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Disclose cost of advice, not commission: Financial Advice NZ

Advisers should be required to declare the cost the adviser distribution channel adds to what clients pay for financial products, not the commission the advisers themselves receive, Financial Advice NZ says.

Thursday, May 31st 2018, 6:00AM 8 Comments

by Susan Edmunds

The Ministry of Business, Innovation and Employment (MBIE) sought submissions on a discussion document as part of its work to develop disclosure regulations to fit alongside new financial advice laws.

MBIE said the existing rules had a lack of transparency, including on what advisers were paid.

Information about the commission an adviser received should be made publicly available, it said.

But Sue Brown, chair of Financial Advice NZ, said it was not so straightforward.

Advisers should be able to instead show the margin that adviser distribution added to the cost of a product, she said.

"The main aim of these commission disclosures is to highlight actual and perceived conflicts of interest. However, clients often get confused that they are paying these commissions and additionally confused as to whether they are paying extra premiums for their insurance," Financial Advice NZ wrote in its submission.

"An insurance premium quoted without commission doesn’t reduce it by the upfront commission. Instead it reduces by about 12%-15%. This is what it costs the consumer to obtain advice."

Brown said disclosing commission could end up replacing more useful conversations between the client and adviser,

“We do not believe that with the right compliance measures, processes and disclosure in place commissions lead to poor client outcomes. We want to see a much more meaningful disclosure of the cost of advice to ensure consumers are fully and accurately informed, and that advisers can have an accurate ‘value conversation’ with their clients,” she said.

Financial Advice NZ said the same rules should apply to everyone giving advice, with bank staff also required to show the margin was added through acquisition or distribution costs.

Brown said that would create a level playing field and allow clients to make meaningful comparisons.

Disclosure and management of conflicts of interest should be regulated in a principles-based way, she said.

“The intent of disclosure is to ensure consumers have all information required to make an informed decision - which includes either accepting or rejecting potential conflicts of interest.

"To achieve this, we must arrive at a framework that ensures that advisers, through providing ‘sufficient specific facts’, can accurately represent potential conflicts and importantly, how these are managed as relevant to their individual advice business. A principles-based approach will achieve this, whereas a prescriptive approach risks adding complexity for both the consumer and adviser.”

Financial Advice NZ also called for additional disclosure requirements for advisers when they were offering replacement advice, including a product comparison outlining the material differences in the products, the risks of changing, and the reasons for the recommendation to replace.

The association also rejected the suggestion that commission should be disclosed in dollar terms. It said this would add significant confusion.


Tags: Disclosure Financial Advice New Zealand Sue Brown

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Comments from our readers

On 31 May 2018 at 12:18 pm Eyeinthesky said:
this statement:

"An insurance premium quoted without commission doesn’t reduce it by the upfront commission. Instead it reduces by about 12%-15%. This is what it costs the consumer to obtain advice."

Surely even this is misleading - if the client goes straight to the insurance company, don't they in fact pay the same premium, and the insurance company wont reduce it by the 12-15% stated that the adviser has the discretion to do?
On 31 May 2018 at 9:45 pm Murray Weatherston said:
Assuming for the moment that Financial Advice New Zealand's assertion that commissions equal 12-15% of the premium (I think I recall MJW thought it was much higher on a NPV basis), can I ask them how would they react to a policy proposal as part of the new regulatory environment that commissions should be restricted to a flat 12-15% of each annualised premium?
On 1 June 2018 at 7:53 am dcwhyte said:
....and restrict all investment advisers fees to a 'once only' $500 - killing off two distribution channels at once and leaving the consumer at the mercy of the VIOs. Great idea, Muz - very constructive and very helpful.
On 1 June 2018 at 11:57 am MediCare said:
This whole debate is crazy. Why don't we simply provide cross market retail price comparisons instead of declaring commissions? My experience is that customers only care what they pay, not what we make. Surely the objective is to make sure that there is market transparency which is best achieved by providing retail price comparisons.
On 1 June 2018 at 12:08 pm Backstage said:
There are to many reasons why NPV is not useful in the above and one especially is if the clients claims within 2 years. In addition there is always a distribution cost and this is regardless of how it is delivered. I think the argument put forward is fine and no one has demonstrated that the current model is leading to bad customer outcomes at this stage. In fact i recall Bill English was quoted as saying there had been no complaints on adviser commissions.
On 1 June 2018 at 2:51 pm Drew Hoffman said:
If we use the same logic employed by Financial Advice NZ and Ms Brown, an investment adviser would not be required to disclose what he or she actually got paid, but only what it would cost the client above and beyond what the client would pay without the adviser. So if they adviser is able to use wholesale funds whereas the client could only access retail funds at a higher cost, then the adviser could reduce his or her reported fees by the amount saved by using wholesale funds. And if the adviser could get institutional rates for trading and the client would pay retail rates if they did it themselves then the adviser could reduce the fees by the amount the client would save using institutional rates. I suspect that this would be branded as misleading and deceptive by Ms Brown's former colleauges at FMA. A level playing field means that all advisers need to disclose what they get paid and not what it saves the client. If that leads to an uncomfortable conversation with the client, then so be it.
On 1 June 2018 at 3:45 pm smitty said:
Two things come to mind - I thought the current regime works well. When giving advice I need to give the client a personalised secondary disclosure, or note it in the SOA, as to the cost of advice. When giving an overall disclosure all fees, commissions etc... are outlined in a generic sense. I thought this disclosure worked well? Secondly, I dont remember FANZ coming out and asking its newly minted members if there was a problem with disclosing commissions - I could be wrong and missed this given all the recent comm's on the proposed changes though. So if it is the case that they haven't canvassed their members, then I'm not entirely happy about that.
On 5 June 2018 at 9:45 am Tash said:
Surely consistency requires employee advisers to declare sales targets, salary, non-cash perks, bonuses...
oh wait, it doesn't matter, they can only sell one provider anyway!!! So we are very uhappy about clients being restricted to one provider for some advisers but not at all for others!!!!!

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