Commission ban back on Govt agenda
The government is considering banning commissions for financial advisers, a move the Institute of Financial Advisers has warned could have unintended consequences for consumers.
Tuesday, April 3rd 2012, 6:00AM 
10 Comments
by Niko Kloeten
The Commerce Select Committee has recommended the government investigate the possibility of banning “conflicted remuneration structures in the provision of financial advice” and consult with Australian authorities on the model proposed in that country.
The government said it “recognises the potential negative impacts of commission based remuneration on the incentives.”
It also noted that in the UK the Financial Services Authority had recently banned advisers from receiving commission on investment products.
"Officials will be monitoring the effect of the Australian and United Kingdom bans while liaising with relevant industry bodies and consumer organisations to better understand the role of advice in different sectors, the nature and extent of problems and the likely impacts of any ban.”
IFA president Nigel Tate said the government was “very likely” to follow Australia’s lead on banning commissions for certain types of financial products.
“The IFA’s position on commissions is that we don’t mind how advisers are remunerated by clients – it’s about disclosure and understanding by clients. It’s up to clients how they pay for the advice.”
Tate said a number of countries around the world had banned commissions on investment products, and he said many New Zealand advisers are already paid fees for investment advice and are therefore well prepared should this country introduce a similar ban.
However, he said that in the risk space, a ban on commissions would be a “retrograde step” given that New Zealand already has an underinsurance problem.
“I don’t see another model that would produce the same volume of sales to people that need it if they were to take away brokerage,” he said. “I’m a great believer that you can skin cats from both ends.
“At the end of the day it doesn’t matter whether the adviser is paid by commission or fees – the adviser is paid by the client.”
Advisers don’t have to worry just yet – a decision on any possible ban is unlikely to be made until 2016, when the government reviews the Financial Advisers Act.
Niko Kloeten can be contacted at niko@goodreturns.co.nz
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Comments from our readers
The corollary is if the Adviser is paid an on-going trail commission of say 20% per annum the result would be the same over the life of the required risk item. Therefore it is fair to assume if the premium payer was asked to pay the same by way of fees, they in all probability would refuse with the result of not obtaining the risk cover and exacerbating the under insurance problem of New Zealanders.
I agree banning commissions on insurance products would be a retrograde step.
So perhaps there is a need to 'level the playing field'.
There is however no reason why any financial adviser can't give their client a breakdown of how many hours they have spent working with the client and working out the solution, putting the business in place, and reviewing it from year to year, and work out an hourly rate based on the commission earned or fee charged.
It would certainly be a very low hourly rate in some instances.
There's also nothing to stop an RFA from disclosing their commission if they wish.
The only problem bigger than under-insurance is churn. The recent new business stats show that sales volumes are almost completely offset by lapses & cancellations. So the current commission model is not solving the under-insurance problem. There are simply too many incentives to churn in this country as initial commission rates are double what they are in Australia.
Moving to a fee-based model means an existing customer is less likely to pay someone to switch providers. Advisers will then have to focus on selling to new customers, rather than tap existing ones, in order to get the same income. Surely then we will have the right incentives to make some in-roads into the under-insurance problem...
Anyway as the article states above the recommendation is that a ban on adviser commissions applies only to investment products not risk.
I think the answer is more simple: Either fix commission rates between all companies (will not prevent churn though), or wipe out up-front and go for as-earned or higher trail commissions. Benefits to clients - unbiased advice, clarity and best products. Benefits to advisers - continued income to allow worthwhile reviews. Benefits to companies and clients - less churning and lower costs.
Or is this model too easy, or not convenient to the churners?
I'm commenting from an administrative view, been in the industry 16 years, I've seen the trends. Ive seen the advisers who thought this industry was an easy place to make a buck, funny how those people are not around anymore to share their glory stories with me any longer.
I also see the advisers who are still around today, right from the days of NZI Life...even from National Mutual days - they are the ones who really stand out to me. Why? because they've survived the ups & downs of the industry. I have total respect for them.
About 3-4 years ago when 'big commissions' could no longer be earnt from investment products, again that eliminated alot of advisers living in a dreamworld, some even selling their book of business and leaving NZ altogether. Who's left around now? mainly the advisers who take nil commission on investments as they usually get risk business which they take the commission on. So I'm all for it, wipe the commission from investments.....
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