The idea that commissions are not conflicted is akin to the argument that guns don’t kill people.
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).
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.
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