Remuneration and the Financial Services Provider Register
This is the last in the series of articles on the review of the Financial Advisers Act, and I intentionally selected these 2 items together, as one, the FSPR, can be dealt with pretty quickly, while the other is somewhat more emotive and controversial. If the FSPR is available to the public, there should be more qualitative information provide on the areas of service and advice offered, and the qualifications attained. Fairly standard stuff - just plain common sense.
However, when we come to the issue of remuneration, common sense, integrity, and transparency seem to be as scarce as hen’s teeth! The existence of commission in a transaction does not automatically condemn the transaction to be distorted by conflicts of interest.
At the recent Financial Capability Summit in Auckland, I was following and agreeing with Professor Kempson all the way, until she alit upon the subject of commission when all the reason, logic, and research-based conclusions she previously offered, went out the window. To compound this inexplicable myopia, Shamubeel Eaqub waded into the debate in unreserved support of the Professor, without offering the slightest hint of empirical evidence to support the assertion that commissions automatically create conflicts of interest. The assertion that the presence of commission in a transaction creates automatic conflict is simply not true.
Here's two examples where commission is payable - without conflict -
1. If I have entered into an exclusive product distribution contract with a carrier, AMP or Sovereign, for example, and the terms of the contract provide for payment of commission for inviting consumers to buy product, there is no conflict of interest present whatsoever.
2. It is also common practice in the area of capital-raising for companies to offer a percentage of the funds raised to be paid as a fee to the entity raising the capital. In other words, a commission is payable, but again, there is no conflict of interest, perceived or real, in this type of transaction.
So bearing those two examples in mind, how sound is the assertion that the presence of commission automatically creates conflict?
I would argue, as does my friend and colleague Simon Swanson ex-CEO of Sovereign, (now giving the Australian life market a wake-up call) that it is the behaviour of some advisers that creates conflict and not the remuneration structure.
Whatever method of remuneration, compensation, and/or reward can be devised by mankind, it is a racing certainty that within a relatively short time span, one individual will have worked out a method of gaming the system.
Think David Ross, Bernie Madoff, Michael Milikin, and a host of others, currently and previously, in penal servitude.
That said, I have no idea whether commissions in NZ are too high, too low, or just right.
What I do know is that the remuneration provided by life companies is set by life companies, adjusted by life companies, and 100% under the control of said life companies.
Some 'adviser' life company business models require high rapid growth in premium income and a company in this space will set out its stall accordingly.
Other life company business models rely on brand strength, longevity, reserves, and a less aggressive marketing strategy.
Both approaches are legitimate.
In order to stimulate the high rapid growth model, a series of incentives can be developed which, when combined with leading edge products and efficient service levels, can achieve the stated objective. Advisers accepting responsibility to look out for a clients best interests can add a powerful dimension to the marketing formula, and in a free competitive market, the success or otherwise of such an approach should be left to find its own level.
The alternative is to tilt the playing field in favour of one model or the other, and that may lead to an unhealthy outcome for the consumer – not something the regulators or the Ministry wish to see, I suspect.
So the question remains - what is a fair reward for the service provided?
Well, there are a number of factors to be considered, including, but not limited to -
- What level of service support is offered to the client?
- Not every client buys!
- The rising costs of compliance.
- The rising cost of maintaining professional development and educational standards
- The General Operating Expenses (GOE) the adviser incur.
- The capital cost of maintaining up-to-date IT equipment and systems.
I’m sure there are a number of other factors that could be added, but if you can work out from the above that advisers are making excessive profits, compared with banks, or CAs, or lawyers, or insurance companies, then I’d agree the remuneration needs reviewing.
However, another factor in this review might be to consider all the office tower blocks in Auckland, Wellington, and Christchurch, and identify who can afford to pay for the naming rights in these buildings!
On the other hand, if the remuneration issue is that the current levels of commission are unsustainable, the answer, as always, lies with the product providers.
Whatever emerges, the evidence for adopting a specific direction needs to be shared, discussed, and debated thoroughly as people's livelihoods are at stake here, and very few vocations in the private sector have regulated earning structures.
Finally, in a land of significant under-insurance and 'no-insurance-at-all', I would have thought that the last thing we want to see is a dis-incentive offered to advisers to make their services available to the consumer?