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Aussie commission ban unlikely to cross Tasman

Commission payments for insurance advisers are unlikely to be banned in New Zealand despite reforms across the Tasman, according to Institute of Financial Advisers (IFA) CEO Peter Lee.

Thursday, May 5th 2011, 7:21AM 16 Comments

by Benn Bathgate

As part of the Future of Financial Advice (FOFA) reforms in Australia, all commissions on superannuation risk insurance are to be banned as well as volume-based payments.

Australia's Minister for Financial Services and Superannuation, Bill Shorten MP, said the reforms would benefit consumers and encourage more Australians to seek financial advice.

"The FOFA reforms focus on improving the quality of financial advice and expanding the availability of more affordable forms of advice," he said.

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

Lee said the Australian ban focused on insurance linked to superannuation schemes, and given New Zealand's different scheme rules were irrelevant to this country.

"Essentially in terms of stand-alone insurance advice - which is the New Zealand context – there is no change," he said.

Professional Advisers Association (PAA) CEO Edward Richards also agreed changes would not be happening in New Zealand, with commission "not on the Government agenda at the moment."

He said the Government acknowledged commissions make insurance affordable and are a valuable part of the marketplace.

Insurance commission has been "unfairly sullied" according to Richards, despite being "a win-win for both the client and insurance adviser."

Lee said he believed a commission ban would be unnecessary with AFA rules now requiring greater transparency on issues such as fees and adviser remuneration.

"Our view is and always has been that remuneration is at the discretion of the adviser. We think what's more important is that the client has gone through a good advice process, which is why we've got the six-step process. The adviser has been professional on how they take them through that process, and particularly that the adviser is upfront in disclosing how they're remunerated."

Lee also disagreed with Shorten's view that banning commissions would encourage more people to seek financial advice.

Arguing that conflicts of interest will always exist in life, Lee said transparency was the key and that debates around commission were a distraction.

"What's more important is that you learn how to manage them [conflicts of interest] and that's actually a more adult approach and gives power back to both the adviser and the consumer to decide. Getting good advice and products that are solutions to client needs is much more important."

More here Australia to ban insurance commissions

Benn Bathgate is a business reporter for ASSET and Good Returns, email story ideas to benn@goodreturns.co.nz

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Comments from our readers

On 5 May 2011 at 8:41 am Fred said:
Peter makes good sense. Commissions work for Governments (Bonds are issued at 'discount'), Real Estate Agents, Sharebrokers, Auctioneers and even Clergy (tithing). Provided they are fully disclosed, commissions are as valid and ethical form of remuneration as any other.
The Aussies have no monopoly on wisdom - that and their sports teams suck.
On 5 May 2011 at 10:39 am btw said:
So is it also understood and agreed that advisors disclose not only the commission they receive, but also the commission offered by other providers? Otherwise disclosure is of course meaningless and quite ineffective.
On 5 May 2011 at 11:17 am Forthright said:
Lee's argument is based on the smoke screen that the majority of risk is written by AFA’s adhering to the AFA rules. As we know RFA’s will write the majority of risk in NZ and RFA’s do not have to adhere to the same rules as AFA’s do. There are no rules in place making RFA’s follow a six step process when providing insurance advice. I agree with Lee on one matter the status quo will prevail. The consumer will be lead to believe they have been provided with a fully transparent service, but only as transparent as the vested interests want it to be.

On 5 May 2011 at 12:26 pm risky said:
whilst there are no specific rules in places around the 6 step process for RFA's - I believe people need to talk to their DRS, as my understanding is that any dispute will use the 6 step process as a guideline for proving skill, care and diligence.
On 5 May 2011 at 4:06 pm Johnny Adviserq said:
It's totally ok for restaurants, supermarkets, appliance retailers and doctors (to name only four) to not have to tell their clients what margin they make on each product or service sale, why should RFA insurance advisers be any different?
On 5 May 2011 at 5:30 pm Independent Observer said:
The real issue is one of disclosure not the billing method. The commissions v fees debate is a red herring sponsored by ignorance (in a lame effort to win public favour).
On 5 May 2011 at 6:19 pm John said:
Yeah - good luck with that!
On 5 May 2011 at 8:57 pm Simon said:
To quote another reader’s comments recently the majority of risk advisers in NZ do a good job and a public service at making Kiwis aware of their responsibilities as adults. If New Zealanders were left to their own devices most would never get off their backsides and do the right thing by their partners and children. Those advisers who continue to limit their clients to one particular insurer all the time (perhaps chasing the highest commission) will have a short shelf life in this industry as more and more clients will simply refuse to accept just the one option. Given that the role of an insurance adviser can be pretty thankless at the best of times it seems only fair we should be paid for our time and advice educating clients do what the majority of us in the industry would not think twice to do by our own loved ones.
On 6 May 2011 at 7:07 am Bazza said:
Risky - The use of the six step process in any dispute is misleading. You don't use a six step process for transactional processes for example, but a dispute could arise and the Adviser would be fine as long as they can evidence what happened and it was in the clients best interest. Forthright - While there are no 'rules' for RFAs there is a need for them to be able to evidence what they did for a client, and a written advice process is the best way to do that. 5 steps, six steps, seven steps, doesn't really matter as long as the RFA can prove what happened and that they showed due care, knowledge, and skill.
On 6 May 2011 at 11:13 am risky said:
Bazza - I hope you are coming from a position of authority. As I said - best check with your DRS on their expectations.
On 6 May 2011 at 2:02 pm Forthright said:
Bazza is partly correct, using due care, knowledge, skill and a written advice process will probably save you, but only if your written advice process can prove you disclosed the importance of medical history disclosure, policy definitions, exclusions and pre-existing conditions. But most importantly your process will have to pass test, of a reasonable purchaser of the risk cover have understanding the consequences of not adhering to the former.
On 6 May 2011 at 3:40 pm risky said:
Sorry Forthright - but can people please state whether or not they speak from a position of authority - there is so much misinformation out there - can someone from a DRS confirm how they would look at a complaint.
On 6 May 2011 at 4:51 pm Dave said:
How can a commission of 140% of a premium that is received by the adviser make commission affordable? If that 140% was not received, the unitised cost of insurance would be cheaper for the consumer. Unfairly sullied...really? Conflicts of interest are no longer conflicts when and where they are disclosed. They become transparent, so disclose your commissions and there will be no issue. Of course, many will not want to disclose such a high rate of ‘payment’ as it will sully the relationship with the customer. Catch 22…fee for service works, and it drives the adviser to charge for time in service and the customer receives a service they pay for. Maybe the issue in NZ is that clients do not see the value in the service provided.
On 9 May 2011 at 11:42 am Regan said:
Get real Dave.
1) If you are on 140% you need to talk to your BDMs.
2)Yes, if you are disclosing properly there is no longer a conflict
3) "many will not want to disclose... sully the relationship... do not see value... (what the fluffy one from Monsters Inc has to do with this I'll never know).
The next few comments will all be 'Me Too" posts. I have disclosed for years. Clients appreciate being informed, and none have raised concerns, a few at times have calculated the commission on a small top-up and been concerned I wasn't being paid enough. It goes toward that mutual trust that is the basis of a long-term relationship. Replacing commissions (properly disclosed etc) with fees wont do that any better, and the downsides of it have already been spoken of.
On 10 May 2011 at 12:45 pm tony vidler said:
just to play Devil's Advocate for the fun of it:

Why is a consumer paying a fee for the benefit of a professionals time a good thing?

The advisers time itself is of no value whatsoever to a consumer.

Surely for the truly consumer-centric business the fee should be established by meeting/exceeding the consumers objectives in a way that the consumer thinks is fantastic value.

"Time" does not come into that equation surely?

Competence, expertise, success in creating the solution for the consumer....surely they are the factors that should determine the appropriate feel (and value created)?

If you agree with that logic, then it follows that some form of contingency payment system would be acceptable. That is a type of commission.

The only question that arises then is whether the client should pay the commission instead of a product provider. That is the nub of the "conflict of interst" argument.

But if the client chooses to pay that contingency fee, or commission, via a regular addition to the insurance premium for the life of the contract, why is that wrong?

On 12 May 2011 at 4:33 pm risky said:
Hey Tony - again playing devils advocate. A fee paying system would ensure a client is more choosy about the person they deal with. So, although not wrong that they pay via the extra premium, that is not something that is required to be disclosed. If each adviser had to disclose commission and what that does to premium that may give the same result - advisers lifting their game to exceed expectations.
Commenting is closed

 

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