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Govt should regulate commissions: Naylor

New Zealand’s Government should step in and set guidelines for financial advisers’ commission, says Mike Naylor, of Massey University.

Tuesday, June 4th 2013, 2:57PM 28 Comments

by Susan Edmunds

It comes after Tony Vidler, of Strictly Biz, said there was a strong perception among consumers and other professionals that advisers were not independent because of relationships they had with providers.

He said there were concerns that advisers all had an inherent bias.  “We have to accept that perception is a reality even if we don’t agree with it.”

Naylor said New Zealand had one of the lowest rates of independent financial advisers, per capita, in the world.

He said there was a real problem with the way insurance commissions are distributed.

Naylor said risk advisers were caught in a catch 22, where if they charged what their advice was worth, no one would want to pay it.

New Zealand insurance commission structures were out of line with the rest of the world and had increased over the past two decades, he said.

Typically, advisers would get twice the annual premium back on the initial sale, and no ongoing commission. “That gives an incentive to sell and then to churn.”

Most other countries paid a quarter of annual premium upfront and then a lot more as trail.

Naylor said all the insurance companies accepted their current commission structure was not a good model but none wanted to be the first to do something about it.

“It needs the Government to come in and say ‘these are the rules’. The companies would be quite happy about that. No one in the industry thinks the current commission structure is a sound way to do things.”

Vidler said regulation was not necessary. “It’s an issue of education more than anything else.”

He said existing regulation helped increase transparency but it was still optional to a degree. “It’s not applied evenly across the market… there is still a large proportion of the RFA world that doesn’t disclose in a fully transparent way, as the rest of the RFAs are. That creates an imbalance, which drives the perception [of a lack of independence].

He said if there was a simple regime that applied unilaterally there would be no room for doubt.

« Churn in Australian watchdog's sightsLatest life insurance sales stats »

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Comments from our readers

On 4 June 2013 at 3:54 pm Johnny said:
So I take it Tony, renewal based commission is OK, it's up front commission that's 'bad', not commission itself? Why is there a preoccupation with what my wholesale cost is, but not with that of any other professional?

Surely if renewal based commission were the only option, the same lack of independence argument could still be made?

Maybe commission isn't the demon after all.
On 4 June 2013 at 9:52 pm RFA said:
Blah blah blah...

If it ain't broke don't fix it...
On 5 June 2013 at 9:29 am Andrew said:
Johnny, that is what the whole article is saying. The theory being if you get paid less upfront there is less incentive to churn cover as you don't receive a large upfront payment.

If all companies had to pay the same upfront and renewal the argument goes surely we would then be more independent .

Of course it would make it tough for new advisors starting out but hey that's good for us existing advisors!
On 5 June 2013 at 11:11 am Dirty Harry said:
Not sure about Tony's point. Independence how? One could be "non-aligned" but still be considered biased simply because of the presence of commission. One could remove commissions and charge a fee but still have a pet favourite company or product - still not completely independent. My accountant may charge a fee for their advice; and he might decide he prefers Xero to MYOB for reasons not to do with me or my interests, rather based on experience and service and function and fit with his business/process/ideals. Does that make his Xero recommendation "independent"?

Like the lawyer, the GP, the Accountant the most important thing is trust. It matters not how we are paid, or even how much. Being able to demonstrate that the client's best interests are at the core of everything is what matters. Furthermore the other adviser clients are working with just want to know thy whys and hows of it all. Include them. That overcomes perceptions of bias, and lack of trust.

Dr Naylor makes a good point that fee based rem on insurance, would, for most advisers, fail to yield what our advice is really worth. However his point that most life policies 200% up front then no ongoing trail is inaccurate. Life policies pay trail, and advisers must choose which mix of up front and trail to take. Many are adopting around 100% up front with the 20% trail. This is a sign of professionalism emerging, a longer term focus. It reflects the high cost of acquisition, initial advice and processing, but the higher trail reflects the greater demands of ongoing service. The last thing I want is more government interference. Yes it builds a higher book value, but you now have to do more to earn the trail - however much that is.

I blame the aggregation groups and the insurers themselves. They allowed the situation we have now to happen. It's the massive up fronts (well past 220% in some cases), over rides (often hidden) and other crap that has been allowed into the market, all buying business and ticket clipping. Adviser are not blameless, but our first responsibility is to make sure our business is sustainable. Part of the relationship with the client is based on being there in the years to come, when they will need us.
On 5 June 2013 at 11:39 am Ron Flood said:
Firstly I would like to point out to Michael that "typically most advisers get back twice the annual premium" is a incorrect. Even companies paying 200% do not return this to advisers as they do not pay commission on inflated policy fees.

I suggest the following may solve a lot of problems.

If you replace cover without an increase in new annual premium, you would get 20% level commission, as earned,for the duration of the contract. There would be no over-ride payments on this business.

If you replace business with an increase in annual premium, you would receive 20% level on the old premium amount and then get to choose upfront or level on the balance.

Michael's argument is that the high up front commissions is an incentive to replace business. Level commission on replacement my be the answer?
Leave the up front commissions as they are with the above framework and this will encourage advisers to chase more new client's, thus reducing the under insurance problem identified.
On 5 June 2013 at 12:19 pm Johnny said:
"If all companies had to pay the same upfront and renewal the argument goes surely we would then be more independent"

Only if the Greens get in surely. I prefer freedom of choice myself, which should apply to running an insurance company too, without being told what you can pay your suppliers.

Anything else is Marxism.
On 5 June 2013 at 12:38 pm Boring said:
Tony Vidler makes an anecdotal comment, an academic decides the Government has to jump in.. are you guys mad! Whilst neither of these 2 were in this industry 30 years ago its the same old song, different singer. I get very tired of "industry commentators" that do not make a living as we do but claim to know better. The real point is are clients suffering, if so, do we have a process to eliminate bad practice and client harm? I am not so bothered by what some lawyers or accountants may perceive, as dirty harry mentions, the ones I deal with know and trust me... the rest is noise!
On 5 June 2013 at 1:49 pm Bank Guy said:
I say keep commissions. It makes my job so much easier when I explain that I'm paid a salary and not a commission and will get paid regardless of what the client decides to do. You can almost feel the tension in the room lessen as soon as you get that on the table.

It astounds me how often clients will tell me that they have cover in place which has been arranged by a broker but they have no idea of exactly what it is as every couple of years the broker comes in and "reviews" things and changes the cover around. "Oh really?" I say, "Every two years you reckon ... What great service ..."
On 5 June 2013 at 3:04 pm Ron Flood said:
Bank Guy. You may be on a salary but do you disclose the incentives received as a result of sales made? And why is it that many of your fellow 'bank guys' replace perfectly good and comprehensive cover with inferior polices with fewer benefits and draconian exclusions.

After years of managing advisers it became apparent that those on salaries were mediocre producers, at best. Once incentives were added such as bonuses or soft dollar incentives, their productivity increased dramatically.

I would suggest that the banks have discovered this and offer both of the above. Of course, as a QFE employee, disclosures of incentives and soft dollar rewards is not required.

On 5 June 2013 at 3:13 pm Mac said:
Hey Bank Guy, when you introduce new business, the bank gets the commission which funds your salary. I can assure you that if enough clients decide not to place business with you, your salary will cease. Also, do you disclose to your clients the bonuses you will receive if you meet your sales targets?
On 5 June 2013 at 4:25 pm Adviser Guy said:
Bank Guy if you believe your advice and your service model is good for the client then good on you, however I'm yet to come across a bank product that is cheaper or more comprehensive than any company I use. In fact many of the DI products are appalling. I love it when I come across a bank client and you tell them that they are going to receive service, the tension just disappears.
On 5 June 2013 at 5:40 pm John said:
So Bank guy you obviously also disclose that you are encouraged to push one provider over another, regardless of benefit to the client.Keep up the good work!
On 5 June 2013 at 6:36 pm billy the broker said:
@ bank guy...keep believing your just make my job a lot easier...the only thing is that you guys just cannot be held accountable with your actions as you hide behind your QFE status..and by golly have I seen some shonky advice with lack of sign off!! And what is this tension you talk about?? Anti insurance clients, well you are welcome to those 20 buck a month punters...good luck mate...
On 6 June 2013 at 9:03 am Bank Guy said:
This may come as a bit of a surprise but interestingly initially as a bank adviser I was AFA so yes, I do disclose remuneration in quite some detail - do you? I only ask as I haven't once yet come across a client who's aware of what the commission levels are.

Adviser Guy - I use the same products you do, don't get me confused with the chaps sitting in a branch.
On 6 June 2013 at 9:47 am Dirty Harry said:
Bank Guy you are coming across quite arrogant, which is a shame. Or maybe you are having a jolly good time winding people up. That would be a shame too. We all have plenty of opportunity to cater to our respective markets so I don’t understand why people come on here and get all antsy.

Many advisers out there have heard the institutional adviser tag lines about salaries and such before. It just doesn’t wash. The sentiment I am reading here is typical of what I have seen from younger, less experienced advisers, who have only their intense in-house ‘training’ and corporate model experience to go on when forming opinions, or from older very mediocre ex-‘agents’ too lazy or close to retirement to bother with ‘that regulation stuff’.

Once people get sick of the restrictive corporate model and wander out into adviserland on their own they usually have a kind of ‘awakening’ and realise the difference. Of course only the decent ones will do that, because it’s worth it. Salary jobs suit the mediocre ones much better.
On 6 June 2013 at 3:56 pm Johnny said:
Hey Bank Guy, do your customers receive cheaper premiums as a result of you being paid a salary and not a commission? Thought not. A lot in it for them then, on the cost argument.

So they pay the same premium, AND they're restricted to one choice of provider. Who's looking after who in that relationship?

On 7 June 2013 at 2:01 pm Graeme said:
Remember that NOT ALL Financial Advisers get ludicrously high commission rates. Fire and General Specialists average approximately 12%. If I insure a car for Third Party Only, for a younger client,I earn $13 for a lot of advice and liability. For this reason many mums, dads and children are not getting advice because I refer them to a direct insurer rather than earn $5 per hour and have the liability because they thought it covered damage to their car as well.
On 7 June 2013 at 2:08 pm Alison Renfrew said:
Having just come back from Australia and talking about commission structures with a financial planner employed by a major bank my understanding for commissions in Australia is that 100% of the first year's premium is paid as a commission. This is not 25% as Susan Edmunds claims. If only salaried people knew and understood the costs involved both financially and emotionally with being an insurance adviser. It's one of the most challenging professions in the world - next to being a surgeon - because we have to confront our fears and face up to people on a daily basis and many people don't want to do this. It takes courage. Why are we talking about being independent? Definition of independence is being 100% fee based and again Edmunds says people do not want to and do not expect to pay fees for insurance advice. I estimate 99% of risk advisers will never be independent. Finally, while Kiwi advisers may earn relatively high commissions we are one of the most under-insured countries in the world - we need advisers to help the community protect themselves.
On 7 June 2013 at 2:36 pm big norm said:
Good on you floody and others I think the bank guys got the message.
On 7 June 2013 at 4:26 pm Mike said:
Tony says "...perception is reality" - what a load of cobblers.

Perception is perception and what we as an industry need to is to either go out to the market place and confirm that the perception is indeed the reality OR show that the perception is wrong and provide the correct reality!

Transparency is what it is all about whether that be a fee for service or commission. In reality no way is perfect....a fee for service can, I would suggest, prove hard to justify sometimes. A cost per hour is equally hard to justify at times and simply causes more work for everyone and commissions are sometimes hard to justify.

The problem as I see it is that there are actually too many self-interest groups pushing their own agendas rather than actually identifying what might be best for a client and explaining why that is the case.

All advisers know that clients/the public do have a choice of whom to use and on what terms they want to do business!
On 7 June 2013 at 6:36 pm Dr Mike Naylor said:
It's good to get debate around this issue. A few points;
1) The quotes were taken from far longer conversation, so they are not in context. I have yet to learn the politicians' art of defined sound bites.
2) Independence from providers and commissions are two separate topics. There is a whole other debate on these pages around advisers being tied to a limited number of companies, based on Tony's comments. I see no problem with advisers only using a subset as on-one can know all companies products in enough detail meet regulation requirements.
3) NZ Insurance commissions are way out of line with other countries, who normally have a max of about 100% up-front (They used to be far lower in NZ). High up-front commissions definitely raises the perception from the public that incentives to hard-sell or churn may exist. "Mike" - there has been a lot of articles and comments within the consumer media around this.
I don't think that decent advisers are affected by that incentive, but they can't escape the backlash from the perception. The alternative is lower up-front and higher trail - so overall commission is unchanged, but there is income to provide on-going service to clients. Simon Hassan has done some useful calculations, showing the change would be in the interests of advisers.
I have yet to speak to an insurance CEO who doesn't think that things should change, especially as it stops their clients being churned. Naomi Ballantyne has been quite outspoken on this. However no one company is prepared to be first to jump, as they are afraid to lose advisers. It's classic catch-22 - its in everyone's interest but no one will do it. More "education" will not work. Its a classic case for the govt to come in and say "maximum up-front is 100%, trail is max 20%" (for example). No-body loses, and firms can compete under the cap. This is what the UK, Australia and the US did, though commission never reached our levels.
4) Fees are a whole other issue. I can see that in investments NZ will sooner rather later follow Aust and ban commissions. Insurance is different as it needs to be sold, but it will be influenced by the ban in the investments area. It would force advisers to explain the clients that their service is actually quite useful.
5)'Boring' - get a life! What's this with personal attacks? I realise that I'm the first academic who has been involved in your industry, and its a shock, but I'm not going away - so get used to me, and play the ball not the man. Talk to me at the next conference.
On 8 June 2013 at 4:36 pm brent sheather said:
Perhaps Tony Vidler should limit his web comments to that other website..where anyone critical of his "views" will get censored and then ultimately banned.
On 10 June 2013 at 9:20 am Broker said:
Unless you've operated as an insurance adviser on commission only for at least a couple of years I don't think you're qualified to comment on matter who you are...
On 11 June 2013 at 12:10 pm Boring said:
Dr Naylor, get used to it... and you probably assume I do not have an academic background.. this stuff is noise.

We have to many commentators re-hashing articles they have supposed to have read, although no 1 can read at that speed.

All claiming they have the torch that shines into the future. Any sensible business person will incorporate "scenario planning" and possible futures but this ringing the bell with "beware" a lawyer made a comment, or the government has to get involved... the government? Get Winston into it, he thinks everything is a conspiracy and an outrage... next you'll want the government to investigate X Factor... again, boring!
On 11 June 2013 at 4:17 pm Dr Mike said:
Boring - everyone else is debating the issues. Try that. (Shouldn't you change your moniker to 'bored'? 'boring' implies something different.)

Read the next article "Churn in Australian watchdog's sights". The FMA will eventually regulate adviser commissions, if only to be in-line with Australia. The only question is - does the NZ industry act proactively to get the regulation it wants or does it wait until the bureaucrats impose their ideas? How do we get industry to do what everyone knows is in their own best interest but they are too scared to do?
P.S. Which article was I "rehashing"?
On 12 June 2013 at 12:56 pm Boring said:
Mike I appreciate the arguments and they have been going for years... this is not new and talk about other countries is not new.

Churn, well it doesn't matter that I don't do it but its a manufacturers issue mostly and often encouraged by same.

The real issue always is the client. Are clients harmed by any practice? If so do we have facility in place for remedy and discipline? My view is "yes" we do.

NZ needs to stop considering that all customers are stupid and make changes for the few idiots as has happened recently in real estate.

We could legislate all we like in any industry and there will still be dodgy practioners.

I guess when I here people scream, "the government should get involved" I start to think that this is lazy thinking... and almost like at school when someone says, "I'm going to get my brother on to you".

You are not the 1 rehashing multiple articles... as far as I know... wasn't talking about literature reviews... I'm talking about rehashing others already written articles and flicking them on linked in faster than you can blink!

Over the years I have attended many workshops in Aus' on their industry changes... it does not necessarily follow that all should happen here.

Most suppliers there are more mature to start with... and, to agree with Tony... adviser education may assist.
On 14 June 2013 at 9:56 am Lindsay said:
How any company spends it's money is their business so please anyone just shut up about what an insurer pays in commission. None of anyone's business
But commission should only be on the new premium brought to the industry.
On 14 June 2013 at 10:28 am Andy said:
After reading the article and then the comments - I realised I got more entertainment from the comments afterwards. It also gave me an insight to the types of people we have in our "professional" industry.

Clearly there are two avenues available: Income generation, or Long term business sustainability. High initial income and a need to chase new business runs the risk of neglecting existing clients and not building a valuable business, while the latter is a much more sound option that could eliminate unnecessary churning.

Obviously there are passionate arguments for each. Personally, I prefer to work smarter, and look after my clients. THAT is where the money is for me.

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