Wednesday 28th of April 2010

The ISI’s surprising announcement that it was introducing a voluntary standard to ban commissions on investment products, including on KiwiSaver, will do more damage than good. My position, as I have said previously, is that commissions are fine. The caveat being that clients’ interests must be put first and that there is transparency, around remuneration. Removing commissions will in all likelihood have a number of detrimental impacts on the industry. One is that it is another force against the small advisory firms. There is already talk that such a move will be beneficial for the large vertically integrated firms, like banks, who will be able to cross subsidise advice for some customers. Don’t be surprised to see “free advice” from these firms as they will make their money from other parts of the process like asset management. Banning commissions will kill many of the KiwiSaver businesses. They are modelled on paying advisers commissions to give advice around KiwiSaver. There are bound to be many other detrimental impacts. Some of the other bits I have trouble with are: The ISI is trying to force a remuneration model onto advisers. Whatever happened to the free market and choice? I could understand it if fund managers all voted for Labour, the Greens or some other left wing party, but I suspect they don’t. Secondly the ISI makes this argument that consumers should be able to negotiate remuneration levels with advisers. This is a nice idea, but bizarre. Who negotiates fees with their lawyer, accountant or doctor? Surely a consumer could negotiate fees with an adviser on commission? Thirdly, they say because the international trend is towards banning commissions New Zealand should blindly follow these other countries. (No wonder there are so many sheep jokes about New Zealanders). I have no doubt that there are instances where commissions have influenced an adviser’s recommendation process. There are lots of comments along these lines and it seems to be accepted wisdom in some circles that is the case. However there is little empirical research to support this proposition. On the other hand one can argue that investors make bad decisions all by themselves. Just look at what happened with finance companies. By far the majority of money that went into failed finance companies was placed there directly by investors, not by advisers. Commission had little to do with it. My guess is that this voluntary standard won’t be widely used and that ISI members will have options for fee based advisers and those on commissions.