Speaking to advisers at a workshop in Sydney last week, risk advice specialist and Chris Unwin Training and Consulting Services director Chris Unwin explained the Trowbridge Report has put the wheels in motion for a change in remuneration structures that could see the industry eventually move towards fee for service.
However, Mr Unwin said he believes it is “actually more ethical” to get paid a commission than a fee for advice.
“As a commission-only operator, I only get paid if business gets done,” Mr Unwin said. “So therefore, presumably for business to get done I have to be giving reasonably good quality advice for [clients] to take it.”
“However, if I am simply charging a fee for giving advice, whether they take it or not, then it doesn’t matter about the quality of advice, does it, because I am going to get paid anyway.”
Mr Unwin also argued it “doesn’t really matter” whether an adviser calls what they earn a fee or commission; what matters is whether the client “perceives they are getting value”.
“I believe most of the problems around value and around fee for service that advisers have in our industry are in their head not in the client’s head,” he said.
“Clients are quite used to paying a reasonable amount of money for quality service and quality advice.
“If you don’t perceive the value you are offering and think you are being overpaid, then you have a problem. So you need to be quite clear what the value you actually represent to your clients is,” Mr Unwin said.
Ethics is about what you do, not how you get paid. Actions can be moral or amoral, regardless of the mechanism of compensation.
Ok.. this is way to long.. thanks to those that suffer through it..
What Chris is talking about it virtue ethics or how an individual reacts to and interacts with their principles to deliver social good.
The problem hasn’t been with the virtuous individuals but with the ethical framework advisers and the advice business operates in, also referred to as a teleological ethical framework the “consequential model”. – have I lost you yet? :-).
Basically, we have good people in a bad model.
How we are remunerated is fundamental to how we behave. There are numerous studies and a lot of research that show the majority of human behavior is simply a reflection of your environment. If I’m paid by the amount of insurance I sell.. guess what.. I’ll sell more insurance. You can argue that no claimant has had to much insurance at claim time but it doesn’t forgive the acceptance of poor standards in our industry.
We’ve got a long way to go on this front and remuneration is close to the heart of the matter.
The suggestion that an adviser charging a fee doesn’t need to worry about the quality of advice needs to be thought through; the quality of advice is never tested as harshly as it is when the client must pay for it from their own pocket.
If we invert this assertion, consider this: Does the payment of commission increase the quality of advice?
I’m not sure it does. It does mean that the solution presented will be insurance and as much of it as possible but it says nothing about how the cover will be owned, structured or selected.
So the question is: do commission based advisers ever suggest clients who are older reduce their cover or do they react to a client complaint about price?
I’m sure many do, but if their pay is linked to keeping that policy as long as possible you’d have to forgive them for leaving it to go for as long as possible.
Do they give due consideration to the long term financial impact of using superannuation to fund insurance with out adequately compensating with contributions? Or do they just scope it out and use rollovers to fund more cover?
Legally there is nothing wrong here.. it’s legitimate to scope advice according to client instructions. Will that help the next waive of advice complaints when people become aware about the fact that they now have no superannuation?
It’s not that good people don’t do amazing things for their clients, we know that happens and I personally think that amazing work is done by the majority BUT thinking strategically; if an insurer determines how much you are paid for your work, then they have a huge influence on the way you work work and what you do.
If you want to be influenced solely by your clients needs the client needs to pay for their work. If you like those strings attached and the convoluted, unproductive and complex way we work then vote for the current paradigm.
I’d like to get to the point where there are no strings on me.
Roger, I have never proclaimed to be an expert on risk. I believe in fee for service for all aspects of financial planning, and now operate on a fee for service basis for risk, as well as general insurance, as well as investment and super. We need to aspire to where the regulators want us to be, to ensure we are ahead of the pack not being chased up the hill and being required to change our business models every few years – get ahead of the pack and regulation won’t bother you..
We do not assess the value of a particular profession by the advice one gets from one firm – there are good and bad in every profession. The best system is one where professional behaviour, professional advice is best provided and that is by way of paying for advice, not by hourly rate by the way. I do not and have never supported the hourly rate system, but commission for the sale of a product is no way for professionals to be remunerated.
Peter, on the other hand you could compare the current remuneration structure to how the legal profession are paid… Lawyers charge an hourly rate, have no incentive for a quick resolution of a matter, invariably the fees end up costing more AND there is no guarantee of a result.
So tell me, what is better for the general public, an adviser who will only get paid if he engages with a client and can place their insurance requirements or a lawyer who gets paid irrespective of whether the client achieves a positive outcome?
I can’t quite agree with Peter as some of the advice i have paid for has not been to the level required. I am talking now about Accounting and Legal, and I assume Peter is talking about “All” professional services not just FP.
I do agree with Roger in that a pure Insurance firm will not, or will have difficulty, surviving by the provision of pure Risk advice in a FFS environment. The only positive comments around this model seems to come from Advisers who mix the FP advice with the insurance and charge a fee for the “bundled advice”.
Sorry Peter I don’t understand. How could you be critical of this article if “you say” “it will result in the industry being regulated to a greater extent than we would like”. I thought you were in favour of fee for service which is what the regulator is moving towards. You operate a Financial Planning business where 54 people on your LinkedIn page acknowledge your “Top Skills” as Financial Services compared to 22 people who acknowledge your professionalism in Risk Insurance. I suppose that one could conclude from this that your Risk Advice is secondary to your Financial Planning and the reason you work on a FFS basis. It’s about time that “part time” Risk Advisers stay out of this issue, as it only those who devote their entire business model to Risk Insurances that are going to be affected by the proposed Trowbridge recommendations.
I for one know that fee for service DOES NOT WORK FOR RISK ADVICE!
What a ridiculous argument! I’m with Peter.
Well said Peter
Chris, I am sorry but that is seriously flawed logic. It always matters about the quality of advice irrespective of the payment mechanism. In fact you have a legislated duty to provide quality advice under FOFA. It’s called the 7 steps to safe harbour and the best interest duty provisions. I honestly can’t believe you said that.
This article is an example of the attitude that will result in the industry being regulated to a greater extent than we would like. Commissions have no place in a professional environment – you can sell saucepans on commission, you pay for quality advice.