Friday 4th of December 2009

This whole public debate about commissions is so misguided it’s enough to drive one mad. For the record, I don’t mind if advisers earn commissions as long as it is disclosed and customers have choice. Also to get things clear, there are different remuneration structures for the various disciplines of advice, namely; investments, KiwiSaver, mortgages and life insurance. I think the debate is only about investment products, however it seems that some commentary has included all financial products and services. With life insurance I tend to agree that remunerating risk advisers on a commission basis is probably the default setting. If you take the argument insurance is sold, not bought, then a commission basis is fine; just disclose it. Mortgages are similar. There is a slow trend to an advice model here and that is encouraging to see. Investments are where things get interesting. This whole idea about banning commissions seems to have come about due to the collapse of various finance companies and perceptions that advisers poured clients into finance companies because of the commission they were paid. There is a slight element of truth to this. However the big over-riding fact which is being ignored in the debate is this: The large majority of the money which went into finance companies that collapsed, went in directly from investors. This money did not get there through advisers. By my reckoning, around a third of the money in collapsed finance companies came through advisers, yet they are getting 100% of the blame. Banning commissions isn’t the answer. It’s investor education, as I argued here. Also it’s up to the product manufacturers to change the way they reward advisers and the regulators to make sure dodgy operators are closed down. Yesterday I sat in on an AMP briefing about what it is doing with its advisory business. One of the interesting things was when CEO Jack Regan talked about the attributes needed to be a successful adviser. I won’t list them all, but what is worth noting is that the whole package was wrapped up by acknowledging advisers were sales people; the term used was “professional salesmen”. Many sales people are remunerated on a commission, or partial commission basis, so why can’t advisers? Another ignored point which bothers me is around share brokers. Hello, these people have been commission-driven salesmen since Adam was a cowboy. Do they get the same opprobrium as financial advisers? Nope. I bet if you looked at many of their portfolios over the past couple of years you will see some significant losses. Apparently that is OK. Very strange.