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Drop commissions to eliminate conflict: NZ Wealth

Investment advice will never be a profession until advisers prove they are on their clients’ sides by ditching commissions, says Ben Brinkerhoff, of NZ Wealth.

Monday, September 2nd 2013, 5:19PM 7 Comments

by Susan Edmunds

The adviser group requires that its 30 AFAs around the country operate in a fee-only capacity.

They deal with fund managers Dimensional, Smartshares, Harbour, AMP and iShares.

Brinkerhoff said not accepting commissions or other incentives was a key part of NZ Wealth’s values. The wider industry should follow suit, to offer clients better outcomes, he said.

“People may or may not express that conflict of interest and some can handle it but it still exists.”

Advisers who were paid a fee by a client would represent the client’s interests to the industry, rather than representing the industry to the client.

More than half the country’s AFAs are tied up with banks or other controlled distribution networks, Brinkerhoff said. Those who were independent needed to be truly independent by removing the commission tie.

There have been suggestions that New Zealanders are not financially savvy enough to pay for advice but Brinkerhoff said that was not a good argument because it indicated that people did not understand how their advisers were paid.

“It’s the adviser’s job to explain their value proposition so the person can make an informed choice… doctors, lawyers and accountants are all on the same side of the table as their clients. Everyone has a fiduciary obligation to serve their clients’ best interests. We will never be a profession until we can say the same.”

The Government should legislate against commission, Brinkerhoff said.

“We’d be happy to find another point of difference.”

NZ Wealth’s advisers charge a range of fees, from 50 basis points to more than 1%. “Not all are doing the same service.”

The portfolio cost for 50% equities and 50% fixed interest was 32 basis points, he said. “This is the future, either embrace it or get left behind. It’s happening in the US, UK and Australia. New Zealand desperately needs to have this transparency.”

« One-person advisers devalue business: AdviceFirstIFA working on pro-bono offering »

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Comments from our readers

On 3 September 2013 at 7:24 am Independent Observer said:
The fees v commission debate remains an industry distraction about the real issue of disclosure. As long as the consumer is fully aware of what each component of the value chain gets paid, then the remainder of the discussion is around value-for-money and how to pay.
On 3 September 2013 at 8:49 am Peter Urbani said:
I quite agree
On 3 September 2013 at 10:12 am Kimble said:
Sure you can disclose to a client how your remuneration is structured, but that's not the same as telling Consumers. Your client is through-the-door already. You have the opportunity to inform them. Not true for the potential client who never seeks you out.

Your industry is judged by the worst operators and the worst practices. Not the best, not even the average. The worst.

As long as anyone is getting commissions from financial products, the public is justified in assuming that everyone does. Until the practice is explicitly banned, you aren't going to change their minds.

So, while commission vs fees may be a distraction in the case of individual advisers dealing with individual clients, the issue is central to the financial advice industry in their dealings with the market.
On 3 September 2013 at 10:44 am btw said:
@ Independent Observer. You've been claiming this for years - but, with respect, you've been misinformed - at least for fiduciaries (which captures most advisors/agents). Your primary obligation as a fiduciary is to avoid conflict of interest - disclosing it is inadequate. So if you put yourself in a position of receiving money from third parties such that it could affect your decision making and advice – you’re in breach of your fiduciary obligations, regardless of the quality of that advice, and regardless of whether you disclose it. At the risk of repetition, your obligation is to avoid [emphasis added] conflict, not merely disclose it.

Disclosure is actually about a lesser duty that, as a fiduciary you’re not entitled to get any compensation or otherwise profit (at all) from the relationship unless it’s been specifically agreed by the principal. And yes, without that specific agreement you are expected to do it for free.
On 4 September 2013 at 9:58 am Frustrated said:
Hmmm thought we were all meant to keep the client upper mind. Fees/Commissions do not mean we will not give the best advice !!!!!

Kimble and others - guess what generally the average Kiwi does not want to write a cheque for fees they are happy to pay within the product - ASK THEM!!!!

Secondly I guarantee some of the fees being charged or that would be charged would be far higher than what the product providers pay - Investment business is not a goldmine of huge commissions -

Not sure how getting paid $2 - $3 for each $1,000 in KiwiSaver could possibly cloud and advisers judgement - Fees or Commission the decision should be between the Adviser and Client not the media beat up - we will still all have our preferred products/platforms, preferred companies/providers so what will actually change - except clients will say a big no thank you to regular reviews because each time they will have to write a cheque - lets get on with helping clients to have the most they can at retirement and waste time in this sort of publication in making sure Ross is outed for being an Accountant who dabbled in Investments instead of an AFA and therefore tarring us with the same brush
On 4 September 2013 at 1:18 pm Kimble said:
Frustrated, again, those are the people you are talking to. They are already, demonstrably, OK with commissions because they know advisers get commissions, and yet they still sought out an adviser.

As for the declaration that fees will be higher than commissions, that's something you have to back up with reasoning. It doesn't stand on its own.

At best you can say that clients should be indifferent between fees or commissions if they are the same amount. There is little reason asides from a tiny amount of clerical ease that would have them prefering commissions over direct payment.
On 4 September 2013 at 2:09 pm KW said:
What we need to remeber with the arguement presented is that it's being presented by someone with a huge bias. Ben Brinkerhoff's group, NZ Wealth, are trying to make this a point-of-difference from some others and so his comments should be seen in this light.

I was going to make a similar observation to that made by Frustrated. What would Ben think would be a suitable fee to charge a client for giving them advice - which could run into hours - on KiwiSaver?

I really think we need to start differentiating between advice on investing lump-sum amounts and drip-fed retirement savings. It is obvious we (the whole profession/industry) run into difficulties when using the very generalised term of "investment advice" or, worse still, "financial advice".

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