ifa reported last year that ASIC took NSG Services Pty Ltd (formerly National Sterling Group Pty Ltd) to court for failing to take reasonable steps to ensure that its advisers complied with the best interests obligation when providing advice to clients.
Yesterday it was announced that the Federal Court ruled in ASIC’s favour.
The regulator believes NSG’s remuneration model had a role to play in the breaches, an ASIC spokesperson told ifa.
The spokesperson also confirmed some clients lost money as a result.
“The commission-based salary structures created an incentive for representatives to emphasise sales imperatives over compliance requirements and a culture in which the best interests and appropriate advice duties were more likely to be overlooked,” the spokesperson said.
“In some instances, the advice resulted in the client being double insured. Some advice resulted in the client’s superannuation being depleted. In many instances, the advice caused some financial loss to the client.
“In no instance was the client’s position improved.”
ASIC could not confirm whether NSG will offer compensation, as this was not sought as part of the relief in ASIC’s proceeding.
The Federal Court’s finding is the first of its kind, the regulator said.
According to a statement yesterday, NSG had a “commission only” remuneration model, which meant that representatives would only be compensated by way of commission for sales of life insurance products and superannuation rollovers.
NSG was taken to court over financial advice provided by NSG advisers on eight specific occasions between July 2013 and August 2015.
On these occasions, clients were sold insurance and/or advised to rollover superannuation accounts that committed them to costly, unsuitable and unnecessary financial arrangements.
ASIC has sought orders that NSG pay pecuniary penalties in relation to the declarations made. A date for the hearing on penalty will be fixed by the court.
Poor advice is not caused by a fee structure. It is caused by people who aren’t acting in the best interests of their clients. This is a bad business model, not just for the clients, but also for the business, as trust and reputation is everything in what we do.
I don’t care how I get paid, I charge fees, or a combination of fees and commission. But I will charge in the way that covers my costs and provides a sensible, ethical level of profit, sometimes this is fee only, sometimes both. My clients get value for money and quality advice regardless.
Of course a commission structure “can” cause a conflict, but only in people who don’t get the fact that working FOR their clients will give them satisfaction, and a good business.
Commissions and conflicts are everywhere in most industries, it doesn’t make everyone ignore the law, and rip off their customers.
In the case in this article, “advisers” were working only for themselves, and were breaching the law by not providing the correct documents, or the correct advice. The fee structure wouldn’t have affected the fact they are illegal con-men.
Well said Melinda, I completely agree that if you put your client interest first, create the relationship, provide the advice you will be profitable. I sincerely believe that the client buys “you”, it has been well documented in a number of studies that this is the fact.
I charge a mix of fee for service and commission, and have NEVER had a problem with this. I think that the “risk” advisers who may have a problem with a fee for service, undeniably a harder transaction to convince the client of, may well have a lack of confidence in their own ability of how to structure the importance of the advice to the client.
If only there were a way to design your fees so that the business remunerates financial planners based on the quality of their advice and doesn’t attract “illegal con-men” to work in the business :wink::wink::wink:
A question for you all.
When you go to your accountant or solicitor, what do you pay them for? Their knowledge, their advice and their time! Some might cheap, some might be expensive, but none of them make their money by selling anything other than themselves. If you want to call yourself a Financial Adviser, consider what you get paid for, selling products, or selling your services?
There might be socio-economic and public policy reasons to retain commissions that act to reduce the upfront costs to consumers, and hence improve access to advice services, but if all you get paid is commissions, and that client comes in that just needs advice, not a product, what are you going to do?
In answer to your last question Max that depends. You might give them advice and see it nothing more as a marketing expense. The hope that what goes around comes around and through good advice comes further referrals and more work. Working in a regional area you can rip someone off about once and then you’re history and have to pack up and move town. Maybe in a large city you can get away with it. Perhaps if you’re working for bank and the sales manager says you’re behind on your target, and you’ve just quit your job to move, you wife’s pregnant with twins, then I guess we all now what might happen to you in that situation. In that case it’s the culture of management in those banks not the adviser. Perhaps you should rephase your question and say if commissions were the only charging method would you change your advice. I charge fee’s myself but I don’t believe one’s remuneration structure determines one’s ethics.
Commissions only exist for insurance…so I can only assume you are asking what a Insurance Only specialist would do? They would likely inform the client that in order to provide them with personal advice there would be a fee to be charged for the preparation of the advice document. They wouldnt know if there was a need/or not for product advice until after they had gathered all there needs/objectives and current policies and researched. They either have a need for insurance or not. If they did then they either have the right level of covers in place or they dont. Even if they do have the right level of covers (product) they would need to provide alternatives (strategy) as well as products (recommending to stay with a product is a product rec). This whole process will likely take around 6-10 hours (if done thoroughly) of course much less if just glossed over. If charging on a time basis I guess they would need to charge a fee of at least $1200 to break even or $2k to make a profit. They could either get this before they start work (good luck unless is for a well off client) or try to collect the fee after all of the work is done.
Max, if i go to an accountant i’m going for a product called a tax return, a BAS or an SMSF audit. They might throw in some ‘advice’ around that product, but if i didnt need to do either of the above I wouldnt be going to see one. Same with lawyers. I’m going to them for a product called property conveyance, business purchase, family law, etc.
All advisers now need to charge fees to a client if they want any product apart from insurance. So it already happens. The issue is that for most people, insurance premiums (sans comms) and an advice fee is going to be more expensive for the consumer than insurance premiums (with comms). If the alternative is that people decide they dont want to pay advice fees for insurance and just go with their cuddly, friendly industry super fund or a direct insurance product, watch this space for the significant increase in disappointed consumers who wont get paid out on their cover. The changes made by some industry super funds havent started to come home to roost….yet. Wait til people are looking to claim on their TPD cover and see that they get it in annual instalments and have to prove each year that they are still disabled. That’ll be interesting. But who will they be blaming? Financial Advisers i’m sure of it. Not the stupid policticians, not the trustees from Industry Super funds. Adele Ferguson will still somehow manage to relate it all to CBA Financial Planning, Jeff Morris, Comminsure, Storm Financial, IOOF and tree plantations.
No use whining or whinging here. What planners believe or feel in regards to this matter is irrelevant. the general public and the regulator believe that the industry has failed to self regulate and therefore commissions will be gone come next election, maybe sooner at this rate. That’s commission on insurance, commission on grandfathered income, gonski. FDS and opt in will be expanded. Of course again, No impact on the real villains, the dealer groups or fund managers. The decision and debate is out of our control. It’s a ticking time bomb. I really can’t see why we as advisers are not doing more at the big end of town to redirect the attention off the front line.
Jason, I hear what you’re saying. Please explain one thing though. You say grandfathered commissions will be gone too. I find this incomprehensible you say this. It has always been common knowledge they are protected by company and trading law under the contract we have with life companies. Please tell me if I am not in the loop with some change to this or some new legislation is in that over rides commercial law. I’m not trying to be argumentative – I would genuinely like to know if something has changed to endanger out grandfathered commissions. Please advise.
Sorry BH, my exaggeration. Agree, It would be very difficult to wind back grandfathered remuneration. Sorry to alarm you, i’m just over red tape and over pushing away ordinary Aussies that want, value and need advice but can’t pay for it because of over regulation and dealer groups compliance burdens that push up my cost and drives me out of business. I just think there’s a lot we should be doing at the big end of town, which includes large dealer groups both aligned and unaligned that’s needs fixing. At the moment it’s these groups that need cleaning up that are driving the train.
Thanks for the clarification Jason. Yes, I agree with your other comments too. Far too easy to feel overwhelmed these days isn’t it?! Very tempting, too tempting to throw our hands up and leave. I’ve been able to restrain myself so far and brought myself back from the brink a few times. As an older risk I am disgusted that there are moves to take me away from my client facing time, put me in a classroom, examine my knowledge on subject matter totally unrelated to helping clients with their insurance (it is all I do) and THEN CHARGE ME thousands for the insult. The place is run by academics who have never sat in front of a mum/dad type client at 7pm in their home to help them. unforgivable what the leadership of our industry has become – academics making irrelevant rules to justify their positions and clients and advisers are their puppets to pay for it all! Where’s the separate licence for riskies we are all screaming for? Does that make too much sense for these office-dwellers?! God forbid we do something that ios REALLY in the best interest of the client and give them a PROPERLY qualified risk adviser who has been examined by a RISK SPECIFIC exam. God what’s wrong with these clerical twats?!!
You have to be a bit careful what you wish for here as the regulator in the UK was told by the Government a few years ago to back off the negative views of commissions as the Life Insurance Industry was about to exit London due to the lack of sales and low profitability. It is heading that way in Australia.
Life insurance is not a commodity seller and so it has to be sold and to do the job properly you the person providing the advice has to be remunerated. Given the regulators fees are now going to be loaded on top of the cost structure in the Industry, then we will see how fee for service goes in that environment, adding a segment on the bill for the regulator fee!
So, ASIC believes that the commission model led to this outcome. Really. If that be the case, best we look at the car industry, the real estate industry, the mortgage industry, the phone industry, in fact ANY commission driven business. Commissions are simply the cost of doing business. Business pays for results instead of expensive employees whose cost over the years have risen to make businesses that use the conventional employee model expensive in price. Fools who seek to slam commissions as a method of doing business are driven by ideology and not common sense.
“The commission-based salary structures created an incentive for representatives to emphasise sales imperatives over compliance requirements and a culture in which the best interests and appropriate advice duties were more likely to be overlooked,”
Well of course it did! These ‘advisers’ were paid on a commission only basis. Don’t sell = don’t eat! I see this same crap everyday where I work – crummy base salaries with generous bonus schemes resulting in questionable decisions by the ‘top performing’ elite, anyone doing the job ethically being constantly pushed to achieve what the top performers are achieving, and a blind eye being turned where necessary. It disgusts me, and if I didn’t have a partner and young kids to support I’d be off like a rocket.
The lesson is move to a fee for service model. It is the only way to go. The days of big commissions belong to a by gone era. for those thinking a flat fee structure will deplete income- think again, it works and works well and there are plenty of examples to follow in this profession. Greed will always bring a practice down when the business is placed first. A good business run well will always prosper. This case reflects profit above all else and this is an example of ( again ) bastardising the industry.
As an accountant, the fee model does work for some clients though not all. When it comes to insurances, your comment is ideal for those who can afford the fee ON TOP of the insurance premium. With mortgages the size as they are now, with budgets tight in many a household, your comment is to perhaps forget many in favor of a few. This only creates and inflames the under insurance problem in this country. Commissions are a merely the cost of doing business. The consumer ought have the choice that suits them. The greed factor and practices such as this which we all condemn can be dealt with effectively. Close them down, fine them and where appropriate even consider jail. Obtaining financial advantage by deception needs be visited in terms of this industry if we are serious about cleaning this up. Many people have been ripped into with the fee model. Ask anyone who has been financially raped by a family lawyer or by a litigation lawyer going after a disability TPD payout.
Maybe in these instances, you might say a commission model would be a GOOD idea….
Greed and a total lack of ethics and integrity led to FOFA breaches, not a payment model.
[quote=Melinda Houghton]Greed and a total lack of ethics and integrity led to FOFA breaches, not a payment model. [/quote]
Don’t you see the connection between payment models and unethical behaviour? The payment model has a direct influence on the people who end up working in the business model and the kind of behavior you can expect.
Greedy and unethical people without sufficient oversight and who work on commissions can be expected to flog and churn. Even well-adjusted people whose remuneration depends substantially on commissions could be faced with circumstances that pit their own interests against those of the client’s. Some of those people will leave the business, and others will flog and churn.
Nobody should seriously claim that commissions are the only cause of bad behaviour – after all, greedy and unethical people without sufficient oversight who work on a per-hour or flat-fee basis can be expected to overcharge, deliver sub-standard outcomes, cut corners, etc. and this can have detrimental outcomes as well. However, the payment model is an important part of understanding how greedy and unethical people end up giving financial ‘advice’ for the reasons set out above.
Hear Grad – obviously you have never had the chance of experiencing facts. Check out the legal profession who financially rapes someone from a family law viewpoint or the TPD claimant
from a litigation viewpoint. Commissions on successful outcomes have been in play for a very long time. If you ever unfortnuately experience either a family law or TPD litigation, you will then cry out for a commission model…but hey until then….go with ideology. Most in business would argue that your world is not common sense….just ideology. Get real Grad
Alistair, I don’t think you read through Grad’s comment in full. Grad clearly states that “greedy and unethical people” are to blame, and that nobody should claim that commissions “are the only cause of bad behaviour”. But there’s also no denying that ‘incentives’ are often a driver of poor behaviour and therefore poor outcomes for clients. I am serious in my comment above when I say I see this in my own workplace – a base plus commission scenario. There are definitely advisers there who are behaving in a questionable way as a result of the outcome it creates for their hip pocket. You mention that ‘commissions are a cost of doing business’ and then go on to call employees ‘expensive’. It seems to me that you’d probably be the type to operate a commission only remuneration package. So let’s hope that you don’t end up with the kind of greedy and unethical people Grad refers to in your business, or you may be next in the IFA headlines.
I think I’ve addressed your concerns in my third paragraph, and I’ll refer you to the anonymous comment below mine as well.
It’s hard to for me to understand what causes people to ignore the extreme hardship caused by poor advice, and it’s harder still to do something about it. I’m just doing my best, like everyone else 🙂