There are those who believe the existence of commissions categorises advisers as nothing more than salespeople and prevents us from being recognised as a profession. Then there are those that believe commissions are an essential component to prevent a worsening of Australia’s underinsurance problem and represent fair pay for fair work.
However, those that seem to support fee for service as the only way forward seem to hold their view zealously. Some go so far as to say that ethics and commissions cannot co-exist and that the very existence of commissions creates a conflict of interest.
Conflicts of interest occur in almost every decision in our waking lives. Personally, my biggest conflict of interest is how much time I let my children watch TV just so I can have 5 minutes more peace and quiet.
But when it comes to my clients, when somebody walks through my door the process is always the same: understand what it is they need and want, educating them, providing them with solutions to consider which meet those needs and wants, and then acting on their informed decisions.
My job is to help people; I do not sell products. What I “sell” is my time, my expertise and my integrity.
I will provide service to any client who seeks my help.
If I were to generalise fee for service proponents, I would say that they restrict their services to a small niche of high net worth individuals who can afford their fees or they only suit a client looking to include investment-based strategies, which subsidises the cost of the risk advice.
Their business model excludes many everyday Australians, which perpetuates the image that financial planning is not affordable nor accessible.
I believe that choosing a commission-based model can be more honourable in doing the right thing by the client.
Yes, I can lower the premiums on a client’s policy by 25 per cent to 30 per cent for the life of the policy, but in order to cover my costs, I would need to charge a fee.
However, that fee would be more than the discount the client would receive. How would that place them in a better position? How is that putting the client first?
If I charge a fee and a client’s application is not successful, or the outcome is unacceptable to them, how would the client feel about paying for not receiving the outcome they desire when it is the only service they have engaged me to provide?.
By opting for a commission, my client can be confident that they do not pay a cent, unless they are happy with their cover and the offer made by the insurer.
To offer my services without guarantee of reward until my client is satisfied for is, for me, the mark of putting my clients’ needs ahead of my own.
The general public recently baulked at the idea of having to potentially pay a GP a co-payment of $6 when they visited the doctor, despite the purpose of the funds being to support the research and advancements into treating diseases that presently destroy the lives of individuals and their families.
It was feared that patients would put off seeing their doctors and have worse health outcomes as a result.
Now if that is true, how can I justify charging a fee significantly higher than $6 knowing that my clients may put off a scheduled review of their cover to take into account changes in their debts and liabilities, or when their cash flow is tight after the birth of a child, or to review an existing exclusion.
The outcome for my client would be far worse.
Regardless of the remuneration method we choose for ourselves we all have the same obligations under the law to act in the best interests of our clients.
I take issue with anyone who uses their business model to denigrate someone who chooses an alternative business model and to infer that the advice received is somehow inferior, tainted or unprofessional.
I can hear you say, ‘I have heard it all before: you all say that you put your client first, but then why are there all these scandals in the media that all involve commissions. The only way to ensure integrity is to remove commissions’.
To me, this is like calling for the removal of all cars since they tempt people to drive too fast, or to cut in, and that everyone should be required to take the bus.
For those of you that hold this view, consider this: perhaps your belief that an adviser being ethical regardless of the method by which they choose to be paid is something you can’t comprehend, because it says more about your own shortcomings than the advisers around you? That does not give you the right to assume and judge the motives and actions of your peers.
For those advisers that say they have personally witnessed wrongdoings by advisers who have been driven by nothing more than commissions, have you reported them? Or did you decide that the responsibility was not yours, that it would be too much of a hassle? Once again, I challenge you to consider: where do your morals stand if you prioritise protecting your image of not being a whistleblower over the wellbeing of another human being.
I think we could all agree that there are people out there doing the wrong thing and that this prevents us from being viewed as a profession.
There will always be people with poor ethics or who make poor decisions in every industry. If we want to be viewed as a profession, we should mimic the responses of the most respected professions.
There are scandals involving doctors inappropriately touching their patients or lawyers misappropriating funds, but we don’t change their remuneration; we remove and deal with the offender.
We should take the same approach. It is not the remuneration issue of a system that is the problem, but the quality of its participants. If advisers or insurers behave unethically, then they should be removed.
At the end of the day, our industry has a long way to go, but mudslinging does not help our reputation. If you choose to focus on the negative issues then that’s all people hear. It is all they will ever know.
Follow the remuneration business model that works for you, but for goodness’ sake, don’t preach and breed mistrust in your clients based on the way another adviser chooses to be paid.
If you do, then it is you who is part of the problem, you who is hurting our industry, you who is preventing trust in the wider community and preventing us from being recognised as professionals. Commissions are simply a vehicle which deserve their place.
Katherine Hayes is a director at Tiffen Insurance Services and a Synchron-authorised Financial Planner.
Gosh hmmmm! Ian or Katherine as an adviser? Goodbye Ian hello Katherine
Well said Dan K.
The insurance commission structure being cheaper than fee for service I didn’t even realise was debatable – it has been pretty well known and proven for decades? Disappointing that you had to spend your time pointing it out with actual figures and facts, but it seems it was needed. The irony (hypocrisy?) was the line in the Original Post regarding ‘educating the client’ about commissions.
Kudos for taking the time to educate an adviser.
“The only way a commission is paid to an adviser is by taking it out of the pockets of every day Australians they serve.”
Bento… the alternative is massive upfront fee-for-advice costs…can you explain to me where this money comes from?
Yep – from the ‘pockets of everyday Australians they serve.”
Both fee-for-advice and commissions are paid by the client, so the attack on commissions as costing the client is a bit hypocritical. Commissions used to offset the insurance advice means the up front costs become much more reasonable and acceptable to the client, meaning they are more likely to get advice and therefore insurance.
Under-insurance is a very real issue in Australia. The ‘ethical’ approach to ensure higher up front costs as barriers to advice is hardly going to help address this issue.
And btw, commission fee structures tend to be cheaper for the client.
Ian, you work for the client by finding them the appropriate product. They pay you via premiums in a drawn out manner that better suits their cash flows (as opposed to much larger upfront fees).
I have no problems with product providers paying advisers commissions – because even though you have worked for the best interest of the client, at the end of the day, you have done work for whichever product provider you have selected for them. You have done a lot of work to get the product provider a new client, in essence you have done their work for them, and should be rewarded for doing their work for them.
The issue with commissions is that they can vary so much between providers and the higher commission payers can therefore influence the nature of the advice – ie, is the adviser recommending the product because it is the most appropriate for the client, or because it offers the highest commissions? Therein lies the issue/concern.
Beyond that, commissions save the client – as they are normally used to offset the upfront cost of the advice to clients. This is very important – Australians are very much underinsured, and the suggestion that we should be placing massive upfront costs to even getting insurance advice will not exactly improve the situation at all.
Brilliant Katherine.
There should be no issue with Fee or Commission, let the client choose , a Fee for Service deducted from the clients Life Insurance premium by the provider and paid to the adviser will solve all of the concerns , and anyone can call it what they want , it is just a name , nothing else.
Perfectly summed up Kathie!
Well said Katherine! I agree on all points except the para on whistleblowers which was a bit too angry. Everything else you said was very true. In fact it has been true for decades. It ought to be common sense. Something has perverted public debate. IMO that new thing which caused common sense and common decency to be thrown away was the introduction by Keating of a system of Superannuation which gave the Trade Unionists a new stream of income. It did not take long for them to get jealous of other people in the same business doing work in a different way. They want us out so we do not embarrass them. Their politicians took up the cause, and no one pointed out in public the conflict of interest which the ALP wears in the most brazen way. The ALP wants to referee the game and get fees from some of the players. This conflict of interest is the big pollution.
it’s not a fair comparison. A real estate transaction is a one-off. And to say bad advice is cultural not a remuneration issue…well remuneration issues lead to cultural issues, that’s what can cause an approach of ‘we need to do what it takes to get clients to sign up / swap policies etc because that’s how we make our money’. workplace culture and remuneration don’t sit in silos – it’s all part of the same dynamic, and i wish old-fashioned riskies would stop pretending otherwise.
Hi Bento, I am curious as to your comment in relation to “commission will almost always cost them more” Let’s look at the numbers, please let me know if an underlying assumption needs amending…
With Commission
Premium to client Yr 1 = $2,000
Yr 2 – $2,200
Yr 3 – $2,500
Yr 4 – $2,750
Yr 5 – $3,000
Total Cost to client over 5 Years = $12,450
Total Paid to adviser = $2,400 Upfront + $1,045 ongoing
=$3,445
No Commission (30% Discount)
Premium to client Yr 1 = $1,400
Yr 2 – $1,540
Yr 3 – $1,750
Yr 4 – $1,925
Yr 5 – $2,100
Fees- Initial $2,400 Upfront + Review Fee….$300? $400? $500?
Total Cost to client over 5 Years = $12,315 (@ $300 review fee)
Total Paid to adviser = $2,400 Upfront + $1,200 ongoing
=$3,600
Now here is where it get’s interesting. During a review in Yr 3 a major product enhancement and premium reduction is available, say 20% reduction in premium is on offer…
Commissionable policy replacement premium = $2,000 ($500 saving)
Non-Commissionable Premium = $1,400 ($350 saving)
Unfortunately to secure the $350 saving for the client a fee needs to be charged (replacement business…say $2,400 again?or is this being subsidised?) What do you do in this situation? Mr. client I COULD save you money on your current premiums (as you have indicated that you wish to) however I have to charge a fee and when I include the fee it’s going to cost a lot more…maybe you are better off accepting that you are paying above market rates for an inferior contract mr client? What if the client is declined or offered substandard terms??? Now they have paid a fee for no result? How is that in your clients best interests? I’m sure others could provide you more everyday situations where if you offered your clients a choice between a commission or a fee, they would be far better off under a commission arrangement. It’s horses for course of course. There are many situations where a fee for service model would be more appropriate. Perhaps some of the other commentators on here are right though, maybe these low value clients end up getting fed to the Direct and Robo advice channels. I think that would be a real shame, with the big loser being the clients.
Katherine some very good logic in your article, but, when I joined AMP in 1982 they told us that only about 20% of Australians were insured or adequately insured. That statistic seems to have stayed static in 3 decades of commission based selling!! So how does the affordability argument work? Commissions are an ethical issue as all case law has pointed at commission based sales as the problem…. The Life sector has always struggled to be considered as professional as accounting & law in assisting the customer, yet they don’t like their fee for service model, I pay my accountant regardless of positive or negative Tax outcome, because I need their expertise to do what is best for my family. Poor clients in future will be buying life insurance Direct or online for 2.50$ a week no questions asked, these are not your client base ……the ongoing premium defines the clients affordability ask anyone who holds life trauma and IP as they age past 40 and 50.
Commissions will go and Australians will still insure if advisors do their job well!!
Couldn’t agree more! And for those that believe that commissions lead to us not being recognised as a profession, or worse leads to unethical behavior, why are banks (ANZ most recently just last month) refunding $30M in ‘financial planning fees’. That was a fee, so they couldn’t have acted improperly surely?! A commission by any other name… There are already processes and laws in place to catch people providing improper advice which trumps how anyone gets paid.
This is the most sensible article that I have read on this topic. Well argued Katherine. If I wasn’t a risk writer myself, I would want you as my adviser as you clearly well manage the alleged conflict of interest that commissions cause. But then again, that is what most of the Insurance Advisers within the Financial Planning industry have been doing for a long, long time.
You have just argued our case far more eloquently than most of us have and Bravo!
You are a Champion!
Bento I am not sure where you are working but the reality for many is that for example a 30 year old couple in most cases will not have (or will not value) the money available to pay $2-3,000 to have a proper plan completed and implemented. If they have any health issues this could easily blow out. Maybe in a mature future market people more will value cover without it being sold. I see no queues forming to pay fees for insurance hence they remain largely under or uninsured. Do you charge extra for the work involved with loadings, exclusions or claims? how do commissions rob but not fees. Our clients know that they pay us via the commission. You must be taking issue with every fee only proponent in the country right now who has denigrated the commission based advisory firms.
“For those advisers that say they have personally witnessed wrongdoings by advisers who have been driven by nothing more than commissions, have you reported them? Or did you decide that the responsibility was not yours, that it would be too much of a hassle? “
Yes. Multiple times. And, having been abused by corrupt management for blowing the whistle, followed by inept management at ASIC (subsequently confirmed in their useless efforts with Storm and CBA) I wonder why I bothered.
Katherine, your article raises some valid points, but somehow while defending your position, and asking not to be denigrated, you appear to want to make fee for service advocates seem uncaring of the general public and devoid of moral and ethical responsibility. Such hypocrisy!
“I take issue with anyone who uses their business model to denigrate someone who chooses an alternative business model and to infer that the advice received is somehow inferior, tainted or unprofessional. “
I take issue at your implication that fee for service advisers ignore giving advice to everyday Australians. Pot. Kettle. Black! I hate commissions because they rob everyday Australians of much needed cash in their hand. If a regular service costs you 25-30 percent more than an equivalent how exactly are you helping someone here? If you really believed in educating clients about money you would start by explaining that commission or none, they pay you, no one else, and commission will almost always cost them more.
The only way a commission is paid to an adviser is by taking it out of the pockets of every day Australians they serve.
Well said Katherine. Ian your comments are disturbing. Our practice has had happy insurance clients since 1973. We have never had an issue with commissions e.g a queue of complaining clients who felt wronged or questioned our integrity. We are in the relationship building business. If you are a crook you will be found out regardless of how you charge. We charge fees for investment strategy work as the scope of advice is clear at the outset. As Katherine stated you are never sure about whether or not you can actually place the cover. There is a business risk with each case. It is unique and has worked for decades. Please remember that cover, in the most part, still needs to be sold. It is not a commodity like an iPhone, people do not queue to purchase cover. How many people genuinely pay a fee to be sold something. Of all the fee only proponents that we have seen many write very low levels of cover, but maintain a certain view from their high horse.
Ian, unless an adviser is emplyed by a life company, they are not working for that company, they are working for their client, they are however remunerated by that company. A Dr and who choses to bulk billl their clients is not working for Medicare, they work to provide services to their patients, it is just the source of remuneration that differs in the exact same way it does for us. It is not that my clients can’t pay for my fees (though for some this is true) given the choice, they choose commission every time. I agree let’s make it simple, but- WE DO NOT NEED TO BAN COMMISSIONS, what we need is CHOICE, and to let our clients decide based on a fully informed decision. What I don’t understand is your view that a ban is needed. Needed for what? To fix a perception issue? And the cost of a perception issue being those who need it most can’t afford it. Who needs that?! Clients need trust worthy advisers, that is a reflection on behaviours, not remuneration methods.
Whilst Katherine’s Sentiments are well meaning the issue is simply this! If you receive a commission you are paid by a life company and as such you are working for the product provider under contract not the client ! If we want a professional industry with professional standards then we must be working for the client which means the client should be prepared to pay us for the professional services we render. Now the issue is according to Katherine the client’s she works for can’t pay her fees up front but can pay a much higher fee for much longer if this payment is monthly ! So let’s make this simple how about the life companies allow advisers to dial up the first two years monthly payments to pay for the cost of the work done. After all isn’t this what we are claiming the life companies already do? So we need a ban on all commissions and the ability to premium fund and then we will have good consumer outcomes and the ability to move on.
Finally, some sanity in the argument.
Excellent work Katherine. Thank you for your eloquent portrayal of a professional and ethical adviser. There are so many honest and hard working advisers who genuinely care about their client’s outcomes, it is simply astonishing to hear the ‘apparent’ consensus from the community that we cannot be trusted to act in the best interest of our clients with a commission based fee structure. I encourage those who are making these recommendations to ‘walk in the shoes of whom they talk’ – it is no easy task to discuss death, sickness and accidents and what happens if this should occur – for a living. But I will certainly say it is the most rewarding career when you know that your clients sleep easy at night in the knowledge they are protected. I knew I had made the best decision of my life to become an adviser when I delivered my first claim cheque to a grieving widow with young children who had the bank manager at her door with an eviction notice. She did not think her insurance had been a waste of time, and there was certainly no discussion about whether I had her best interests in mind when her husband took out the policy.
Perfect!
Superb prose Katherine. Thank you.
I often wonder how say the Legal industry REALLY NEEDS TO FIX (familiar words right) the conflict between a swift low paying OUTCOME compared to the more lucrative, wilfully elongating a matter…
A great read – rational and with all the right intent – the best interests of clients (even for those that can’t afford advice….)
Congratulations, Katherine. This is the most logical and sensible description of the issue I have ever read. I would add that there are innumerable instances of inappropriate advice that did not involve commission, which clearly suggests that commission, itself, is not the issue.
This is the best explanation I have heard yet. Well done Katherine
Well done Katherine,
Everything I’ve been saying, only said better.
I don’t see the same concerns with mortgage brokers, real estate agents, general insurance brokers, those selling off-plan property under the guise of ‘wealth planning’ etc… I’m interested to know how the selective process works?
I haven’t heard of real estate agents not being allowed to charge a selling fee/commission or whatever name it gets on the basis of the value of the property being sold.
If the required/right amount of work goes into ensuring clients get the best possible broad based advice to improve their financial wherewithal then the business or person involved needs to be able to make their business work. The client has the right to say ‘No’.
The net result will be turning the clock back 30 years to employees and tied agents. And will that negate any conflict of interest?
The issue of bad advice is cultural not related to remuneration. Otherwise the vertically integrated financial services companies would be blemish free… wouldn’t they?
Commission based risk advisers also demonstrate a zealous protection of their preferred remuneration method. The truth is that the client pays for the advice under either method. It is up to the adviser to demonstrate the value they bring under their chosen business model.
Incredibly well said, Katherine. It’s amazing how rare common sense is these days. Thank you!
Hear Hear Katherine. Well Written.
BRAVO! Well said Katherine!
At the end of the day, everyone gets paid commission.
If they fail to turn up to work, they don’t get paid.
If they fail to write new business they won’t get paid.
If advisers charge a fee for service, it is a commission for work performed.
If advisers receive a commission for work performed, they are paid for their service.
Don’t work and you get nothing!
I don’t like to think of the analogy of call girls in hotel rooms and those on the street, They both perform the same service and both get paid.
Perhaps there’s another analogy to consider!
Maybe lawyers, but then again we seek honesty.