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Advisers 'must shake off product ties'

Advisers are being told they must find a way to disconnect the advice they give from the sale of products - as new statistics show the bulk of AFAs are still largely paid by commission.

Wednesday, August 10th 2016, 6:00AM 4 Comments

by Susan Edmunds

Financial Markets Authority data from this year's information returns shows 43% of advisers receive commission from product providers, down from 45% in 2014.

Just 33% receive a fixed fee or hourly rate from their customers, down from 36% in 2014.

AFAs also said they received incentives such as entertainment, business coaching, travel and vouchers from providers.

Twelve per cent of advisers generated more than 50% of their commission or production bonuses from investment products of one provider.

Former Financial Services Council chief executive Peter Neilson said it was a problem for the industry if it wanted to be seen as a profession.

He said the advice given based on a client's circumstances had to be distinct from the decisions about what they ended up buying.

With current commissions structures, he said people paid for advice over a long period of time and ended up shelling out more than they needed to. “We want to get to the situation where they see value and pay upfront.”

If advisers could show people the return they could offer over their investing lifetimes, rather than year by year, they might be more willing to pay, he said. "If you could sit down with a smart calculator and help people so their financial assets were aligned with what they want in life, they could get huge value out of that conversation."

That would be more appealing to young people as a career because it would not rely so much on existing relationships, he said. "I am personally optimistic about financial advice but we have got to find a way to break the link between products and advice."

He suggested a solution would be for KiwiSaver members to be allowed to withdraw money to pay for advice at key points in their lives, such as when they started work, when they wanted to buy a house and when they were near retirement.

David Boyle, of the Commission for Financial Capability, which is currently working on a review of retirement income policy, including KiwiSaver, said it was an interesting suggestion but potentially problematic.

"It could also open up a can of worms that might lead to other requests for access of funds being, further education for example. I think it could dilute the real purpose of the savings which is around building funds that will create an income for members non-working years."

Neilson said the arrival of new low-cost KiwiSaver provider Simplicity could put pressure on other participants across the industry to cut fees. That could reduce their ability to pay commission.

Tags: AFA Commission financial advisers KiwiSaver

« Financial services provider 'should be allowed to follow law'LVR restrictions to be reviewed »

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Comments from our readers

On 8 August 2016 at 8:13 am Murray Weatherston said:
Where is the disclosure that your principal commentator on this story Peter Neilson is a trustee of the new no commission Kiwisaver provider Simplicity.
I wonder if he would have made such comment in his previous role as CEO of Financial Services Council?
On 8 August 2016 at 10:28 am Simon Hassan said:
Professional advice, where this is required, is the biggest value add in the financial-product-to-consumer value chain.

For much too long product providers have pocketed the lion's share of product revenue, deciding on and the level of commissions they would pay to those advisers (agents) who accept this remuneration for the services they provide.

From a product provider’s point of view, these services have always primarily been supporting the sales and retention of their products.

But these services vary greatly from adviser to adviser – ranging from nothing at all (effectively just ‘clipping the ticket’ because they could) through to fully comprehensive advice, going the extra mile and often covering a far wider area than that was touched by any particular financial product.

For example, one evening quite a few years ago, a client phoned me, distraught to have arrived home to find her back door broken in and her home burgled. I had referred her to a particular a fire and general insurance adviser – let’s call him 'Ian' – several years earlier. But she told me she had not ended up using Ian, having got cover through the bank instead. I said I’d make some enquiries and get back to her about what she should do. I phoned Ian to find out, and his immediate response was: ‘No problem, I’ll give her a ring and help her sort it out.’ The next day I had another call from my very grateful client to say that Ian had come to her home, fixed the door, and was handling the claim for her.

What would fair remuneration look like for Ian? What about for her bank insurance adviser? Commission is often a very blunt tool for adviser remuneration.

It’s not easy for advisers to move from a commission to a fee model – indeed for the ‘mum and dad’: ‘kitchen table’ insurance market, fees may never be the answer. But for advice on investments fees can and do work very well. Not only do fees help distinguish remuneration for advice from rewards for product distribution, a fee basis for advice is essential if indeed the ‘industry’, as Peter Neilson puts it, ‘wants to be seen as [and actually become] a profession’.

And it’s not about returns, it’s about what you do, what you are paid for doing, and who is paying you.

Until now it has been hard to provide fee-only advice on KiwiSaver. Low average balances, for one thing, have made this approach difficult. But balances are growing, and the arrival of Simplicity’s very low cost KiwiSaver scheme will challenge professional advisers to find ways to move to fee-only advice models – for clients who want and need advice – here too.

That can only be good for consumers – and for this emerging profession.
On 9 August 2016 at 8:22 am Bikedude said:
I have always found it most interesting that people on salaries have the greatest interest in commenting on commissions.
On 20 August 2016 at 3:22 pm I was wondering said:
You absolutely hit the nail on the head there Bikedude! These people who take it on themselves to comment on our remuneration have never risked anything personally to be In business for themselves. Nelson is a salaried mouthpiece for others.

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