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Commission disclosure back on the agenda

Friday, August 17th 2007, 7:29AM 13 Comments

by Philip Macalister

The age old debate about commissions seems to have raised its head again recently, and this time strongly.

While it was the centre of a muddled discussion at the IFA Conference, it has been in the mainstream media over the past fortnight through a series of articles – or a so called special investigation – in the Sunday Star Times.

In addition to that the life insurance side of the industry has been talking to the Minister of Commerce about the subject this week.

Over on the investment side Bridgecorp and commissions are two things have been talked about too.

My take on commissions is that that are fine as long as they are disclosed. In the investment side it would be useful to see the amount disclosed in dollar terms.

I understand one finance company is even planning to write to all its clients and tell them how much commission they had paid the adviser who recommended their product. This disclosure was going to be in dollar terms.

It would be useful to see more advisers move to a fee-based model. My understanding is this is slowly happening and one catalyst for this change has been KiwiSaver.

On the insurance side the debate is raging over whether the commission should be disclosed in dollar terms. It is a die-in-the-ditch issue for leaders in this part of the industry. They oppose dollar disclosure.

I’m leaning towards their side of the argument at the moment.

On the SST piece last week I thought it was pretty sensational and not very balanced. Also I would be interested in your views.

What would be useful though would be to see better disclosure around the soft-dollar stuff. I’m not sure we should go as far as Australia where they require firms to keep a register of soft dollar payments. But I wouldn’t be surprised to see that forced on the industry unless changes are made.

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Comments from our readers

On 17 August 2007 at 12:22 pm Jeff Goldsworthy said:

Whilst upfront commissions can be disputed, the time involved at the other end of the process (claim) can be quite involved and there is no financial compensation for this factor. I see the claims management process as being a pivotal factor in the equation (not shared by all advisers) and feel very comfortable with upfront remuneration for a total package service. I do not see a fee for service process being viable for insurance as I believe the consumer would not see value in this

On 17 August 2007 at 12:53 pm Brian Hopkins said:
Colonial moved away from high front up commissions in the mid 90s,(mx 40% + bonuses, however Sovereign, who took them over, effectively canned it when it wound up the franchise system introduced under the Colonial banner.
Sovereign replaced it with no upfronts and a lower rate of trail for Independant Financial Advisors than enjoyed under the franchise system unless you were under Sovnet, a semi-tied arrangement.
Their actions speak volumes, they want only new business and pay lip service to retention.
On 17 August 2007 at 12:53 pm David Whyte said:
Greetings from the other side of the ditch - with an interest in the commission item. You're right in separating the investment and life risk management sectors, as acquisition costs such as commission impact on the respective purchasers differently. Impact on yield caused by intermediary compensation should be clearly and adequately disclosed at point-of-sale and in writing to the investment consumer. Pretty hard to object to that, and Advisers should concentrate on confirming the value of the relationship with the client, rather than let the SST blather on about the cost of access via commission structures.
Life risk products have more complex issues attaching. Fee charging for mortgage protection policies is well nigh impossible to sustain commercially, and only adds to the house purchase burden. Leaving mortgagees unprotected should be rendered illegal as a vile and criminal act of gross negligence. The cost of the product, or the commissioin paid, as we all know, is never raised at the point of claim, and disclosure could be seen as a barrier to the provision of proper protection. However, the recent trends in adviser compensation appear excessive and the publication of 'sliding commission scales' or 'dial up/dial down' commission levels would reveal how much the life policy premium is loaded to cover the intermediary compensation cost factor. The more excessive the levels get - and the 200% figures being talked about during my last visit - would be the highest in the OECD countries to my knowledge - the more the regulators will be tempted to force full dollar value disclosure. The 'soft dollar' registers are seldom accessed in Australia as far as I am aware, and it would be useful to conduct research amongst consumers regarding their attitide to such compensation structures rather than let the media rant on endlessly, casting aspersions on an indsutry that makes a serious contribution to the NZ economy.
On 17 August 2007 at 1:05 pm Graham Shaw said:
an appropriate industry response would be useful from a risk perspective anyway. The reality is that the clients premium is only affected by approximately 20% even with the full upfront commission being taken. i would have thought that clients would not be to concerned at this cost given the advice we give. i was interested to note the comments of Allan Morris in the same article, he comes i understand from an F&G background, where material damage commissions average 20%+ and they are received annually.
On 17 August 2007 at 2:06 pm Theresa Hatton said:
I have no issue in disclosing commissions although I do not think the general public will be any the wiser. Most clients tend to be happy with commissions as they do not want to pay another cheque.
This is the most important point the special investigation will miss is that if we do not receive commissions we will be charging a fee - at the end of the day we need to be paid for the work we have done. Regardless the client has to pay for work done.
On 17 August 2007 at 4:40 pm Andrew Kerr said:

THE SST special investigation is interesting given the things they have 'discovered' have been around for such a long time / will my cabinetmaker disclose the overseas conference incentive he goes on annually for using one company's hardware products in sufficient volume / run a nil commission quote and see the 'huge' price difference / can I disclose my expenses also please such as office space & 3 support staff ?

I am happy to disclose margins and soft dollar availability - as well as explain my value - but do not see specific dollar amounts as helpful in increasing the amount of risk coverage sold in our 'under insured' country.

Fee only would be great but a recipe for increasing the level of 'under insurance' in NZ.

On 17 August 2007 at 8:31 pm admin said:

My take on this is somewhat simple.............until the public accept that they are dealing with professionals we will for ever run into the issue of charging fees!

They are happy to pay fees to a lawyer and an accountant but not readily to their financial adviser..........I still cannot fathom this split and it has to be purely historical - you don't pay a Financial Adviser!!!

I have a market that is primarily UK migrants and they are pretty adverse to the idea of fees but I do charge an initial upfront fee and can readily justify this by pointing out what I do for the fee and that in reality if I am going to commit my time and expertise to them they need to show some commitment as well - hence a fee.

By the nature of my business I also charge a commission based on funds invested into NZ and they are happy with this approach whether its a percentage amount or a dollar amount - again the key is that prior to actually undertaking the actual investment my clients clearly know the amount that will be paid to me - its all out in the open.

I appreciate that there is concern over "soft" dollars but to be frank why is that a concern to a client - if they know the premium and it fits their budget and the cover provides what they agree they need it makes not a jot of difference what the soft dollars are as it does not impact on them!

In my opinion it is all about being up front and making sure you give great service and great value - clients then tend to be happy with what they are being charged or what you are earning as a commission!
On 20 August 2007 at 12:55 pm Ed Saul said:
Comments on this post appear to focus on the concern that consumers would look adversly at the level of commissions paid. One comment suggests consumers would "not see value" and another mentions that commissions are probably the highest in the OECD.

Whilst this may all be true, I thought the main point of the 'special investigation' was that the large DISPARITY in commissions offered by insurance companies led to SKEWED advice.

The report suggested that advisers 'push' products with high commissions... ahead of products that may be better suited to a consumer's need. And it suggested that some insurers' products may, for the same reason, not be represented at all.

Disclosing commissions would make this practice a lot more difficult.

Commission disclosure will also give consumers more confidence that they were getting objective advice. This would be positive for the industry as a whole.
On 22 August 2007 at 9:46 am Dr Steven Joynes said:
Disclosure of commissions is all fine and dandy but ultimately for the client the issue is "who's paying the advisor?". It's simple really. Advisors recieving commissions are being paid by the product supplier. Advisors charging the client a fee are being paid by, yes, the client. Once a client knows the renumeration structure they will know who the advisor really represents. Although I would prefer fee-only advisors (for the credibility of the industry), I would not want to bag commission advisors in the same way I did not ask the Noel Leemings salesman what mark-up he recieved when he persuaded me buy a Simpson appliance over an AEG two weeks ago. Ultimately its buyer beware and up to some organisation to educate the general public on implementing a good process when investing and seeing beyond the flash brochures, big brands and high returns offered.
On 24 August 2007 at 3:02 pm Giles Thorman said:
Hello Philip,
I worked in the Insurance Industry in the UK during the 80's and have been through this all once before. One thing is for sure that the UK and Australia both had many people exiting the industry as a result of legislation, not as much in the UK as the industry was larger and more established.
I think advising clients directly as to dollar amounts earnt will see a lot of business just not proceeding. I would however have little problem with soft dollar commission being phased out and a schedule of maximum commissions being imposed, some of the commissions on offer currently are becoming absurd.
I do object to Ed Saul stating that commission disclosure would ensure that clients get objective advise, this implys that no-one who is paid a commission gives objective advise now. I also would expect that anyone who is not paid a commission has to give a disclosure of salary and any bonuses; just to make for a level playing field.
I would ask as a final question, what does the Goverment feel commission disclosure in the risk insurance market will actually achieve?
On 24 August 2007 at 5:48 pm newby said:
hi as a new person of a year or so, I had an experience where a client asked me my comissions, which for a $350 premium, were high. They were appalled at first, but once they saw the work I did for them - running around signing application forms with trustees, managing loadings etc, they voluntarily offered the thought that in fact the work I had put in was worth it, and have referred me two clients since. However, I was not receiving the commissions approaching 200%, so I can see that this could be a problem, and while a quote on a nil commission basis shows little difference, in fact over 10 years the difference is very large.

I do agree though, that it could add to even lower insurance in NZ, which is a serious consequence, or , pressure on adviser to reduce fees like real estate agents perhaps, or, pressure on providers to reduce commissions - in which case many might leave the industry. As I have been surviving on lower commissions so far, I will stay!
On 27 August 2007 at 11:37 am Adolf Fiinkensein said:
The people who shout about risk product commissions allegedly skewing advice will need to provide some evidence. I'm not aware of any risk product salesman who goes running after the insurer which happens to be touting the highest commission of the moment. I suggest the majority of advisers have well established strong relationships with insurers, based on a number of non-commission related factors such as (a) is this company a pleasant place to do business? (b) do the underwriters have a practical approach? (c) can I trust these people to do the right thing at claim time? (d) what evidence do I have of past business practices which might damage my clients?

At the end of it all the question will arise:- Is the remuneration package in it's entirety adequate and reasonable? Let's not forget that up front commission (with which some commentators are obsessed) is just one part of the package.

If the idiots who do all the shouting want to push the industry back to the days of risk products being sold by salaried tied agents, then just keep shouting all this baloney about commissions. It's market forces at work. The company which is desperate to buy market share does it buy offering ridiculous commissions. Most advisers ignore them because to do otherwise means severing existing satisfactory business relationships.

It's time for a number of people to grow up.
On 27 August 2007 at 11:39 am Adolf Fiinkensein said:
Oh yeah, I forgot to add, on any given day you will likely find in the nation's jails more accountants and lawyers than insurance salesmen.
Commenting is closed



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