Investment product commissions - R.I.P.

1905 NZ Government Life Insurance 3 pence brown Great article from my old mate David Chaplin in last week's Herald re commission on financial products and the world-wide trend away from same.

From time-to-time, between Presidential elections, or the latest middle-east cease-fire - when there's a lull in the flow of interesting news - the subject of commission on financial products gets an airing from the media.

Not that I'm suggesting David's item is in this category - he's a serious financial journalist with a deep understanding of the issues which face the financial services industry.

But there is an alarming tendency in some media to group all financial products which have a commission remuneration structure under the same banner.

I suspect that in the interests of space and brevity, David chose not to separate the concepts of commission payable on investment products - which have a direct impact on yield - and life insurance risk products, where the impact of commission is less significant.

Let me state categorically, that a universal ban on life insurance commissions would be a fundamental and potentially catastrophic error for the community.

Of course, David's article doesn't advocate this. Indeed, he reports on the Accountancy profession in Australia seeking to prohibit its members accepting commission from any financial products - a move which the Laird supports without reservation. Leaving such tricky, complex, and highly technical products to those qualified in a completely different area of expertise is a recipe for disaster anyway, and the professional body's proposal to remove such financial inducement is laudable.

However, as a compensation structure, commission on life insurance contracts is a valid, economic, and viable method of extending the reach and penetration of financial protection mechanisms which are vastly under-utilised on both sides of the Tasman.

Whether the client pays for the cost of entry by fees - as he/she should for investment products to ensure transparency - or via product commission, is largely a matter for the market to determine. The global market trend is toward removal of commission on investment products, and this will continue inexorably until all investment advice is fee based, whether or not products are included in the recommended financial solutions.

It's worth remembering that the investment product providers in the early days of financial planning were life insurance companies, and access to collective investments was provided by these life companies via whole-of-life or endowment policies, or tax-paid single premium investment bonds.

However, the world has moved on since, and few life companies offer such 'traditional' products these days, preferring to concentrate - rightly, many would say - on insuring the risk in the life and lifestyle related areas. Oh sure, these organisations still have investment departments and subsidiaries, but the days of the whole-of-life and endowment policies have all but gone.

But there always seems to be a ready and willing audience for investment products and clients who continually chase high returns are occasionally punished by events, such as the Finance Companies collapse, the ANZ Bank/ING CDO debacle, or the latest scandal emanating from the Ross Asset Management tale of woe.

Life insurance products, on the other hand, have to be sold to consumers and distribution is effectively and efficiently funded by the evolved commission structures in place across the risk product industry.

Now, if there are concerns over the quantum of commissions payable in New Zealand - compared with Australia and the U.K. - then the Laird has considerable support for those concerns. But that's a different argument deserving of an entirely separate discussion, and for the thrust of this article, the Laird contends that any move to abolish or remove the current compensation structure would only serve to exacerbate the already pathetically sparse protection which New Zealanders and Australians currently have in this key area of financial planning.

Slàinte mhòr agad

The Laird of Albany