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Commission regulation unlikely: Tate

The Government will be hesitant to regulate risk advisers’ commissions because of the country’s under-insurance problem,  says the president of the Institute of Financial Advisers.

Wednesday, June 12th 2013, 7:14AM 22 Comments

Massey University’s Mike Naylor told Good Returns earlier this month that the Government should set guidelines for financial advisers’ commissions, to help ease the perception that their decisions were influenced by what they were paid.

He said the insurance industry needed to move away from high upfront commissions and provide better trail, to bring New Zealand in line with the rest of the world.

Nigel Tate did not think the Government would want to tackle them because it wanted to encourage advisers to sell more insurance, not less.  “That would be way too hard. New Zealanders are all too horribly underinsured and they don’t want to make it worse.”

He said he would like to see the Government legislate for the maximum level of risk brokerage that could be paid. “So we don’t have to rely on the companies,  someone would have to be first.”

But Fidelity Life’s Milton Jennings said his organisation already offered the lowest upfront commission and the highest trail. “That encourages quality advisers to keep their business with us. If you pay a high upfront commission all you are doing is encouraging churn.”                          

He said he doubted the Government would want to tackle commissions, as its counterparts in South Africa had. “I don’t think it’s on their agenda at the moment. They want an open market.”

Tate said risk advice businesses would be worth more if there was less of a focus on upfront commissions. He said it was inevitable that the FMA would introduce some ruling on investment advisers’ commissions.

 

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Comments from our readers

On 13 June 2013 at 11:21 am MJS said:
The idea of "someone" (i.e. the government) regulating the amount of commission payable concerns me. I can see only the insurance companies profiting from this while my revenue is slashed, despite rising costs. Would premiums reduce for end-users? Possibly, but that would have a further chilling effect on my business revenue.

On the other hand, what innovative schemes would insurers devise to make themselves more attractive to the distribution channels? 'Soft dollar' incentives to compensate for the fact that revenue has been slashed by...what percentage Mr Naylor?

So, yet again we have an academic who has probably never sold in his life and uses the spurious saw that we should get "in line with the rest of the world". Why?

Mr Naylor makes a presumption that commission is bad and a driver of advice. Perhaps this is so in some cases, but not in mine. I appreciate that the product manufacturing side of the industry offers a reasonably flat range of upfront commission, as well as a range of higher trail options.

This diversity allows us to build our businesses the way we choose, and to take different 'risks' (to commission) on different classes of clients.

Let the market decide.
On 13 June 2013 at 1:04 pm Boring said:
MJS, quite like your thinking :)
On 13 June 2013 at 4:27 pm Amused said:
What evidence does Mike Naylor even have that consumers are concerned with our commission been a decider in where we place them for cover? Please show us the survey Dr Naylor that has been undertaken recently to justify your assertion. No survey? Oh so this is really just the “opinion” then of one academic but we should still treat what you say as gospel regardless?

In the financial services industry we deal with real facts and figures not conjecture.
On 16 June 2013 at 3:26 pm Dr Mike Naylor said:
There is amble evidence from the US, the UK, Australia and elsewhere that (i)high upfront commission encourage advisers to churn, and (ii) these commissions are a source of concern for consumers. This evidence is detailed academic research, industry surveys, consumer association surveys as well as government department surveys. Take the time to read the work of the Aust regulator. Within NZ there has only been industry surveys and consumer association surveys. However any readings of the comments of media article on insurance reveals a passionate anti response to advisers. Actually it doesn't matter if high upfront commissions actually influence advisers (which I think is not that common) it's the perception which counts.

MJS, Boring and Amused - I'll repeat what I said in comment to the last article. The suggestion is to reduce upfront commission and increase trails as well as charge fees. It is easy to create examples which show that adviser income actually increases, rather than being slashed. 'Soft Dollar' incentives will be eventually banned so ignore them. Nigel is also mis-understanding me - but in his case its probably the journalist asking for comment based on a mis-quote of what I said.

I know that Mils Jennings agrees with me, as his company does offer a good mix of lower upfront and higher trail. It would be better if all companies could match him. Fidelity runs the risk of losing those clients to advisers who churn. However Mils cannot under law meet with other bosses to discuss this -as they could be accused of price fixing.

MJS - where exactly did I say 'commission is bad'? Where did I say 'we should get in line with the world'? Please read more carefully, rather than jump straight to what you think I said. I have no issue with commission in insurance - it is the mix between upfront and trail which was being discussed. I assume that MJS uses no Fidelity products?

It is a fact that NZ has the world's highest upfront commissions - Australians are amazed by it. Yet somehow advisers in the rest of the world do just as well in money terms - am I missing something?

So the issue is: do you agree that high upfronts/ low trail give an incentive to sell new policies or churn, and no incentive to service existing clients, whereas medium upfront/ medium trail gives an incentive to sell and to service, or do you disagree?
On 17 June 2013 at 10:57 am Boring said:
I think the proposition that upfront commission can influence some advisers is a fair proposition.

I also think suppliers are affected by clients re-positioning and this is a challenge with pricing. Suppliers have thought of all sorts of ways of approaching this, even vertical integration (also costly).

I think that some clients have a negative view of advisers, we may have negative views of lawyers, these perceptions exist. What you do find however are statements clients make such as... " all insurance advisers are bad but not my guy/gal... they are great". Same with other professions.

When designing your income, do what you like... upfront, free, trail, invoice... whatever works for the client and you.

When it comes to suggesting legislating.. now ya got me. Yes Milton would love to collude... legally... it is mostly a supplier challenge that if "we" advisers do not assist with, the supplier will attempt to make us pay.

Perhaps a trip back to Porter's 5 forces would assist suppliers in finding about where the power lies and who has the influence.

I will state, I do not think dealer groups assist.

On 17 June 2013 at 11:36 am MikeT said:
It stops and starts with the insurance companies. Stop "rewarding" advisers who blatantly churn. Of course sometimes she's a fine line between what constitutes churn and what doesn't , unless we look in depth at how much of an advisers' business (and an insurance companies for that matter) is replacement business from elsewhere, is there a trend of replacing, and was the clients interest first and foremost. But whose going to do that? Most consumers don't separate advisers into "good" and "bad" piles.... We are all under the same umbrella. The sooner this sort of thing is put under the microscope, the sooner our industry will be better regarded by those whose very lives we are trying to protect.
On 17 June 2013 at 2:38 pm MJS said:
Mike Naylor - I agree you didn't baldly state "commission is bad" though it is implied, you DID in fact say " the insurance industry needed to move away from high upfront commissions and provide better trail, to bring New Zealand in line with the rest of the world" - or at least the journo has paraphrased you as saying that (not a direct quote, I admit).
Why would you assume I use no Fidelity products??? I do, in fact, find that Fidelity KBP & Rural KPB products are often the preferred option in certain age groups - this despite the reduced up-front they have imposed. The client's need is paramount, and the fact that I don't necessarily LIKE the fact that Fidelity's income-related products are effectively subsidised by advisers (by way of significantly lower commission, due to the fact that, according to my Fidelity BDM, they "can't make a buck on the income book")does not stop me recommending the most appropriate product for the client's specific & individual needs.

[EDITED]
On 17 June 2013 at 3:19 pm Concerned Stakeholder said:
Commentators here should also read "Churn in Australian watchdog's sight" comments. There seems to be a common theme going on here with some good comments from all. Unless we start acting like the professionals we purport to be then someone or something will intervene and we'll all be winging about even more regulation.
On 18 June 2013 at 10:18 am MJS said:
For those who don't use Sovereign, here's the latest "shot" in the 'who can pay the highest commission' competition among issuers: http://www.sovereigncomms.co.nz/acton/fs/blocks/showLandingPage/a/1340/p/p-00f9/t/page/fm/0

So, who is driving this? Advisers or Issuers?
On 20 June 2013 at 9:15 am wake up said:
MJS: Both
On 20 June 2013 at 3:39 pm MJS said:
Wake Up - please explain how Advisers drive it? Issuers are, as Russell Hutchinson states in his blog today "have had to continually fight to find a way to get your attention". Fidelity is resisting this and trying to turn the tide, whereas Sovereign is hunting new revenue by offering 210% at present. How do Advisers 'drive' this?
On 21 June 2013 at 9:30 am Dirty Harry said:
MJS: Like it or not advisers drive it by placing larger volumes with the top payer. Every few months Tower have been doing boosters and mini incentives to (try to) buy business. Sovvy does it really big periodically too - remember ROCKIT rewards? My BDM told me then that the usual writers carried on, but they got massive amounts of business from the advisers who otherwise didn't do much with Sov, during that campaign.

The companies know that these promos result in a boost of new business. Just ask your BDM. If it didn't work, they would all be following Milton and his anti-competitive ideas.
On 21 June 2013 at 9:54 am btw said:
@ MJS, so you're saying that advisers don't have any ability to think beyond whoever pays the highest commission? As insulting as that is, if true it certainly demonstrates beyond doubt as to exactly why adviser commissions need to be banned - sorry, correction, they are banned and have been since 1908.
On 21 June 2013 at 10:24 am David Whyte said:
Harry - the issue with advisers placing larger volumes with the top payer - if indeed that is the case - is that the placing consists of the SAME business which was placed with the previous 'top payer'. Increased commission has to be paid for at some point - usually by the policyholders.
And before quoting Tower as an example of higher commission attracting more new business, I'd suggest you look closely at the FSC stats. Tower's new business figures have been flat-lining for years - higher commission offers have had no impact. And if I were you Dirty Harry, I'd take what a BDM tells with a very large pinch of salt! Commission rates are the exclusive domain of the product providers, and if the only response to increase competition is to throw more commission on the table - it's time to change your sales management leadership. And could you please define Milton's anti-competitive ideas?
On 21 June 2013 at 2:58 pm Dr Mike Naylor said:
The news from Sovereign and the related knowledge that at 210% they are paying less than Onepath or Partners proves my point that the companies (Fidelity aside)cannot help themselves, they see themselves as either paying up or not playing.
Its like two boys squaring up for a playground fight - they both want to stop but neither will admit it. It needs an outside adult.
On 21 June 2013 at 6:27 pm Broker said:
Meanwhile some of us have meaningful things to do like address the underinsurance problem in this country...
On 22 June 2013 at 3:37 pm Broker said:
It's an insult on all quality advisers to suggest that commissions is all we are concerned with...we are bored with that angle...next?
On 23 June 2013 at 10:25 am MikeT said:
The problem is @broker that despite there being quality brokers out there, there are still those that are all about looking after themselves first and foremost, and many clients are not able to tell the difference. It only takes one bad apple to create a poor perception of us to consumers.
On 24 June 2013 at 11:20 am MJS said:
@ btw
"On 21 June 2013 at 9:54 am btw said:
@ MJS, so you're saying that advisers don't have any ability to think beyond whoever pays the highest commission?"

Huh? That's an interesting response to what I have said in this conversation...perhaps you should re-read?
On 24 June 2013 at 12:28 pm btw said:
@MJS. In your comments to Wake up and others you were suggesting that the issuers were driving the commission process and questioned how the advisers could drive it? Correct? The answer is that the advisers, as the consumers in this case, have the ability to walk away. If there is no demand from the advisors for the high up-front commissions then Sovereign wouldn't do it. Therefore the advisers are driving it. Maybe not exclusively, ...but they are driving it.
On 25 June 2013 at 10:42 am MJS said:
@btw - that's a different way of looking at it! But, I maintain the Issuers drive it - humans are incentivised into behaviours and those incentives are determined by the issuers, who are trying to get what THEY want (market share). Still, we have the lonely example of Fidelity, (whose products I often recommend) resisting the current "common practice". How far down the road will it get before other issuers join it? Or will it have to eventually fold to the pressure? It will be interesting to see.
On 25 June 2013 at 5:31 pm btw said:
@ MJS. I agree. I'm reminded of the Goldman Sachs CFO who turned round after the GFC and said it wasn't their fault as they are just human, greed was a human emotion, and they merely succumbed to greed. He then claimed they needed regulation otherwise they would do it again!!

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