get FREE advice from industry professionals.
None of these people will pay to get advice and these are the people that need it.
No commissions = no advisers and this all adds up to less kiwis saving for retirement and more kiwis under insured, "Recipe for disaster"
Bring on regulation to get rid of the cowboys and then make sure brokers disclose what they get paid (i already do this)
If commissions are banned then all they will be doing is throwing the baby out with the bath water

On 27 April 2010 at 11:41 am Dorothy said:
Most of the ISI members these days are probably owned by the banks and paying no commission or trail will suit them just fine. They have in house sales people.It would seem like a sound business model to distribute product by using a salaried "tied agency" force. And to be able market it by saying it is better for the public is pretty smart too. "Independents" need to be looking at their business model and their marketing too. Fees for service can be a very attractive business model. As far as IFA is concerned, the members need to decide if they want a board that represents "independents" or one that represents employees of institutions.
As advisers, we will get what we deserve.
On 27 April 2010 at 11:49 am Lyn McMorran said:
As Adam Smith has directly asked me 2 questions, I'd like to take the opportunity to respond.
1. It needs pointing out that this policy has come from the Insurance and Savings Industry Association (ISI) announced by their CEO, Vance Arkinstall, not the Institute of Financial Advisers (IFA) of which I am the President. The IFA's policy with regard to commission is clearly covered in our Codes of Ethics and Practice Standards. Our first principle is that the clients' interests should come first and we are also very clear on the need for transparency in terms of any potential conflicts of interest that may influence the advice an adviser might provide and that the client must be fully aware of the way in which the adviser is being remunerated for their services. If a situation arises where an adviser might receive commission from a product provider, we believe that the adviser must be totally transparent with their client about this and must also justify their recommendations in terms of their suitability for the client's needs. We are absolutely committed to ensuring that consumers have confidence in seeking financial advice which is why we have always been very supportive of regulation of the profession. This means that we have always been concerned to ensure that access to advice remains within reach of the average consumer and does not become the privilege only of the wealthy. Having said that, however, we are supportive of ISI's initiative. The trend worldwide is to move to a fee-based model for investment advice and we will be looking to work with ISI and the product providers to determine ways in which our members can continue to be adequately rewarded and remunerated for the valuable work they do.
2. Again I believe Adam has confused the ISI with the IFA. The IFA is not opposed to commissions on investment or insurance products per se. We are opposed to remuneration creating situations where advisers are conflicted by their remuneration model in terms of the advice they provide and where they may therefore not provide advice to their clients that puts the clients' interests first. What we do promote is the value of advice and the need for all consumers to have access to good, affordable advice.
On 27 April 2010 at 12:57 pm Johnny Adviser said:
Sorry, was it the commission paid to advisers, or the quality of the investment itself and the way the companies themselves were run that led to finance company collapses, particularly Bridegcorp?
On 27 April 2010 at 1:06 pm Mac said:
My only issue is with trail commissions. What is stopping the institutions from deducting an annual fee (on behalf of the adviser)from the client's investment account and paying this to the adviser in lieu of a trail commission?
On 27 April 2010 at 1:10 pm Independent Observer said:
This world wide display of Regulatory Ignorance - to abolish commissions in favour of fees - reflects the beginnings of "the butterfly effect".

In years to come, the financial services industry will come to recognise that the payment system was not the rogue that caused so much financial hurt throughout the noughties (albeit that it was closely associated with many of the villains involved), it was the lack of financial regulation combined with an unworkable rules-based-approach that help industry & consumer greed and naivety to flourish.

The reason that the big financial institutions are applauding this latest regulatory fiasco is that it will once again (for those who were around in the eighties) permit them to openly flog their products through tied-agency arrangements, involving a variety of business development initiatives that avoid scrutiny. The victims (again) will be the consumers who will have limited choice or ability to pay for it, and those fragmented financial advisors who will be forced to gravitate towards a big brother.

As I have remarked in the past, the next decade will demonstrate the futility of the fees versus commissions debate, and will end up focusing on the real issue of principles-based-approach in favour of a rules-based-approach. For the time being, we live in a era of regulatory ignorance that will ultimately cost us all dearly.
On 27 April 2010 at 1:30 pm Kimble said:
I would have thought that the removal of commissions would just change the remuneration structure, not the remuneration amount. If you say that it changes the remuneration amount, then you are in fact saying that clients wouldnt pay as much for advice if they knew exactly how much it cost them.

There is no such thing as free advice. Even if the money investors pay for the advice is channelled through a 3rd party, like a product provider, they are still paying for it.
On 27 April 2010 at 2:06 pm Arthur said:
Will ISI reduce their management fees accordingly. Will they "buy out" the trail that they are no longer going to pay? or will existing books retain the terms and conditions they were sold with? Are the ISI members willing to change their billing structure so that they invoice investors rather than deduct a management fee from the investment balance?
On 27 April 2010 at 3:30 pm common sense said:
How big a sledge hammer do we need to sort out what was an issue? Advisors it wont be long and you will be told how much and what you can charge for, what days of the week and what hours you can operate.Before it is to late "geat real" and stand up for yourselves. Obviously your organisation or association isnt doing any thing to protect your choice of how you earn income.The politicians love this stuff telling the public what a great job they are doing in protecting the public. The big corporate providers are going to love this, its great for them.
On 27 April 2010 at 5:03 pm Alistair Fowke said:
I am angry that the IFA's Lyn McMorran is making such comments. They are there to represent their members not make unilateral decisions about what we should or shouldn't do. Their are people who would rather have commissions than fees and why shouldn't they be able to make the choice.Let's get real and let the people make the choice instead of these people looking after there own interests.
On 27 April 2010 at 5:24 pm Independent Observer said:
It is unusual for an industry body to reflect the opinions of their members when they haven't formally asked for them.

It may be useful for the IFA to clarify their process for arriving at the decision to support fees over commissions.

For the record: the billing process is not the issue - as discussed previously
On 27 April 2010 at 10:18 pm Ron Flood said:
As the President of the Life Brokers Association and a member of IFA with the designation CLU, I would like to to ask the following question of the ISI. Are their members going to slash their management fees and charges once commissions are banned?

Currently most fee only advisors rebate all upfront, trail and renewal commissions back to their clients. This option will no longer be available as a 'selling point' as there will be nothing to rebate.

If, as is proposed, there will be no commissions payable,are we to see a massive reduction in the management fees etc or is this seen by their members as an opportunity to increase their 'bottom line'?

The media is quick to attack advisors commission payments, yet these commissions are paid for out of the fees and charges imposed by the product providers.

We are continually told that commission based advisors have a vested interest in continuing to be paid commissions. I put it to you that now the boot is on the other foot. Unless the product providers reduce their fees and management charges, they have a vested interest in suporting a ban on commissions.
On 28 April 2010 at 11:12 am Kimble said:
"The media is quick to attack advisors commission payments, yet these commissions are paid for out of the fees and charges imposed by the product providers."

Do fund managers use the management fee to pay commissions or do they use the entry fee?

Captcha: administration droopy

On 28 April 2010 at 9:13 pm Ron Flood said:
Both. The management fee is used by some providers to pay growth commission on the funds under management.
On 29 April 2010 at 11:08 am Ross Ironmonger said:
A personal comment: any product you buy includes in its pricing an element that provides for the cost of distribution. Why should investment or insurance products be any different? Is there something immoral about a financial adviser earning a living through being paid commissions by the providers of the products that he or she sells?

Surely the key issue for the client is that they are aware of the charges and that these charges will inevitably impact on returns.

If the industry is forced to change to a fee only basis then an awful lot of people will never get any financial advice because they will be either unwilling or unable to pay for it.
On 29 April 2010 at 2:16 pm Lindsay Strathdee said:
I note the silence on this issue from the Fund managers and Insurance conpanies that make up the ISI.
Could it be that Vance has suprised them also??.One national sales manager I emailed was scrabling for a reply to advisors....yet to be received!!
Commenting is closed

 

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