Conflict-free commission – perhaps it’s a unicorn dressed up in drag, wrapped up in a mysterious enigma or perhaps it’s the ultimate nirvana, never actually attainable.
From ’06 to 2012 there was sixty-seven finance company collapses in New Zealand. An inquiry by the New Zealand Parliament estimated losses at over $3 billion that affected between 150,000 and 200,000 people. It seems almost everyone knows at least one horrific tale of life savings lost due to being lured in by high returns and a slick sales process. Where can we lay the blame here – on unscrupulous sales tactics by the providers, on the advisers who were heavily incentivised to promote products that were not fit for purpose, or on lax regulation? Perhaps some of the blame could be pointed at naive investors themselves even, but really? Investors who got burned here are kind of like the victims of spousal abuse – it’s pretty harsh to say they were to blame in the slightest as surely we should have a structure in NZ that protects people like this.
It cannot be overstated how much this tragedy impacted everyday mum and dad investors, many of whom were on the final approach to their own retirement.
In the area of financial services, the Financial Advisers Act 2008 and Financial Service Providers (Registration and Dispute Resolution) Act 2008 were enacted which dealt with some of the risks associated with dealing with financial advisers – currently, the FSLAB (Financial services legislation amendment bill), will go even further to ensure that the conduct and client-care obligations of financial service providers and the regulation of financial markets remain fit for purpose for consumers.
Ever since the GFC, understandably, there’s been a little less trust in the financial advice profession. This doesn’t help when you throw in the topic of commissions.
In Australia recently there was a Royal Commission into misconduct in the Banking, superannuation, and financial services industry. Check out this link https://www.myfiduciary.com/fiduciary-perspectives.html . Vertically integrated business models often seen with the Australian banks came under increased scrutiny. As a result, many Aussie banks started to offload their wealth and insurance business in order to reduce this perceived conflict of interest. In NZ the discussion heated up slightly around the topic of linking remuneration to volumes of business. Almost overnight insurance companies cancelled their overseas trips for insurance advisers, and many banks removed performance-based bonuses for high performing mortgage advisers.
Since then, I’ve been thinking a lot on this topic- If financial advisers, who are supposed to be acting in the best interests of their clients, are receiving a commission for placing business with a bank or insurance company, surely there’s a conflict of interest here right?
Now you may not ever use a mortgage adviser, an insurance adviser, or an investment adviser, but if it’s of interest to you as to how they work, then join us today as we lift the bonnet on this topic of commission conflict. In the process hopefully, you’ll be better equipped to make a good decision around whether or not to use an adviser and if so, hopefully after this, you’ll be better equipped to choose the right type of adviser for you.
Derek Blank, and AFA joins us to finish up this discussion
Now I know we’re focussing a lot on the money side of the equation specifically what financially motivates financial advisers – don’t think that’s all that’s relevant when making a decision around what type of adviser you should choose to work with.
Ponder this question – can you trust the advice of someone when you know they are receiving income should you follow their advice? Are they advising you or are they selling to you?
Here are some examples of where the line between sales and advice can often get blurry:
- getting new tyres.
- going to a medical specialist who not only advises on your options but gets paid if you choose to proceed with elective surgery.
- using a solicitor to resolve a conflict – considering they bill for hours taken, is there every an incentive to draw things out?
- A builder recommends certain sub-contractors because he or she trusts them (any incentives going on there?)
- Your computer guy often recommends upgrading hardware when all you really wanted was help setting up your email exchange
Kickbacks, incentives, favours, commissions, bonus – there everywhere!
If you’re in the workforce – why are you there? For the genuine love of the job? Perhaps, but for the most part, we all to work for money – is that wrong? Is it wrong therefore to state absolutely that those whose income is pegged to performance is wrong?
And just to be clear – mortgage and insurance advisers receive a commission for the work they do for the most part. Some charge upfront fees also which may or may not be refundable depending on whether or not the business results in them getting paid. Now apart from Kiwisaver and some other products, for the most part, investment advisers do not receive a commission from the provider – they charge fees which are disclosed upfront. Some charge a variable fee based on the time taken and some have set fees depending on what it is they’ve agreed to do for you. Legally all advisers need to disclose to you how they get paid – don’t feel awkward about asking the question.
To suggest in a dogmatic fashion that all financial advisers who receive a commission for their work cannot be trusted is not only cynical and naive, it’s incredibly unhelpful. Many advisers are doing huge hours helping Kiwi’s make good decisions around their retirement options, their insurance needs and their property investment options – don’t we want people on the job here who are qualified, motivated, passionate and incentivised to provide good outcomes?
To suggest that it’s 100% okay that all financial advisers receive a commission for their work is equally silly and short-sighted – I don’t think the status quo is perfect, but I do think it’s a lot better than some think it is.
So, if you enjoyed this episode and you’d like to hear more about how to choose a financial adviser, feel free to reach out to me on facebook.