How to fix fees and can commissions

There was a tinge of pre-emptive nostalgia in Vance Arkinstall's statement issued last week predicting the "inevitable" demise of adviser commissions linked to the sale of investment products.

"Commission has long been an effective way of spreading the cost of investment advice and has made investment in products much more affordable," Arkinstall, who heads the Insurance Savings and Investment Association (ISI), said in the release.

But with the ISI's Australian counterpart, the Investment and Financial Services Association (IFSA), recently announcing  it would demand its members end adviser commissions on superannuation products, it seems the jig is up: commissions must go in New Zealand too.

However, I don't think commissions will disappear here anytime soon. Arkinstall's statement was really just a vague suggestion - a debate-starter. The IFSA declaration limits itself to removing adviser commissions on compulsory superannuation products only, which is a big deal in the trillion-dollar Aussie industry. The New Zealand equivalent is KiwiSaver, which already has strict controls on adviser payments.

In Australia, IFSA has left its members free to charge commissions willy-nilly on non-super products. Like the ISI, IFSA also does not represent the country's entire investment community leaving plenty of loopholes for the commission arbitrageurs.

Admittedly, the Australian Financial Planning Association (FPA) has revealed  more widespread plans to phase out commissions on all products for its members, which it claims is 90 per cent of the advisory industry. The New Zealand advisory associations have not been quite so bold, absorbed as they are with other more pressing issues, like coming regulation and staying in business.

But the trend is clear, adviser commissions are on the way out or more likely to be renamed as something more PR-friendly (note, for example, the "plan service fee" in the IFSA release). The debate in Australia, however, is moving beyond adviser-bagging with Jeremy Cooper, a former regulator who now heads one of the numerous government enquiries into the superannuation business, now questioning the appropriateness of any asset-based fee on compulsory super products.

"Percentage fees should be looked at very carefully and trustees should be asking why fees structured in this way are appropriate," Cooper told the Sydney Morning Herald. "These fees operate like a wealth tax; they attach themselves to your super savings."

One of Australia's influential asset consultants - which determine where many superannuation funds invest - has also called for a 'fixed fee' model across all funds management business. In this story  carried on Australian investment industry website Investment & Technology, Fiona Trafford, head of Frontier Investment Consulting, said: "Our aim is to de-link funds manager revenue from assets under management. Funds management is one of the few industries which is selling hope.... How about a fixed-dollar fee, which you could ratchet up each year with inflation, and a performance fee?"

I look forward to the day when the ISI starts promoting this concept.

 

David Chaplin