Investment commission a flawed model: Hawes
Regulation is not enough to restore public confidence in investment advice and a ban on commission is required to create a fully professional, trusted advice industry, according to adviser and author Martin Hawes.
Tuesday, June 28th 2011, 7:15AM 
12 Comments
by Benn Bathgate
Hawes believes the payment of investment commission provides oxygen to the argument of conflicts of interest, and until it is removed the public will always wonder who the adviser is working for.
"When there's a commission on the sale of something even when the investment adviser is absolutely ethical and putting the client's interest first there is a perception that they're working in their own interests," he said.
"I would advocate moving completely towards that [a commission ban] so we become a respected profession instead of a mistrusted and distrusted industry which is often effectively just a channel for the investment manufacturers."
While welcoming the new adviser regulation he believes the fundamental problem with the perception of the investment advice industry is caused by the commission model.
"I think that [regulation] will go a long way to helping the industry but I don't think this will become a fully trusted profession until it has a different business model. The public is rightfully pretty wary of financial advisers because the business model is wrong."
While he acknowledged that charging upfront fees for investment advice may deter some from seeking advice in the short term, he believes in the longer term it would raise the standing of the industry which would in turn prompt more people to seek advice.
"I have a vision of the financial advice industry turning into a financial advice profession, so that instead of becoming a conduit or a channel for the sale of investments we simply give advice. Look at all the area around the Code and the new legislation and the standard sets, it's always talking about product. I'm not sure what a product is, I know what an investment is, I'm an investment adviser. I'm not sure I have anything to do with products."
Benn Bathgate is a business reporter for ASSET and Good Returns, email story ideas to benn@goodreturns.co.nz
| « News Round Up: June 27 | KiwiSaver mismatch a 'huge challenge' for advisers » |
Special Offers
Comments from our readers
In the Uk, the client has to receive an illustration using different projected assumptions on growth over the whole period of the contract. The back of this illustration highlights the total cost of the advice for that full period. The adviser is required to explain this to the client.
The whole process is about clients being treated fairly and being aware of what they have, " a silk purse or a sow's ear".
Many clients prefer paying over the term of the contract rather than an upfront fee. We do not want a situation where clients are deprived of choice, or indeed, where highly professional and qualified advisers are struggling because they do not have the gall to charge like Lawyers or Accountants $200 per hour for advice. Hopefully the new legislation will weed out the sharks; let us not get rid of good advisers by throwing the baby out with the bathwater.
Commission as a payment model is fine, it's the fact that companies are allowed to play the commission game and compete solely on renumeration rather than product and/or service offering that causes distrust.
Some regulations on maximum commissions payable and/or moving towards a less up-front, higher renewal stream model is in my opinion a better solution.
It refers to payment of commission on investments - nothing at all to do with risk - so this would have no impact on the problem of under-insurance.
I also don’t think clients get upset about an adviser receiving commissions on category 1 products, provided the commissions are disclosed.
I believe that if the only remuneration available for investment advice given is an up front fee to clients, then we are hindering the availability of advice to everyone. Many people do not see the point in paying for an intangible.
So if we are truly acting in our client's best interest (in terms of the Code) the real question that needs to be addressed is "how do we get quality advice to people and still get paid for it?".
I believe the public knows that we have to be paid so they don't care whether we get a commission or charge a fee.
Everything we purchase has fees included in the form of wholesale and retail margins - we don't accuse a retailer that he is only selling us food or drink because it is in his interest. We know that just like our clients know that.
The point often seems to become misdirected and it appears that much concern centres around whether the paying of commissions may be the bigger "culprit" when assessing the ethics and quality of investment advice?
What about a re-visit to my original point of concern being that they are over-plugging the supposed merits of "regulation" as being the big saviour to protect investors...!
Regulation must remain as possibly one of the biggest culprits...partially because of the somewhat strange "perception" that the very offering of "regulation" provides such a comforting level of protection.
Remember my claim that investors will inevitably perceive that investments offered by 'professional' investment advisers will be protecting and safe because the investors will know that their investment adviser is regulated and that all the investments offered will likewise be regulated and therefore be considered safe(r).
Be again reminded that all the finance companies which melted out of existence, PLUS the likes of Blue Chip and the worthless managed funds were all REGULATED by having a prospectus...!
Regulation may very well become the big enemy of the usually unqualified investor...simply because of the 'perception' it offers.
In that case, I suggest that commissions may actually pale into comparable insignificance as 'culprits' which contribute to sub-quality investment advice.
the shammy investment advisers will remain to rear their heads from time to time, and regulation will offer them more 'assistance' than hinderance, and commissions will hardly even feature...mark my words.
Michael Donovan
It won't be until investors under the new regime start to lose money that the whole fiasco will start to be put under the microscope, only to create more legislation, rather than addressing the real issues.
Caveat emptor.
Commenting is closed
|
|
Printable version |
|
Email to a friend |
One point of clarification with your reference to up front payments as an alternative. It is not the formula that is the problem with commissions - it is being paid it by 3rd parties (the insurers/fund managers etc). If advisors operate more like stockbrokers or real estate agents for example and charge their clients commission directly then 90% of the conflict goes away (there remains a residual conflict in charging activity based fees for investment advice but we can leave that for another day). Conversely, changing the fee structure to upfront payments doesn't solve the problem if it continues to be paid by the 3rd party provider!