Recent pronouncements on risk product commissions have tended to be at either end of an opinion spectrum.

At one end - all commissions are the cause of all conflicted behaviour, at the other, individual conduct drives conflict and the commission structure has nothing to do with inappropriate behaviour and/or "churn".

The reality probably lies somewhere in between these views and the adviser industry must find a way forward to assist and inform those charged with supervision and monitoring financial advisory businesses.

While the FMA has uncovered a few practitioners who appear to have acted in a way that has subordinated some of their clients’ interests, there is no substantial evidence or statistical data that supports the contention that ‘churn’ is a widespread systemic issue. Indeed, recent statistics indicate that lapse rates in the NZ market are reducing overall.

It’s likely that a combination of incentive structure and errant behaviour gives rise to conflicted advice. We see from the revelations in Australia that such conflicted behaviour is not exclusive to the advice space, and in comparison, whatever conflicted behaviour has occurred via churn is chicken-feed compared with the behaviour of the VIOs in Australia. Perhaps an even-handed approach to financial services distribution should now be adopted by the NZ regulator and local VIO claims that NZ is different have a very hollow ring.

However, arguments about cause and effect is interminable, contentious, and offers no practical resolution to the satisfaction of interested stakeholders.

It is true that commission rates have increased in recent years and can be regarded as a transfer of expenses from product providers to intermediaries.

In the past, the Mother Mutuals provided office accommodation, systems support, training/education, subsidies, etc. Now, these costs have been allocated to the commission account for advisers to meet the costs doing business with the subsequent rise in the rates of commission paid. And, of course, with the advent of regulation and formal compliance, those costs are continually rising and unlikely to dissipate in the foreseeable future.

But it is inappropriate to infer that the level of commission quoted is that which the individual adviser receives as compensation. Just as legal and accounting fees are not what the individual solicitor or accountant receives as ‘take home pay’ the commission paid to an adviser’s company (or soon to be licensed entity) is not what the individual adviser receives as compensation. Expenses must be paid before any personal drawings, salary, or wages can be disbursed – just like any other business.

In a similar vein, it is true that however effective and accepted a Code of Conduct and the enabling regulations and legislation may be, there will be individuals who set out, with malice and aforethought, to abuse the rules and to enrich themselves at the expense of the consumer.

But setting these considerations aside for the moment, how can we suggest to stakeholders a practical, acceptable, and equitable structure that retains and/or enhances the quality of advice and increases accessibility of that advice to consumers?

While it is true that a tertiary level qualification is not a ‘silver bullet’, aspiration to higher levels of qualification, knowledge, and expertise is surely a factor in the mix.

We also know that product providers cannot collectively decide to lower commission levels for fear of accusations from the Commerce Commission of indulging in a cartel.

It also seems to be the case, that the new Government has no more appetite for banning commissions than its predecessor, and that regulating commissions is a step too far.

So, if the product providers are hamstrung and the Government continues to be supportive of SMEs, the only viable alternative seems to lie with the Advisory sector itself.

This has not been the most cohesive of industry sectors in the past, but I would suggest that it needs to become more proactive before the regulator and or the Ministry decide to be so on its behalf.

There are organisations who have recognised that overseas incentive trips are not a good look, dilute the professionalism of the adviser, and call into question the integrity of the advice.

Whether this is perceived or actual is irrelevant.

Financial advisers are rightly held to a higher standard of conduct than other industries because of the greater responsibility carried. Financial Adviser entities that seek to be licensed under the pending regime should politely decline to participate in such incentive schemes from product providers, seek alternative ways to stimulate better productivity, and request that providers allocate these funds to improved products, benefits, and processes for advisers and their clients.

Other entities have eliminated product bias by equalising the maximum upfront commission payable to advisers across all products at an agreed level. Any excess over the agreed level is paid to the adviser entity to fund compliance, training, education, or similar functions that enhance the quality of service provided.

Still other firms have requested a uniform structure from all providers be paid to the Adviser company to eliminate product bias at entity level. This may be practical for more mature businesses with higher levels of renewal commission, but nevertheless offers a way to dilute allegations of conflicted behaviour.

Level commission – a fixed percentage of premium paid - prevails in the Fire & General broker world and has considerable merit in building equity value in the adviser entity. The same is also true of ‘as earned’ commission with the added attraction of there being no clawback of commission in the event of a lapse.

Building a business with a strong balance sheet with a valuation based on a multiple of Earnings Before Interest and Tax (EBIT) can deliver greater wealth to advisers in the medium to long term than merely a multiple of renewal commission. The days of the goal being able to afford the Bach, the Beemer, and the Boat are, and should be, consigned to history as a relic of the old sales-at-all-cost mentality.

At the very least, this approach should be left to the Vertically Integrated Organisations and their salespeople as their exclusive domain.

And just to be cIear, I have no objection whatsoever to VIOs setting out their stall in a free or mixed market economy and organising their affairs as they see fit within the framework of the law.

But as mentioned earlier, Financial Advisers are, and should be, held to a higher standard and it is incumbent upon those Advisers and their commercial organisations to eliminate perceptions of conflicted behaviour before a solution is provided for them.

The blood-letting currently taking place in the Haines Royal Commission of Inquiry in Australia is bad for everyone and is an indictment on conflicted behaviour within our industry. Advisers and their advocacy representatives need to develop effective solutions to perceived and real conflicts within the adviser space – and this needs to occur sooner rather than later.