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New advice rules to consider trail commissions

Whether advisers have an obligation to offer ongoing service when they receive trail commissions is one of the questions still to be pondered by those developing the new financial advice regime.

Thursday, July 5th 2018, 6:00AM 13 Comments

by Susan Edmunds

Questions have been raised in recent years about the appropriateness of trail commission being paid to advisers who are no longer able to offer advice on a product, once the client has moved to a new adviser, or when the adviser has lost touch with them.

It’s an issue that has also attracted attention in Australia.

Trail commissions are common in insurance and with some KiwiSaver providers.

Angus Dale-Jones, chair of the working group developing the new code of conduct, said at present there was no obligation for advisers to give any ongoing advice if they received trail commissions.

It is not something that is addressed in the existing code of conduct.

But he said the new code will have to consider such situations as it moves from predominantly applying to the more one-off domain of investment advice to cover ongoing insurance relationships, too, he said.

His group had sought approval from the select committee considering the Financial Services Legislation Amendment Bill for the code to apply to ongoing advice relationships.

At present, it only applies when advice was given.

“One of the indications of an ongoing advice relationship is the payment of trail commissions,” he said.

Dale-Jones said it was “almost inevitable” that somewhere in the regime it would have to be dealt with but it was not yet clear whether it would be through the code or other regulation such as the new disclosure rules.

He pointed to situations where a client might move to a new adviser who would provide ongoing service but would have no entitlement to the commission. “We think the code should be able to touch that.”

Financial services lawyer David Ireland said FSLAB did not follow the Australian FOFA route of requiring an ongoing agreement from clients and did not explicitly regulate payments of commission.

He said, in cases where advice was  not being given, no regulatory conduct duties would arise. "Is it then a conduct issue for the provider/payer of the commission? Potentially, although contractual obligations are likely to impact."

But Paul Flood, of Ron Flood and Associates, said it was not something that regulation or legislation should get involved with, and instead it should be worked out between product providers and advisers.

It was a contractual agreement between the two, he said.

Some insurers have been encouraging advisers to move away from high upfront commissions to higher trail structure.  But Flood said that could encourage a situation where they eventually were incentivised to do nothing, so as not to interrupt that ongoing flow of commission.

His firm supported trail commissions not following clients, he said, because the commission was agreed with the product provider as part of the initial deal.

Tags: Angus Dale-Jones Code Working Group Commission

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Comments from our readers

On 5 July 2018 at 8:47 am Brent Sheather said:
The Code Committee fiddles while Rome burns.
On 5 July 2018 at 9:29 am w k said:
remuneration is strictly a commercial decision for the provider.

an adviser can choose to take over an existing client whether he'll be paid the trial or not - that's his commercial decision.

regulator should be concern with two things - advisers' conduct and transparency of product providers.

On 5 July 2018 at 12:26 pm BayBroker said:
"His firm supported trail commissions not following clients, he said, because the commission was agreed with the product provider as part of the initial deal."

Really Paul? You think that when a client decides the original adviser wasn't doing a good enough job in whatever way that was, and then appoints someone else, that the new adviser shouldn't then receive the servicing/trail commission?

That right there is one of the reasons we have "churn".

No, insurers being instructed to now pay servicing/trail commission to the new adviser is IMHO an essential part of any new regime. It'll stop advisers just sitting on a renewal book, and make sure they actually do some work for the money they are getting paid.

Anyone who thinks otherwise is only thinking of his/her own book/income rather than what is right for the client.
On 5 July 2018 at 7:28 pm Ron Flood said:
BayBroker. "That right there is one of the reasons we have churn", really. I suggest anyone who churns business because they are missing out on renewal commission of $15-$20 per month has no place in this industry.

If renewals/trails are legislated to follow the client, a completely new industry will evolve, one where advisers will simply call on clients and get letters of appointment to receive a large renewal base.

The problem is, there is no process to check if a client is receiving service or not. I can't see the FMA employing 1,000 new staff members to audit who is and isn't servicing a client.
Anyone with the 'gift of the gab'can get a client to change advisers on the pretense they have not received good service.

"Anyone who thinks otherwise is only thinking of his/hers own book/income rather than what is right for the client." It must be great to have this 'holier than thou" attitude.
On 6 July 2018 at 8:45 am Paul Flood said:
"Really Paul? You think that when a client decides the original adviser wasn't doing a good enough job in whatever way that was, and then appoints someone else, that the new adviser shouldn't then receive the servicing/trail commission?"

I most certainly do think this BayBroker. Ron makes some very good points, and we regularly take on clients and service policies for which the renewal commissions continue to flow to a previous agency. This is a commercial decision that cuts both ways - we continue to receive renewals on policies that are not longer in our agency

Is this ideal? Probably not, but it is the lesser of two evils - the other evil being a Wild West in which the "gift of the gab" bottom feeders divert renewal streams into their agency through questionable means. One example - we recently had an adviser attempt to poach one of our risk clients by having them sign an agency transfer request for their risk policy. The client thought they were simply giving the adviser access to their KiwiSaver information. (We don't provide KiwiSaver advice.) Under your proposal, the jolly poacher would have been financially rewarded for her trickery.

The time to address the level of service a client receives in return for a renewal commission is at the time of disclosing commissions. While mandatory disclosure is not yet in place, once it is it will hopefully lead to discussions between clients and advisers that address service level level concerns.

In my recent submission on the Discussion Document "Disclosure requirements in the new financial advice regime" I proposed the following:

"I think that both initial and renewal commissions need to be disclosed. Where there is a change in the level of renewal commission over the term of a contract, this should also be disclosed."

I made a similar point in my submission on the CPCFAS.
On 6 July 2018 at 9:56 am BayBroker said:

The person who decides if the service they are receiving is not good enough is the client. No client I've dealt with would appoint me if they didn't trust me to be acting in their best interests, and if they thought the advice they received from me was right for their individual circumstances.

As for "If renewals/trails are legislated to follow the client, a completely new industry will evolve, one where advisers will simply call on clients and get letters of appointment to receive a large renewal base."

How do you expect advisers to do this whilst looking after their own businesses? Do you really think clients would just go and appoint someone following a phone call and a meeting? In my experience that has never happened. It takes time to build the trust with a client and to be seen to add value to them with the advice given. It's at that point in time that appointments get made. And it's following that appointment that commission should go with who the client wants looking after them - it works in general insurance so why shouldn't it work for risk insurance?
On 6 July 2018 at 10:13 am Dirty Harry said:
Says the poacher: Trails should vest to the 'servicing adviser'.
Goes about collecting lots of appointment letters.

Says the game keeper: Trails should vest with the adviser that wrote the policy and is holding ultimate responsibility for the initial and ongoing advice.

Says me to the poachers: Find your own dam clients, you're under no obligation to take over mine. If the only way you can "get paid" is to try and justify re-writing them (AMP is in the gun over this very issue in Aussie right now) then your future in this business is going to be limited. BTW: Hellooo; you should charge a fee for that valuable service only you can provide.
Baybroker is totally wrong. Vesting trails will mean more advisers simply ‘sitting on a renewal book’ doing little more than collecting appointment letters to enhance the money they get paid. Once they have nice big book full of other people’s hard work they will be the ones ‘sitting on a renewal book’. Those promoting this idea are the ones who are clearly not able to think outside their own book/income – go do some actual work and find some new clients.

Says me to the regulators: Many of us are taking much reduced upfront, and higher trails – IE spreading our commission. That is a commercial decision that reflects a desire to build a sustainable business that provides sufficient cashflow in a higher-cost business environment, and to provide suitable adviser services to our clients. There is no way to know that an adviser taking over my trails will deliver the promised level of service, so there is no sound basis for vesting. Besides, it’s not in my agency agreements that this could be possible, and I wouldn’t sign it if it was.

Says me to Ron and Paul: The other name for trails is 'Servicing Commission'. I disagree that a strong flow of trails incentivises 'doing nothing'. That's an old-school POV that is not relevant in the modern market. In fact the opposite is true; even if your persistency is a good 90% that's a three- year loss of 30% of your trails. Doing nothing will see a precipitous fall in persistency, which undermines the whole point of spreading the commission.
On 6 July 2018 at 10:57 am First Time Caller said:
Couldn't agree with Ron Flood more! A complete new breed of adviser would focus purely on getting change of advisers signed and add no new value, if you are an adviser that will add value then you'll be the type that will buy the client of the existing adviser.

Also makes hiring staff, new advisers etc a huge risk.

Also means everybody would stop taking higher trails and then take higher up-fronts, contributing to the "churn issue"

Whilst it sounds sensible, unintended consequences would be FAR worse
On 6 July 2018 at 1:24 pm Rob Thumath said:
It's simply a sideshow. The big players know it's all about margins and fractions of margins on huge flows of money.
The poor old adviser on the end gets the smallest fraction of the margin but let's pick on him/her.
But that's right it's not really a profession anyway
On 6 July 2018 at 1:58 pm BayBroker said:
Dirty Harry: who are these poachers Ron and others seem to be afraid of? How would you suggest people will "collect appointment letters"? Adequately service your clients and you're under no threat.

Totally agree with you regarding reduced up-front commissions. Our business are in the process of moving to this rem model as well.

I am yet to hear a sensible reason for renewal commission staying with the adviser and not following the client as happens in GI other than "it's in my agency agreement"
On 6 July 2018 at 3:32 pm Barry Read said:
Bay Broker. Most life insurance agency agreements state that the the upfront commission and renewal commission will be paid to and vest with the agent who introduces the policy, and as long as the policy stays inforce they will receive the renewal. In a lot of these cases the renewal isn't linked to providing ongoing advice and/or service and the client isn't party to that agreement of what or who they pay renewal to.

The changes you are suggesting have merit, but insurers are the ones who have to decide to change their agreements and figure out how to handle the existing arrangements.

On 13 July 2018 at 1:09 pm Another AFA said:
Is there an obligation to provide an ongoing service if receiving trail or not?
On 13 July 2018 at 5:14 pm Murray Weatherston said:
@Another AFA
I have always thought that the payment of a trail/renewal was a contractual arrangement between the manufacturer and the introducing adviser that was established when the product was first purchased. It has nothing to do with the client.
So surely the answer depends on what the manufacturer/adviser agreement said - arguably if it said nothing about terms and conditions, the trail would be due so long as the client retained the product.
If the agreement said the payment continued so long as the client didn't formally de-recognise the adviser with the manufacturer (with or without the client appointing a new adviser) then that would be a different story.
Regulators/outsiders seem to want to say "no service - no trail" without even being aware of the contractual relationships.

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