Debates over product commissions still rage because FOFA presented the wrong solution to the wrong problem.
This week we’ve seen a robust exchange as the issue of commissions once again rears its controversial head. This debate – and both camps – will always have a voice at ifa, as a helpful barometer of sentiment in the non-aligned community and a chance to challenge and persuade others about the pros and cons of various remuneration models.
On the one hand, Synchron director Don Trapnell made bold comments that life insurance commissions are entirely compatible with professional service delivery. In response, self-licensed adviser Justin Brand, an IFAAA member and advocate for Corporations Act independence, retorted that true professionalism precludes the salesmanship implicit in product commissions.
Now, I’m not going to offer an opinion in this particular fray, believing the conclusion of Brett Walker at SMART Compliance – that clients should ultimately vote with their feet when it comes to how their adviser is remunerated – to be an eminently sensible one.
Arguably, the more pertinent question is not which of these models is the more professional, but rather, why we are still having this discussion several years after FOFA became law of the land.
The obvious answer is that, with the ongoing to and fro regarding the Life Insurance Framework, the question has simply been topical. In addition, ASIC recently put the fear of God into many by indicating they may once again look at asset-based fees.
But on a deeper level, perhaps we are still having this roundabout conversation because FOFA was fundamentally misguided – because the legislation sought to address the wrong problem.
A product commission by itself, as a form of remuneration, is not conflicted. It is only conflicted when it is becomes an incentive that influences the professional and unbiased service the consumer believes they are getting.
To adopt that well-worn car spruiker analogy – the car salesman that takes a commission on Ferraris is only crooked if he tells the prospective buyer he is an impartial consultant on luxury cars.
This was the status quo in much of the financial advice industry prior to the reforms, but the remuneration itself was far less problematic than the lack of disclosure underlying that contractual relationship.
To be blunt: commissions are not to blame for the industry’s woes; lying is.
And yet, when government and regulator took it upon itself to intervene – something the advice community has now become all too accustomed to – they sought not to enhance disclosure or crack down on deception, but to outlaw an entire business model.
Powerful interests are now considering a similar kneejerk reaction to problems in the life insurance space.
Regardless of whether a fee-for-service model is inherently superior to commissions (and there is plenty of evidence now suggesting that the former can be viable and lucrative), all FOFA ultimately did is price a certain cross-section of Australian society out of the advice process entirely and take away the competitive advantage of the innovators that had already invested in a “more professional” model.
The same outcome would occur if life insurance commissions were to be banned, as it did in the United Kingdom, causing the fools in Westminster to about-turn.
This is what happens when politicians and bureaucrats – who are motivated primarily by political PR aims – try to solve problems at the surface instead of at the root, as they so often do.
Splitting the industry into two categories – financial product agents and professional financial advisers for example – would have been a much better outcome to banning the former outright. This would have allowed lower-balance consumers to continue accessing products they need and it would have granted the more high-end professional adviser the marketing kudos they have earned.
Meanwhile, we could have focused on the true elephants in the room – the hidden ownership structures and subtle incentives that still exist within model portfolios, licensee control of technology choice and BOLR payments to mention a few.
But that would have been very inconvenient for powerful interests that wanted to keep the “financial planning profession” whole, like the owners of licensees and the professional associations.
It is too late to change the past, but not too late to change the future.
The lesson should be that consumers don’t need to be protected from business models or from the right to make a decision – they need to be protected from systemic lies.
Otherwise we will continue to suffer under misguided and devious solutions from the crooks in Canberra and their mates in bank and super fund boardrooms – and continue to have the same conversations again and again.
Aleks Vickovich is the managing editor at ifa
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