The ASIC action on Findex opened a Pandora’s Box. If you describe your services as “independent” or even “independently-owned” you had better be right about that, or risk being publicly labelled “misleading and deceptive” (or worse – being in breach of Corporations Act s.923A and found to be a criminal by the Director of Public Prosecutions).
Advising under the influence of incentives is a risky business!
What’s so wrong with commissions? How does co-existing with commissions make you less professional? With some litigation lawyers now charging a percentage of the winnings and nothing if they lose, you can well understand why the question is being asked.
The bigger question, though, is why do the remuneration structures of financial advisers generate so much debate? It gets everyone hot under the collar.
Professionalism versus commercialism
One side sees conflicts of interest as a threat to professionalism and the other side sees its removal as a threat to commercialism.
Sitting on the fence and arguing that the public should decide the issue by “voting with their feet” (as an ifa editorial recently did) is at the very least short-sighted, and at worst irresponsible.
We are, after all, the public’s financial advisers, n’est-ce pas?
The public doesn’t get the significance of the issue. Why would they? As far as they’re concerned they’re just buying insurance or making an investment. But there’s more happening under the hood – if the consumer is acquiring the financial product via an intermediary’s recommendation then the issue is entirely significant. ASIC’s Shadow Shopping program has proven this time and again, but even better proof has been supplied by Westpoint, Fincorp and Storm.
Guns don’t kill people
The ifa editorial argued that “a commission payment by itself isn’t conflicted”. Really?
Guns don’t kill people, people do – the gun doesn’t pull the trigger by itself. This is an entirely true thing to say and also a masterful misdirect.
The purpose of the gun is to have its trigger pulled so that something or someone ends up dead. Guns aren’t being produced and distributed in their millions to sit on someone’s mantelpiece, they are being bought by someone who intends to point it and pull the trigger.
Likewise, the purpose of commissions is to distribute product. The manufacturer wondered, “How can we sell this product? I know! We’ll incentivise salespeople by giving a chunk of our profit to them for each one they sell – the more they sell, the more they make, and the more we make.”
A commission is, by definition, an incentive.
To a salesperson this is business as usual, however, to an impartial adviser the existence of an incentive creates a conflict of interest.
Why? Because it’s an incentive.
Whether the adviser chooses to act on that conflict or not is irrelevant. Even if the commission does not influence the advice at all, a conflict of interest still exists. And the existence of conflicts of interest “distorts the quality of advice” (ASIC, 2009 PJC submission, et al).
Chicken Little
In insurance land, there are those who’d have you believe banning commissions will rob an entire demographic of advice without which the sky will fall in.
Really? Mother Teresa, is that you? Or are you just choosing the path of least resistance to protect the status quo?
In my experience, since turning ‘indy’ in 2007, the opposite has been true. Those who value advice seek it out, the highest quality possible. Those who place no value on advice will continue to do what they do, and their choices are increasing.
Welcome to the free market.
I have found that abandoning conflicted remuneration structures and becoming genuinely independent elevates the value of advice as far as Joe Public is concerned, and Joe seeks it out because it is now relevant and useful. Note that I didn’t say that I am now suddenly trustworthy since becoming independent. I believe I was trustworthy before then too, it’s simply I had more work to do back then to convince Joe of the same. That’s not a conversation Joe seems to need now.
Fine, I can get on with my job.
Members of the IFAAA practise the Gold Standard of Independence and this creates clarity and direction for them and more trust from their clients.
Daniel Brammall is president of the Independent Financial Advisers Association of Australia (IFAAA) and director of Brocktons Independent Advisory in the ACT.
John M RE: “And if the IFAAA or their members think that they are ‘conflict free’ because they charge fees only, then not only are they not in keeping with the ASIC requirements, but their train of thought is dreadfully derailed.”
You are correct we do have a conflict we OWN our OWN business. That is what our auditor said when reviewing our business / AFSL. Enjoy your 2017.
Someone using the same slogan US NRA (gun lobby group) in a serious debate? Hilarious, haven’t has as good a laugh as when John Oliver interviewed NRA spokesman Philip Van Cleave (worth watching for a concerned laugh over how illogical and misinformed someone can be), this blog has about the same attributes.
Anonymous (again why not post under your name so we have transparency in regard to your view?). You are CORRECT [“any adviser can make the same choice, regardless of how they are paid. What stops an adviser from doing business with a client (by any means of payment) if they can’t add value? It is professionalism, ethics, and overriding all of that in recent years, BID. The method of payment has nothing to do with it.”] My comment was in regard to yours referring to all remuneration forms being conflicted which is not the case. Is the fee I pay to my doctor or accountant conflicted because I pay them a defined fee to deliver a defined service ?
Again you are CORRECT [“The IFAAA doesn’t have a monopoly on good behaviour”] no one from the IFAAA said this…but what we have said is that REMOVING the CONFLICT goes a long way to improving the quality of Advice and reduces the potential for self interest to get in the way of good advice. Again GREAT ADVICE comes from advisers who receive conflicted remuneration…but it as also been shown that HORRIBLE advice has also come from advisers which operate under a CONFLICTED REMUNERATION model If you want to take advantage (in your words) of the “commercial marketing advantage ” that you refer to, then remove the conflicts and join the IFAAA. If NOT accept that the LAW should not be changed to simply allow for firms that do not meet the independence definition under the corps act to suddenly become independent in NAME ONLY. Are there any other laws you want changed to also suit your view. If a firm such as ours and other IFAAA members (and we would suggest other non-IFAAA members) can operate within the corps act to be called INDEPENDENT so can any firm…nothing is stopping you and others from changing the way you are remunerated IF YOU want to be called INDEPENDENT. Again best of luck in the coming year.
Fergus, your comments are embarrassingly naive. Yes all forms of remuneration are conflicted, even your Dr fees (a simple analogy that you may understand; why don’t they bulk bill rather than charge? And if bulk billing, why not provide a free service or travel to third world countries and donate medical skills?). These are all conflicts of interest using your scenario, but none have a negative connotation, like you and our dear blogger Dan, try to indicate.
Conflict does not mean ‘detrimental’; it means two diverse or [i]opposite[/i] paths. Just like in legal terminology, a conflict of law means a legal disagreement in which a law court must decide whether a judgement should be made according to the laws of one country, state, etc., or another, doesn’t mean one is more correct or right than the other, but that one is more presiding in that situation.
If in a job interview, a member of the panel declares, “I need to declare a conflict of interest here – one of the candidates for the job is a friend”, does the room go silent in horror and the person not interviewed; does it mean the person declaring that has to be excluded, even if they are the most experienced and necessary person in the interview? Of course not, what poppycock to act as if that is the case.
A guffaw actually erupted at your comment somehow trying to pin “HORRIBLE advice” in this discussion on commissions, as if F4S was somehow free of this. Australia’s worst case of “HORRIBLE advice” (hate when weak logicians use capitals to try to make a point, as if that somehow improves their argument), involved a firm who charged fees not commissions on investments, Storm Financial.
And if the IFAAA or their members think that they are ‘conflict free’ because they charge fees only, then not only are they not in keeping with the ASIC requirements, but their train of thought is dreadfully derailed.
Fergus, horrible advice has come from some firms starting with “S”. Should all firms starting with “S” be banned? What about banning all firms with a greenish colour in their logo? Correlation is not the same as cause. You constantly harp on about Storm, and I share your disappointment and outrage over what happened. But a misleading and counterproductive definition of “independent” is not the solution and never was. An advice firm could quite easily choose to meet the Corps Act definition of independence, and at the same time provide illegally inappropriate advice.
While the Corps Act definition of independence has nothing to do with inappropriate advice, financial planners do now have a very comprehensive solution to inappropriate advice in the form of BID. BID imposes a higher legal standard of conflict of interest avoidance on licensed financial advisers than the largely voluntary standards that apply to accountants and doctors.
The advice you get from your accountant or doctor is indeed conflicted. You are relying on them to manage their commercial conflicts of interest to recommend a solution that is appropriate for your needs. Telling you how much it will cost and giving you the choice is just fee disclosure, it is not necessarily appropriate advice. This is actually a significant conflict that surgeons face all the time. Do they recommend an operation and take the large amounts of money on offer, even though the operation may not be the best option for the client? Ethical surgeons routinely say no to clients who they don’t think will benefit from their surgery, even when the client is quite willing to pay. Less ethical ones just perform the operation and take the money. It is also a conflict of interest that accountants face all the time in deciding whether to recommend a SMSF. Unfortunately a huge number of accountants fail that voluntary ethical test and recommend SMSFs which are not in their clients’ best interest, so they can generate more fees. Nearly all those accountants would meet the Corps Act definition of independent.
At the end of the day guns are dangerous – in the hands of the wrong people ie bad guys. Same applies to commissions . Lots and lots of bad guys in this industry who have been found out too often .
In regard to Life Insurance Gav is correct “People NEED life insurance”, but they will also if it is properly explained to them pay a fee to obtain the advice and help to implement it. Anonymous (why post under Anonymous?) sees a commission and salary as one on the same they are not. A salary is a dollar figure that you agree to pay your employees whereas a commission is a % based sales remuneration that rewards the adviser / agent who sells insurance at a higher premium or establishes a larger portfolio (vs perhaps repayment of a mortgage or some other also valid investment). Morgan Jones appears to suggest that the IFAAA are killing the industry…NO it is conflicted remuneration and a sales culture (the banks as well as other non-bank owned firms, STORM being one such example) that has tainted the industry and delayed the industry becoming a PROFESSION. RE: all remuneration being a so called conflict (“Yes, commissions are conflicted. But so is fee for service and every other form of remuneration”), Anonymous you are incorrect. If we do not feel that a client will get sufficient value from our services we choose not to even meet them…we are hence not trying to sell them our services simply to make a BUCK. While Daniel and the IFAAA have a different view to the majority it does not make the view incorrect. Unfortunately too many great advisers who do operate using a conflicted remuneration model have been tainted by others who have ripped off clients and caused clients considerable financial loss and pain. Daniel and the IFAAA are suggesting that these great advisers can move to a non-conflicted remuneration model and continue to provide great advice to their clients without there being a conflict. All the best for 2017.
Fergus you state “If we do not feel that a client will get sufficient value from our services we choose not to even meet them…”
But any adviser can make the same choice, regardless of how they are paid. What stops an adviser from doing business with a client (by any means of payment) if they can’t add value? It is professionalism, ethics, and overriding all of that in recent years, BID. The method of payment has nothing to do with it.
The IFAAA doesn’t have a monopoly on good behaviour. They just have a commercial marketing advantage due to the hopelessly out of date Corps Act. I understand that you and your IFAAA friends want to protect that, but it is time the Corps Act definition of independence was updated to be relevant and helpful to consumers.
TEAM before you start about commissions please 1 TELL how many claims you have helped in then millions of dollars2 your in force insurance book then we know if are on the playing field
Up to about $2.5m now Joe with several ongoing claims that pump out about $25K per month…
[quote=Anonymous]An as far as a “commission being an incentive” is concerned, please have a chat to my employees about incentives and conflict. They only come to work because I incentivise them to do so. Except in their case its called a salary… which they get whether they turn up fully focused or not…[/quote] That’s exactly what I thought when I was reading this article. Incentives to get ahead are everywhere not just as life insurance commissions.
Still don’t get it Warren?
(Damn, I’d hoped I’d be able to pull back from these articles for longer than this this new year but I’ve already found myself fuming about another opinion piece on ‘commissions vs fee for service’ so here’s goes for yet another year…)
For Daniel to state” [i]”We’ll incentivise salespeople by giving a chunk of our profit to them for each one they sell – the more they sell, the more they make, and the more we make.”
A commission is, by definition, an incentive.
To a salesperson this is business as usual, however, to an impartial adviser the existence of an incentive creates a conflict of interest.
Why? Because it’s an incentive.”[/i][b][/b] is a staggering statement in my opinion.
Every person that wants to get ahead in life (as opposed to waiting for government handouts) will realise that do that, you need to work harder or longer – for more pay! Isn’t that also an incentive? Some people even have bosses that state – work hard or get fired! That’s also an incentive for someone struggling from month to month.
Incentives (to get ahead or get more) are what makes the world go around so how is a Risk Insurance Adviser selling more insurance to their existing or to any new clients to increase their revenue any different to all the corporate companies out there (including life insurance companies, banks and Superfunds) that incentivise their salespeople and management with annual bonuses, overseas trips and other perks? Incentives exist in almost every job, I would have thought.
Commission for life insurance works for the very reasons ‘Gav’ stated above – and because life insurance is an intangible product that people don’t instinctively want to pay for with further costs for the advice the adviser gave – although I do appreciate there is a SMALL percentage of people who will. The fact is, the vast majority won’t and that’s the market us risk insurance advisers are trying to assist.
The way I see it, there are too many people focusing on the minority of issues in this industry and not the majority and that’s that Australia is still (allegedly) 70% under insured – which is a massive gap.
Commission is only conflicted if you’re focusing on you anyway in my opinion. I focus solely on my clients needs and let the rest take care of itself when it comes to payment for the work I do so sorry Daniel, I don’t buy your argument one bit.
Warren. Is there any comparison to sales commissions and an employee working harder or longer? The sooner education standards are raised the better.
peter, broaden the scope of your vision son. The tunnel you are looking through is affecting your ability to rationalise and be unbiased. Never a good thing. To not be able to see any comaprison here shows a narrowness of thought, surely you are better than that?
Well said – I too am annoyed that people cannot see that commission is not a dirty word nor is sales for that matter. All done properly and in a compliant manner is fine. Commissions will make you work hard and smarter – you will stop seeing time wasters and focus on clients that need your services, you will also potentially work longer as you know the rewards are there – in regards to sales – again, done properly and not a ‘product flog’ sales people are able to uncover clients needs and are able to answer and objections or concerns that a client has – all in their best interests.
I too am sick and tired of hearing about how bad it is that staff are being taught sales processes and that paying staff commissions is bad – if we made sure that anyone that does not do the right thing by a client is banned – no second chance – we might be able to get away from all the crap that I keep reading from do gooders who have never been in the real world!
Does anyone detect any conflict of interest in “Daniel Brammall as the president of the Independent Financial Advisers Association of Australia (IFAAA) and director of Brocktons Independent Advisory in the ACT” writing an article pushing the particular style of financial advising that provides his income?
Going forward it is clear that all articles on independent financial advice should only be written by authors who are not independent advisers, as the latter are severely compromised in this regard.
It is just exasperating that financial advisers of all sorts continue to try to promote their business no matter how they are paid. Anyone would think we are trying to make money as well as provide service to our clients. It is a shocking situation.
Love your work Mervin. I wish our industry could get rid of these “holier than thou white knight do-gooders” and work collectively, for the common goal and being the best we can be, looking after the best interests of their clients and running a sustainable and profitable business. Mind you, as long as there are product manufacturers, Industry Super Funds and an over-regulated society, by an incompetent ASIC, we can only expect more of the same. It also doesn’t help that we have totally out of touch associations, that apparently represent the interests of professional planners. Seriously, how can they, they are mainly funded by product manufacturers.
I sadly, find our entire industry, a dysfunctional rabble of a cottage industry, yet we do so much good for our clients.
Happy New Year to all. My new Years resolution, is to stop reading this garbage and try and spend more time helping clients, between compliance and regulation!
Very well said, sadly though by bowing out, the vocal minority like Dan the man get more of a voice, and therefore more influence. I would urge you to keep voicing an opinion for the collective good as you state but also to ensure you are able to aim to defray any of these dictatorial minded hypocrites from affecting your own business sooner… When you read nonsense like this ‘article’, rather than get upset, perhaps take a breath and treat it like you would an extremely slow or mentally affected child – no reason to get upset if they aren’t even able to see their inability to grasp their errors or the bigger picture.
One of the reasons our associations have been taken over by those out of touch is that the standard adviser has bowed out of conversations or making their voices heard for far too long.
The article is actually well written and like similar ones must be a pretty close representation of what actually happens for it gets such vitriol in the comments.
Just to pick up on one comment a salary is not an incentive it’s a legislated requirement.
I’m not 100% against commissions because at the lower end of need can be the only way a person can pay, or is willing to pay, for advice. But when you look at the massive, yes massive, amounts of commission that are sometimes paid for what is, more often than not ( be honest with yourself ), templated advice its very hard to justify. It is not difficult to show the cut-off point where it defies BID to continue to charge a client by commission.
And as for Best Interest Duty protecting a client as has been suggested the reality is that it does not always do that. Why else do some of the bigger licensees, and may be the smaller ones too, have compliance departments finding thin templated “excuses” to justify switches? Some I have seen may technically just, and I do mean just, address BID would fail a moral audit under a one size fits all lens.
Aha! So not only will our compliance be more robust, but all conflict of interest will cease, along with shonky self-interested operators who make switches or changes simply to benefit their bottom line, simply if we move to F4S? Wow, why didn’t we realise this earlier?!
In the words of the late great Walter Matthau, “I must come visit you in LaLa Land sometime”.
“…a salary is not an incentive…” Ha! Classic. Straight to the pool room with that quote.
Yes, commissions are conflicted. But so is fee for service and every other form of remuneration. They all involve an inherent conflict around the potential of providing a product/service that may not be the best option for the client, in order to get a higher amount of remuneration for the adviser. How many of the hundreds of thousands of SMSFs out there were set up unnecessarily, on the advice of accountants keen to earn extra SMSF administration fees?
The issue is not whether a conflict exists. It does, and is unavoidable. The issue is how the conflict is managed. Licensed financial planners (unlike accountants) now have a statutory Best Interests Duty to manage those conflicts. All the examples regularly trotted out to highlight the evils of commissions predate the Best Interests Duty.
On the other hand, commissions do provide clients with an alternative method of advice payment, which for many may be more affordable or cashflow effective than fee based alternatives. It could actually be argued that advisers who flatly refuse to consider the benefits of cashflow effective advice payment by commissions, are not acting in their clients’ Best Interests.
To purposely misquote Shirley Strachan of Skyhooks fame; “Conflict – is not a dirty word”.
Well said Anonymous, your reasoning is far sounder than the glib line in the ‘article’ (flagrant opinion pushing) re. guns. The blog is nothing short of embarrassingly short sighted, and extremely unprofessional. One wonders at how much real experience he has in the higher levels of broader scope regulatory analysis, real AFSL risk management mapping, or simply comprehending the real issues around the oft maligned word ‘conflict’. Like it or not, ‘conflict’ exists in literally every decision we make, and especially those regarding any form of business or remuneration. As you correctly point out, it is how we risk manage that conflict, the repercussions and choices provided to all parties, and how transparent the ‘conflict’ or nature of the dealings are, not the fact that a ‘conflict’ exists.
Time IFA got onto real reporting and less blatant sensationalism by posting silly blog opinions simply to garner reactions, thereby ‘proving’ readership numbers which in turn helps sell advertising space – conflicted much?
This article is a marvelous misdirect. Commissions don’t kill the industry, advisers who think there way is the only way kill the industry.
An as far as a “commission being an incentive” is concerned, please have a chat to my employees about incentives and conflict. They only come to work because I incentivise them to do so. Except in their case its called a salary… which they get whether they turn up fully focused or not…
People NEED life insurance. Of that there is little doubt. Some even WANT Life Insurance. However FEW WANT to pay for the advice to get it because they do not understand that not all premiums are the same and that not all tax treatments are the same. This is where the true conflict lies. People will not pay for something they do not understand. The insurers understand this and hence THEY pay on behalf of the client so that the client will hopefully get a product that will meet their needs and provide the value. To expect that this will work effectively in any other way is pure conjecture and has failed miserably in the UK. We need to get over this high-horse mentality as it is NOT in the public’s best interest to have to rely on social security when the underinsurance problems come home to roost.
I marvel at these purists who lift on fresh air and write maybe one or two clients a month and hopefully convince them that they do not live in la la land.
What does this guy think that the Life insurers are going to do when the cashflows crash? And they will.
No one is going to write life risk insurance and not get paid.
Another case of stupidity and its time this guy went and worked for a bank so he can understand what independence is really all about.
Mervin, please you can’t just keep posting online. all good advisers are yearning for representation and sick to death of being demeaned and having their mental well being and human rights violated. will you please lead us into sensible discourse please for the love of God. please say you will
Great post Daniel, love your work!
Great post Ben, I am glad we have people like you in our industry, lets hope your business is sustainable and your around for a long time. Love ya work Ben!