What actually happened was something quite different, as witnessed in the royal commission. The banks and AMP set about gobbling up much of the industry, vertically integrating their operations and distributing products through their vast networks.
The race was on and selling financial services was as easy as falling off a log; trusted brands, branch networks, incentives, best of breed software, large scale support, careers and egos.
The larger organisations initially found attracting good talent fairly routine. This pool of experience was often taken from smaller organisations attracted by the ability of the larger players to pay higher salaries and provide tremendous benefits that small organisations couldn’t compete with.
The ‘arms’ race wasn’t limited to just the majors. Large accounting firms were getting in on the act, as were non-institutional dealer groups, all hell bent on creating scale with the view to a trade sale down the track. Many of these were supported financially by the vested interests at the top who had by this stage vertically integrated their operations and were agnostic as to who sold their products.
The wallpaper behind this activity was the notion of ‘advice’. Apparently we had emerged from the ‘middle ages’ where showy or even ‘shadowy’ salesmen had been responsible for the distribution of product, and we had moved into the era of the professional advisers. We knew this because the brands behind the advice were trusted names; they were already embedded in many other aspects of our lives.
The banks played on this despite the fact that recruitment of good advisers became increasingly difficult once the stocks of the smaller companies had been plundered. New advisers were rushed to the front line with neither experience nor intelligence.
There were two fundamental errors in this approach from both the government of the day looking for the headlines and the regulator suffering from Stockholm syndrome as attempted to regulate their captors:
- Firstly, moving from sales to advice assumed that primary motivation would be different and aligned more closely with clients interests but there was no merit test for advisers or channel management; and
- Secondly, the pretence of the advisory process provided the perfect cover for the institutions to push their own products without the full disclosure of their motivation; brand accounted for trust, advice accounted product deficiencies and regulator was spellbound.
The old sales system wasn’t broken. It relied on agents and representatives disclosing who they were representing and enabled the customer to make a value judgement as to whether they bought the product or service or whether they sought other opinions from other providers. If any part of the system needed renovating in was the products themselves, not the manner of the distribution.
In addition to this, it had opened the door already for a proper financial planning profession to emerge and possible converge with accountants. The two distribution methods should have existed side by side; the manufacturers beating their drums and selling their products and a professional sector providing independent advice, But sadly, the complexity of the financial sector was overblown in the minds of the legislators and this gave rise to the wholesale slaughter of the old and effective distribution system. The retail financial services sector is very vanilla at its core.
Everybody became an adviser. There were no standards to speak of that weren’t laughable to any educated person and the regulations didn’t impose boundaries that included tax and loans; everybody complied, provided advice and were able to ignore the two greatest elements of wealth creation and investment planning.
In short there was no integration, so is it any wonder that advisory process, hijacked as it was by dopey Mandarins and brain dead politicians, was compromised. It became clear during this passage of time that the advisory process hadn’t improved and so the feckless morons in Canberra needed a scapegoat – enter commission and conflicted remuneration. What a quaint way to lay the blame squarely at the feet of the advisory business.
Commission was now the great ‘bogeyman’, a double whammy for suppliers; commission was the root of all evil and removing it lowered costs.
The regulators flocked to sit at the table. FSR had had failed in its intention to professionalise the industry. Banks were raking it in, customer complaints were on the rise and independent advisers were being asphyxiated by the regulation.
Some in the advisory area were initially happy to join the chorus, not realising that they were being sucked into the vortex of conflicted remuneration and all the sins that could be associated with any practice that resembled commission being an acceptable form of revenue. This is yet to play its final movement as ‘grandfathered’ commission is the new target.
Fee for service would now save the sector. Removal of trails, standardisation of commission, clawbacks, you name it – business revenue was under siege and the independent sector failed to realise by just how much. FOFA was but the logical result of an irrational determination of the problems in the sector.
The heart of this issue though goes back to the failure to understand the commercial imperatives of those producing products and services and those acquiring them. Not only have we tethered a moral responsibility to the adviser to account for the total interests of the customer despite this being an impossible obligation, we have emasculated the ability of the customer to be part of the decision making by producing overly complex statements of advice, useless and misleading projected outcomes, weighty product disclosure statements and introduced annual budgetary changes to superannuation so planning for retirement is a financial lottery.
Not only is this impractical, it has created a fiction in the marketplace that ‘advice’ is reliable, independent and, worse, omniscient.
Today, we have literally thousands of ‘advisers’ limited in both commercial and social experiences, masquerading as advisers, taking the client’s best interests into account without any notion that these advisers have the social skill, the experience, knowledge or intelligence to discharge their duties in this way.
These ‘advisers’ should be simple subject matter experts (agents) selling their wares on behalf of the suppliers. On this basis there would be no confusion.
So, this is the hoax that has been played on the financial services sector. It has bled as a result. It is wearing the bandages of FOFA and other recent acts and amendments but the outcomes haven’t and won’t improve.
Commission driven selling is the high water mark for disclosure. It creates clarity, it creates choice, it encourages the customer to seek other opinions, but most importantly it divides the sector into component parts and creates the opportunity for the truly independent advisory professionals to emerge on their terms.
Retail financial products are simple in their nature. Selling investments and insurance should be no different to selling home loans or cars or anything else. Stock brokers have and are doing it still. Let the brands compete and do their best but allow the breathing space for impartial advice to co-exist rigorously; a profession will emerge because when you integrate financial products you then need advice. Until this issue is addressed it will remain smoke and mirrors.
Trail and up-front commissions are not the enemy. They are paid from the manufacturer, forms part of their marketing and business acquisition budget, does not increase the cost to the buyer, is fully disclosed to the customer, lowers fees to clients and underwrites a competitive marketplace from which we know all innovation is derived. The time for commission to make a comeback is now; the internet has never made the market more transparent.
I have just re read the article after a week where the RC is targeting Life Insurance. The issues are more complex than the headlines. Direct Life sales have always been a problem, but not one anyone (yes I looking at you Mr ASIC) ever gave any consideration to. Any Risk adviser worth his or her salt will tell you that coming across some direct insurance product when do a review of. New or exisiting client more often than not was easily replaced as it was usually dearer, of poorer quality and often mis sold.
All that said, the headline aact at the Hayne RC will focus on the really bad aspects of life sales (direct or advised) and tar all of us with the same brush. It is a bitter pill (for the hard core financial planners among us who believe that fees are the only way to go) to swallow where commissions are concerned. The simple fact is for the vast majority of people who “need” life insurance and good advice around the product, fees are not an option. They invariably have ISN super, are mortgaged and are often a 1.5 income family, with not a lot of extra fat in the budget for fees on top of life insirence premiums.
I would also suggest that a mandatory annual review in the majority of cases is redundant, anything up tom3-5 years is more likely to yield a more meaningful discussion around needs.
But as usual, the advice baby will get thrown out with the commission bath water in this messy week at the RC.
If commission is not a cost to the client why do life insurance companies discount premiums when the adviser reduces the level of commission?
Well done for putting it out there Scott. Everyone in the industry knows what has and is going on but few have spoken up.
Personally, I like to control the margins in a business. Coke provides a wholesale rate to Coles and Woolies and they work it out from there.
Was this not edited before it was published? Lots of errors.
You must be joking, Scott. How many examples have been uncovered of “advisers” selling clients unsuitable products motivated by upfront and trailing commissions? And how many more have not been uncovered? Need I mention timber schemes with 10-12% upfront, Storm Financial, advice to create non-viable SMSFs toenable access to schemes favourable to the adviser. Financial products are not simple, especially in their risk profiles and matching those to client, and not adviser, needs. Disclossure, even when provided, can never be an effective safeguard with the massive “asymmetry of information” between adviser and client, and the “moral hazard” borne by the client.
Scott has dressed this argument up a little too much… simply put a well disclosed commission shows very accurately the motivation for a sale coupled with “advice” for a client to see very clearly. In a commission world the client has tangible evidence and recourse if the advice was poor to point to.
“No commission” does not suddenly mean that all advice will be perfect and in the client’s BEST interest. As an industry it appears that we are contriving to build advice that is both faultless and blameless – how arrogant.
The lengths that we have gone to with absurd documentation, safe harbours, disclaimers and disclosures all aiming to distance advisers from their advice and protect licensees and manufacturers. All this will achieve is an environment where clients won’t trust advisers as they have no skin in the game – no recurrent revenue, no asset based fee, all care but no responsibility.
An adviser can recommend any old crap (the cheaper the better!), articulate best interest by putting words into the clients mouth through well documented file notes and an over-engineered SOA then charge a whacking great fee and the client hasn’t got a leg to stand on.
Sign me up!
The big winner from the removal of commissions are actually advisers. I still care for my clients and treat them like family whether I was charging a fee or getting a commission. However today I make more money and have less clients. I just say NO more often. There is no way in hell I’d go back to commissions.
You can’t bring back commissions with licensee’s still being owned by the banks and pretending to be something different.
Whilst this is quite an articulate article, it is written with a huge amount of arrogance that detracts from the points to be made.
Scott’s comments are likely too far reaching and complex for a casual read. He goes into great depth in some areas but in summary says what many of us agree with. Govt has allowed manufacturers of product to represent themselves as something they are not. Commission or any other fully disclosed fee is not the real issue.
The issue is that the investor should know what the adviser is being paid and by who so a value judgment can be made by the investor themselves as to potential conflict. Not some generic standard. Some investors will choose to pay a higher fee to obtain the perceived protection of a brand. That is rightly the investors the prerogative.
If the govt does nothing else it should require manufacturers of product to identify themselves fully including any aligned advice arm, when an investor chooses to invests in a product they have manufactured.
You don’t need to ban the practice of instos owning/controlling advice providers. You just need full disclosure up front where it can’t be missed. i.e. a CBA, AMP or NAB logo on the front page of the advice letter provided to the investor.
A very coherent and logical article. And I believe absolutely correct.
Anonymous Trolls should not be entitled to an opinion if they are too weak to put there names to there comments common guys and gals Grow a pair !!!!!
Their names , but yes, I agree
Very interesting article Scott. Talk about heresy. Well done!!! Not that I entirely agree. But I do think it’s worthwhile fully interrogating this line of thinking with an open mind.
IFA – Why dont you upload viable comments ?
IFA, you put this forward as a genuine opinion piece? Alex has now left and you are going down hill very fast.
You forget to mention some of commissions ‘siblings’ such as high up-fronts, contribution fees, exit fees, agent ‘lock-in’ commissions, or that commission depends on volume of product, not nature/complexity of advice. Or commissions ‘cousin’ – sales training.
This article is just wrong, wrong, wrong.