Power: NZ will not ban commissions

Commerce Minister Simon Power says the New Zealand government has no plans to ban the use of commissions.  

Tuesday, April 27th 2010, 4:17PM 12 Comments

by Jenha White

Yesterday Australia announced it will ban the use of commissions on investment products and soon after the Investment Savings and Insurance Association (ISI) announced plans to implement a voluntary policy to discontinue the payment of commissions on investment products, including KiwiSaver.

Power notes that banning commissions on the sale of financial products is gaining momentum internationally.

However, he says New Zealand is in the process of introducing a new regulatory framework for financial advisers, which would require full disclosure of commissions.

"I am confident that transparency of commissions, along with various other standards, will ensure mum and dad investors can make informed decisions about whether to use a particular financial adviser and will ensure that advisers act in their best interests.

"I would need to be convinced that the new financial advisers regime was not sufficiently addressing this issue before I considered banning commissions in New Zealand."

Power welcomes any voluntary move by the industry to improve incentives to act in the best interests of investors and says he will be monitoring the impact of the ISI's voluntary policy to discontinue the payment of commissions on investment products with interest.

"However, I currently have no plans to mirror this initiative in New Zealand law."

ISI chief executive Vance Arkinstall says the association has been concerned for some time now that commission payments are an arrangement between product providers and advisers with no input from the consumer.

He says the association wants to put the investor in a position of control and influence over the level of fees they pay for advice and how they pay for it.

"I think it's a good thing for industry to take the lead on this as it takes pressure off the government to regulate.

"If industry didn't take a voluntary approach then it would have been inevitable that government would in time have moved to ban commissions."

He says a wide number of people have responded directly to the ISI including a number of financial advisers with positive support for the initiative.

Arkinstall just regrets that the move by Australia forced the ISI to announce its plans earlier than expected. The ISI had been working on the voluntary policy since late last year.

"I would have preferred to engage with adviser groups beforehand for their input."

Institute of Financial Advisers president Lyn McMorran says the institute is 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," she says.




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

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Comments from our readers

On 27 April 2010 at 5:00 pm Mike Cole said:
I would suggest that what would be good for the general public would be choice.
They should be presented with options of the adviser either taking a commission [the amount of which would be disclosed at outset] or to pay a fee either as a lump sum or as a per hour figure.
As long as there is transparency choice would be the sensible option.
Well done Mr Power to resist the "knee jerk" to the Australian approach!
On 27 April 2010 at 5:20 pm Andrew said:
Ban commissions they are insidious !!
( Dictionery: treacherous, working evil secretly ! ) Not transparent either ?
As light follows day NZ will follow Australia and the U.K. in banning commissions eventually.
On 27 April 2010 at 7:03 pm James Camons said:
In South Africa we negotiate our fees upfront/at new business stage with each client. Once agreement has been reached, arrangements are made for the respective Insurer/Product House to collect the fees on our behalf and pay them accross to us on an As and When basis. These fees are ongoing for the serivce and advise provided, the fee can be moved to another Advisor if you are not up to the task and be renegotiated. I do agree that Upfront commission are not in the interest of the client and add to the costs of the product. However I beleive that we add huge value to our clients and that we fullful an indispensible role to both the client and industry. I wish you all the very best through these troubled times. James Camons
On 27 April 2010 at 7:15 pm Jyoti said:
ISI chief executive Vance Arkinstall says the association has been concerned for some time now that commission payments are an arrangement between product providers and advisers with no input from the consumer.
If Consumer is the real concern they Why not give the Customer a say in where his money should be invested by KiwiSaver Providers.
Are Kiwi Saver providers out of this ambit?Will they continue to remain free to do what they want with customers money(invest it anywhere they want)and still escape if the fund performs poorly as is the case with most at this time.
On 27 April 2010 at 9:14 pm Glen said:
Agree with Mike, and in full support of fees, however transparency is the name of the game !
Commission or no commission, the buyer will choose who to do business with because no other element of success can compensate for failure to establish an honest transparent relationship with clients. The US, UK and Aus are riddled with the failures of good advice, even with banned commissions so don't be a sheep in following them. I'm in support of Arkinstall suggestion that the industry ought to take the lead !!
On 27 April 2010 at 10:14 pm Neil Smith said:
I've heard Mr Simon Power speak twice. Once in an open question and answer forum, and once in a formal speech.

He is a man of great ability and I have a lot of respect for his guiding influence. Its a pity there aren't more like him around.

Thank you for seeing that declared transparent commission is pretty much the same as fees.

I've had no problems declaring risk and investment commissions for a while now.
On 28 April 2010 at 8:15 am Norman Stacey said:
Commissions work very well as the main method for remunerating the issuance of Gov't stock, IPO's, share trading, Real Estate, auctions, contingency lawyers and Religion (tithing). It is a little mysterious they should be impossible as a choice for one segment.
Minister Power is to be congratulated for not slavishly following possible Australian stuff-ups.
NZ needs to do things better & smarter than Oz, to close the gap.
On 28 April 2010 at 9:59 am Bazza said:
Well said Simon! Lets get this round of regulations in place and see if they work beofre considering changing anything else.
On 28 April 2010 at 11:36 am Kimble said:
Norman, I am not sure those example are apt. They are of commissions being paid for a single service, not for "on-going" services. Can you think of any examples of trailing commission outside of insurance and advice?

Those examples are also different in that the commission is known before the fact. Commission in financial advice is not widely recognised.

Also, in those examples it is widely recognised that the person recieving the commission will be operating in their own self interest. Whereas an investor could rightly think that a financial adviser will be operating in the investors best interest first.

The alignment of interests in some of the above cases are much more obvious. For example, auctioneers try to get the highest price to maximise commission. Which is why the seller hires them. Same with real estate. If the agent in those cases doesnt try to get the best price, then we dont think they are serving the interests of those that hired them. The agents are there to do right by the seller.

Isnt the problem in financial services that the people receiving the commission are seen to be in the employ of the seller? And at the same time implying differently to the investor?

Transparency is the key. The client must know what they are paying and what they are paying for. This is not a radical idea.

If an adviser informs the client about how much commission they are recieving for selling the product (in dollar terms) and that it is the client that is paying the commission, then I dont see the problem.

The problems with commissions arise when (1) the client does not know that a commission is being paid to the adviser, (2) the client doesnt know how much the commission is (in dollar terms), (3) the client doesnt realise that they are actually the ones who are paying the commission, and (4) when the value of "on-going" advice provided to the investor doesnt match the cost.

Does anyone disagree with any of these 4 points?
On 28 April 2010 at 5:02 pm Ron Flood said:
Yes Kimble, I disagree with (1) & (2) of your points. Since 29th February 2008 changes to the Securities Markets Act 1988 requires all advisers to disclose the amount of commissions they receive in their Adviser Disclosure Statement. Any clients who have been unaware of any commission payments have been dealing with advisers operating outside the law.

Commission payments should remain in some form to give (1) Consumers the right to decide how best to fund the advice they are receiving, and (2)give fee based advisers something tangable to rebate to the client.
If in fact commissions are banned, I would expect to see a massive reduction in the management fees charged by the fund managers.
On 28 April 2010 at 5:57 pm BW said:
Kimble is quite right on all his points. What other commentators, fail to acknowledge is the difference between an agent being paid by someone other than their client, and the inherent and indisputable conflict of interest that arises as a result. Commentators also need to appreciate that the issue is not about actual conflict. Disclosure for example does not cure it. The issue is about apparent or possible conflict. An advisor, as a fiduciary, has an obligation to avoid being in a position of conflict. The moment they accept money from another party they are in that position, even if they think they are otherwise acting in the best interest of the client. There is one simple question that commission-paid advisors can ask themselves in this debate - have they ever, ever, recommended a client into a product that did not pay commission to that advisor?
On 29 April 2010 at 10:46 am Tony Vidler said:
in response to the final question posed by BW:

YES. Frequently. Many advisers I know, including myself on any number of occasions do precisely that.

Furthermore,many well qualified and/or competent advisers offer a vast range of financial advice (estate planning, cash management, debt management, taxation advice to name a few), where there is NO product, and NO commission of any sort. And they often do it without charging fees because the commission does suitably compensate them for their time and expertise in providing this other advice.

It remains a ludicrous and banal argument to adopt the simple "commission is bad" argument, or to contend that "all advisers" are motivated to provide "advice" because of a commission component. It is sometimes true of some advisers, it is often not true of many advisers. It is sometimes never true of some advisers. but it is certainly not true as a sweeping indictment of an entire industry.

The issue regarding commission remains as it has always been - and there is the point where regulation can (and intends to) make a positive difference.

Commission is fine as a remuneration method provided there is transparency in advance, conflicts of interest are disclosed and understood by the consumer in advance, and the two parties to the transaction are both happy with that form of remuneration. End of story. Free market at work on an informed and consenual basis. Who actually has a problem with that? Socialists do perhaps.

Moving beyond this point and dictating that consumers do not have the choice any longer to employ a commissioned adviser is dictatorial, and political correctness of the nanny-state variety. Effectively market movers and/or regulators who might wish to legislate it out of existence in only one commercial sector are telling consumers "we know what is good for you better than you do".

I for one find that an abhorrent position. But that is just me speaking as a consumer. Which of course I am, as well as being an adviser. I employ an adviser for myself, and am perfectly happy with commission as a form of remuneration for that adviser.

So why, as a consumer, can't I continue doing that?
Commenting is closed


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