Late last year, there was some criticism in both the mainstream press and financial planning circles, regarding the merits of commissions and fees (I know, criticism of financial planning - surprise, surprise).

Many of the points make reference to a report by Roy Morgan research - Superannuation and Wealth Management - which revealed that in the four years between 2005 and 2009, financial planners from the six largest financial institutions - the big banks, AMP and AXA - directed more than 70% of sales into their own products.

This figure, expressed in isolation, does suggest that something is amiss and many of the commentators criticising this percentage express some doubts as to the ‘fairness’ of such a system. But how does this criticism stack up against other information?

How Terrible.

Let’s look at the reality of what institutional planners face:

• legally, they're only allowed to recommend products on their employers Approved Product List (APL). Why would a bank have another banks products on its APL? That's effectively saying they don't have the best product. They’re not, generally, in the business of recommending other companies products.
• if I go into an ANZ branch, I expect to deal with ANZ people telling me about ANZ products. I don't know if I'm unusual in this expectation, but it seems there're a lot of people that expect something else.
• there are, or at least there were whilst I was there, targets for planners to achieve that normally relate to the volume of business they write. But before we persecute these bank planners, let's remember that most other financial planning businesses have similar structures in place. (If you ever get the chance, be sure to ask the most vocal critics of the banks for their remuneration and incentive structures for their staff.)

That's Just How It Is...

I'm the last person to defend the status quo. Logic dictates that it’s impossible for each bank to have the ‘best’ product for 70% of the clients they see - so I’ll accept that this part of financial planning could be improved. But I have an immediate suspicion of critics that adopt the slightest holier-than-thou tone in their remarks.

Always question the criticism.

 Dig deeper, and you’ll find that many of the people harping on about the evil of commissions and planners concentrating their product recommendations see nothing wrong with charging their clients percentage-based fees - something I have serious issues with.

 The bigger issues, in my mind, are

• the value that clients get for the fees they pay, and
• making sure that the strategic advice (not the product) is at the forefront of the planners  mind.

Hypocrite, or Hypo-Critic?

As for this critic of the system, I've said it before - we do not charge new percentage fees or accept commissions on superannuation or investments. We do accept insurance commissions, for the reasons outlined in our Operating Principles.

I'm happily upfront about this situation with my clients and openly criticise those that charge percentage-based fees, because I can demonstrate to my clients the value we bring to their financial situation, and all of our advice is based upon the strategies they need, not the products we're selling.

 Be sure to question the critics.

Comments (7)

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Insurance churn
written by GAB, January 19, 2010

There was one other thing Jordan, with regards how to battle insurance churn. Perhaps commission levels need to be reduced, shock horror. 120% upfront is pretty high, don't you think. Maybe the insurers should reduce it to say 45%, and if the insured are lucky, maybe the premiums will reduce across the board. This might reduce churning and also help eradicate the unscrupulous insurance salesmen from our industry. Underinsurance should not become a problem, as a professional adviser should still recommend and implement it, and charge an appropriate fee if the commission amount is not deemed sufficient reward.

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...
written by GAB, January 19, 2010

Jordan, section 2: "FP profession guilty of......but at Tandrem we see things slightly differently". Section 5: recurring feature of financial advice profession.....proliferation of massive groups of clients to one adviser". Section 6: ...no need for 80 page FP, no need for complicated projections and assumptions...disclaimers used to protect inadequate advice...

I'm sorry, but i don't like the way you've written this document. I don't think you need to critise or compare yourselves to others if your firm is as good as you mention. You should stand on your own merits. It reads more like a list of "sledging" priniples.

I still cannot come to terms with your dislike of percentage based FUM fees, yet accept insurance commissions. You say "commissions enable us to offset other costs in our advice process..." Do you mean offset your business costs, unrelated to that client? If it is expected to take say 5 hours to complete the risk portion of the advice, why wouldn't you just take no commission and charge a set fee as you do for the rest of their business? Are you afraid the client may baulk at that, and not proceed?

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Thanks for your replies
written by jdvak, January 18, 2010

Again, everybody, thanks a lot for taking the time to comment. If you can bear with me, I’d like to address some of the points raised.

First, to GAB.
A few things;
We don’t call ourselves fee-for-service as that would be misleading.

By accepting commissions we disqualify ourselves from this term.

We’ve debated the idea (at length) and determined that we will accept commissions on insurance if:
- we show our clients the competing quotes
- have strong enough reasons to justify internally the selection of a more expensive product (we’re tougher on ourselves than clients will ever be)
- we give clients the option of full commission, or full rebate and a corresponding implementation fee - the option is theirs.

What is an ‘inappropriate’ level of risk? Too little, or too much? I understand the argument that over-insurance is just as damaging as under-insurance, but I don’t think I really agree with it.

As for churning, you’re right - the temptation is always there. But we set hurdles (well and above those set by the authorities) to justify any new policy that we recommend to clients.

Thankfully, as a new business, we’ve not had too much of this problem yet but I think that when we do we will have to determine a lower-rate for replacement policies maybe?

Can you elaborate a bit further about how our Operating Principles are a 'slur on other advisers, and possibly the industry?'

The insurance commission issue is one that we’ve wrestled with for some time and is one that we consistently review and I’m not foolish enough to say that we have it completely right - I’m open to new ideas.

I’d be interested to hear how other planners have resolved this issue and attack the status quo.

Peter Vickers, the conflict between advocates and advertisers is one that’s well beyond my payscale to resolve!

Alex567, I don’t understand why the argument that somebody going to ANZ is expecting ANZ products is spurious? It’s not a comment on the respective quality of each institutions products - as we point out, is it a coincidence that in 70% of cases, their product is the ‘best’ for the clients? Rather, it’s a comment on the distortion of view that people seem to have when it comes to institutional advisers.

I think that people going to a particular institution should, under the law of common sense, expect that institution to sell them their own branded products. Perhaps that’s a tad naive?

But regarding your insurance point - the temptation to churn - I agree with you. And that’s an issue that we’re aware of and we’re trying to resolve before we start to really hit that sort of issue.

Are there any thoughts out there about what’s the best way to battle insurance churn?

Bob, totally agree with you - I guess that was part of my motivation for writing this opinion piece - products aren't everything.

The fact is, products are easy to debate, make for good arguments and let people look like they're debating financial planning, whilst avoiding becoming entangled in any of the serious issues - like the quality of advice, educational standards and compliance overload.

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Critique Advice Not Product
written by Bob, January 18, 2010

I am not a bank planner and never have been. I agree, what is all the noise about.
If you look at what is required by legislation.
(1)A planner must disclose the limitations of advice through FSG, SOA and if satisfied the client engages. Non bank aligned planners have recommended lists and very few if any are "unlimited".
(2)A planner must recommend an appropriate product to the needs of the client. Who determines "best product" anyway - how can you compare like for like. The product providers go to great lengths to be “subjectively” unlike each other so an “objective” comparison cannot be made.
To my mind, the far greater issue is the Quality of Advice, that leads to the product placement. I would like to see more comment from the media on this subject and less about products.

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Coming clean
written by Alex567, January 18, 2010

How many times must we hear the argument that people go to ANZ or others expecting to get sold ANZ products? This argument is spurious to the extent that these same groups will promote the idea that they provide client focused advice when, in reality, they will sell their own product 7 out of 10 times. If they raised their hand and said "We will sell you what we believe to be the best [insert bank/institution name] product we have to sell", I would be more accepting.

Also, your arguments re insurance commissions are a little generous - 120%+30% commissions = propensity to churn policies to maximise revenue.

Let's be completely honest here.

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Chartered Accountants
written by Peter Vickers, January 18, 2010

What I find amusing is that people advocating the abolition of commissions like the FPA and the Professional Planner then accept advertising from the same groups that are paying commissions. They certainly are not carrying advertisements for my business. I cannot afford to pay the costs of that type of advertising.

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written by GAB, January 18, 2010

I cannot understand how a true "fee for service" business can advocate a fixed fee unrelated to FUM, yet accept insurance commissions. Shouldn't your annual fee or implementation fee cover the risk component, otherwise you could be tempted to write innapropriate levels of risk or churn even? I also find your "Operating Principles" to be a slur on other advisers and possible the industry, which I think is unprofessional.

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