Financial advisers and the companies that pay them handsome commissions have had a bad rap of late.
A report into the conduct of life insurance companies by the Financial Markets Authority and the Reserve Bank of New Zealand found life insurers in particular were encouraging advisers to put sales and profits ahead of customers' needs.
Back in November the FMA also told banks to remove sales incentives completely for their own staff and a progress report is due in March.
The lure of commission and incentives such as holidays means the less honourable practitioners sell policies or products on the basis of what they could earn rather than what was good for the customer.
For the 15 years I've been back in New Zealand I've heard complaints about financial sales people hawking products on the basis of the commission. Sometimes those products don't pay out as a result.
"Not me" I always hear when I write about the subject of commissions skewing behaviour, although some, to their credit, do behave impeccably.
The industry's argument is that Kiwis wouldn't get advice if they had to pay up front.
It's a catch 22 situation because consumers often do need advice for complex financial products such as insurance and investments, and we've been conditioned by the commission model to think we can get advice for free.
Individuals can also help themselves by asking the following questions when shopping around for an adviser or products.
If the adviser looks uncomfortable, then move on.
What do you sell?
Be clear whether they're selling insurance, mortgages, investments, property or a mixture. Don't expect someone selling property only to advise you about your KiwiSaver or other stock-market-based investments such as bonds or funds.
Are you a registered or authorised financial adviser or something else?
A Registered financial adviser will mostly sell either insurance or mortgages. Only an authorised adviser can provide a financial plan and advise about funds.
Which companies' products do you offer?
Some advisers may only sell products from a limited number of companies that pay the best commission and not the entire market. Although they can shop around on your behalf, they may not be considering a wide range of products.
What percentage of your business is with the company you've just recommended?
Financial advisers selling insurance sometimes move a good chunk of their business from one company to another, gaining new commissions every two years. That one-size-fits-all advice can be very tempting for the adviser, but is not usually in the interests of clients.
If I refinance my mortgage or replace my policy within two years do you charge me fees and if so, how much?
This is a question from Financial Services Complaints Limited, one of the organisations that handles complaints advisers. Customers are sometimes shocked when hit with a bill from the adviser clawing back commission if you move on within two years.
How much will you earn from this transaction?
What you are looking for is an actual dollar figure that this business will be worth both immediately and over the lifetime of the product. Also ask, "do you receive the same amount of remuneration from each bank/insurer you deal with?" If so, then there is less chance of conflict of interest.
What soft commissions do you receive?
These are holidays, conferences or other non-monetary incentives. Last year the FMA reported that insurers spent 9 per cent of the sales revenue on soft commissions. Nearly half required the adviser to reach a targeted number of sales. This encourages them to move customers to that insurer whether or not it's in their best interests.
What am I not covered for with this policy that I was with the previous?
The lure of commission sometimes pushes advisers to churn customers to new policies. The new policy may not cover conditions you have developed in the Intervening years.
The same advice applies to anything sold by commission, right down to insulation, heating and ventilation systems.