Why I hate commissions
How can we accept commissions that are made for sales industries when we want to become a profession?
If Einstein were here today, I think he would say we are all no longer sane.
This week John Trowbridge, the independent chairman of the Life Insurance and Advice Working Group, released a report that sent the financial planning world into a storm.
It is actually more like a hurricane, with everyone battening down, protecting their businesses and speaking with fear in their eyes.
I have read many comments by other planners, industry professionals, association members, insurance providers and the general advice community with a sense of pure disappointment.
Very few really get the bigger problem, it seems: all I see are people protecting their self-interest, not offering any decent solutions and in fact making the situation even more evident – that change needs to happen.
I have had numerous discussions over the past few years where I have upset other planners because I am so passionate about conflict-free advice. I hate commissions and I hate conflicts.
A commission is something that is paid to a seller for selling something. The more they sell of something, the bigger the commission they get. Therefore, if I am paid a commission I am incentivised financially to sell as much as I can and as often as I can.
If you ask me; commissions are solely linked to a sales industry.
Apparently the financial advice industry wants to become a trusted profession and to no longer be a sales industry. It’s something I hear every day, from everyone.
Before we go further, my first question is how can we accept commissions that are made for sales industries when we want to become a profession that is paid a fair fee based on value, expertise, risk and administration?
I want to leave that part of my argument there. Plenty of planners will be saying BUT "we can because I am ethical and I will only recommend to my clients what is in their best interests. It does not affect my advice."
I will not list the past 20 years of controversies for the financial industry. I’m sure we all do not want to hear about forestry schemes, double-gearing Storms, CBA, Macquarie, NAB. It is clearly evident those commissions had a huge part in all of these controversies and, if the situation is not changed, will continue to do so.
Every person in Australia knows we have a huge underinsurance problem. The reason? Because 95% of Australians are underinsured. I will not bore you with stats, but the biggest reasons are cost, trust in planners, complexity of the advice and general “she’ll be right” culture.
I will back this up with ASIC's view, stating that 3 per cent of insurance advice is good. Not my word – ASIC’s. So we have a problem: the advice is poor, conflicted and we do not have enough of it.
So let's all be clear that commissions create conflict. A commission creates an ethical issue and a decision for the adviser: “Do I make the recommendation solely based on the client’s best interest, or do I help them to a ‘certain extent’ while potentially structuring things to suit me?’."
Without becoming a whistleblower, I have seen and know of advisers who over-recommending cover, not choosing the most cost-efficient insurer because they are licensed through a certain organisation or cannot be bothered researching the market.
They are replacing a current policy to get paid a commission and some are sitting on huge ongoing commissions for 15 years and doing nothing for it.
Another huge issue I hate is that advisers decide how they want it to be paid. If they set up a $5,000 a year insurance policy they can decide on how much they want upfront and how much. ongoing. Do I want $6,500 upfront (yum) & $500 a year; $4,500 upfront (Sounds good) & $1,000 a year, or just $1,500 every year?
This also gives an incentive to advisers to write on higher upfront commission initially and get it again in a few years at another insurer – churning, they call it.
I am not going to hammer this home any more but the commission creates all of these conflicts and problems.
What has annoyed me further is that a lot of the industry is bagging out the report and how silly the recommendations are without any other ideas on what could help to solve this problem.
I have not had the time to read the report and in reality I am not worried because I charge a fixed fee for my insurance advice.
It was my decision to do this because I believe it is better for the client.
It is against the grain and it is hard. But I still choose to do it this way because it is better for the client, I believe in transparency and I hate conflicts. I would prefer to not have any at all and recommend what i think is best without it affecting me.
I know there are other ways.
Let's be clear: if no one believed there were better ways to do things then present we would all be getting to work on a horse and starting a fire every night. We look at better ways, we improve, we develop and we evolve.
The industry must do this, too.
Christopher Bates is a director and independent financial planner at Canopy Private
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