Adviser commissions under fire

Vance Arkinstall, CEO of Investment Saving and Insurance Association said advisers need to be 'upfront' and find ways for consumers to understand what they did. Photo / Supplied

A wave of international pressure is mounting on Governments to ban financial advisers from accepting commissions and bonuses, but New Zealand is still undecided.

This week an Australian report recommended its Government work with the industry to stop commissions and in Britain the Financial Services Authority has said it wants them to stop by 2012.

Watchdog Consumer New Zealand chief executive Sue Chetwin says New Zealand must join the move to stop consumers from receiving biased advice.

"When you have commissions you are automatically set up for a conflict of interest."

Last year the Government began putting in place laws to allow the regulation of financial advisers and product providers.

Changes have already come in which force advisers to tell their clients what their qualifications and experience are. Next will be rules pushing them to disclose any benefits they receive from product providers including commissions and bonuses.

Ms Chetwin says this will be a start but while commissions can be disclosed it can still be confusing for the public. "It can be done in such a way that is confusing for consumers and makes it difficult for them to compare the cost of getting advice between advisers."

She wants a full ban on commissions being paid altogether. It is a move which Lyn McMorran, president of the Institute of Financial Advisers, believes would devastate the industry, leaving advisers unable to earn a living and consumers forced to pay high prices for advice.

Ms McMorran, whose body represents around 1300 advisers, says they want regulation but also believe the public needs to recognise the value of good financial advice and be prepared to pay for it.

Ms Chetwin recognises it is a problem.

"Kiwis are not prepared to pay for advice. There is scepticism about the industry. People are reluctant to pay for something they can't see the value in."

She says the events of the past few years have not helped and the appearance of banks giving away advice free has also led people to expect it.

Simon Hassan, a financial adviser who runs his own business, says the reality is that public trust will not be restored until commissions are stopped - particularly on investment advice.

Mr Hassan says most in the financial services industry are good people but do not understand that taking any commissions completely "pollutes" their relationship with their client.

He said the commission system stemmed from pressure on the insurance industry in the mid-1990s to cut costs which they did by encouraging their salespeople to go out on their own and call themselves advisers.

Those companies then ensured their products were still sold by paying commissions.

Mr Hassan said it was often not made clear that commissions on investment products were taken from the money invested by the consumer so they were still paying for it.

"It's very easy to mask the effect of commission on investment." In the good times the investment went up and it was taken out of the return and in bad times it could be blamed on the market.

Mr Hassan says a ban on finance companies paying commissions should be at the top of the list.

"Bridgecorp paid twice the commission of others. Even when advisers recommend and rebate a commission it's still an incentive planted in the decision-making process."

He says there is no way advisers would have recommended finance company debentures as much as they did if there had been low or no commission on them.

But not all are convinced. Vance Arkinstall, chief executive of the Investment Saving and Insurance Association, which represents the companies which pay commissions, sees it as more of a disclosure problem. "I don't believe the problem is so much the industry pays commission - there is not a lot wrong with commissions providing the status of the adviser and the conflict is stated to the client."

Mr Arkinstall says advisers need to find ways for consumers to understand what they did. "They have to be more upfront."

Annabel Cotton, Commissioner of Financial Advisers - a role set up by investment watchdog the Securities Commission to oversee the changes made through the regulation, believes there is enough going on in New Zealand to help figure out if a ban is needed.

The financial advisers code committee last week began consultation on its proposed minimum standards for ethical behaviour and client care for those who will become individually authorised advisers from next year.

"If ever there was a time for advisers, the industry and the general public to have their say on this matter, it is now."

Ms Cotton says the Government is also looking into banning commissions as part of its investigation of finance company failures.

"It's just a matter of timing - ours is happening a little bit after but we are all heading in the same direction."