I’ve listened to the arguments in favour of retaining the commission system as the principal mechanism for remunerating planners, and to the many comments that I don’t know what I’m talking about. I know it’s not a black-and-white issue (even though that’s how it must sometimes be portrayed, for the sake of making a point), but I don’t think that every argument in favour of commission stands up. Here’s a few examples why:
Argument 1: Commission is an appropriate way to be paid for advising clients who can’t or won’t pay for advice.
If clients do not realise that they are paying for advice anyway, via commission costs built into the products they buy (and hence through lower net investment returns), then they may not have been fully informed. The argument that some clients won’t write a cheque for advice raises the question of whether they actually value the advice they’re receiving at all. But anyway, even if a client can’t or won’t pay a planner directly does not change the fact that they’re being charged according to how much they invest, not according to the value of the advice they’ve been given.
Argument 2: Commission is an administratively simple way of collecting payments from clients.
For crying out loud, we can send unmanned probes to the far edges of our solar system, we can perform medical feats that were utterly unthinkable only a few years ago. We have built supercomputers capable of trillions of calculations per second. And yet some planners claim it’s still not possible to create an efficient client billing system. One model proposed is that a fee be calculated (and agreed) for the advice provided, then for payment to be recouped via the commission system until an amount equivalent to the fee has been received by the planner. Thereafter, all commissions are either turned off, or rebated to the client. That harnesses the commission system effectively, and also achieves the aim of the client paying for the advice, not for how much they invest.
Argument 3: Commission payments are tax-deductible to fund managers, so it’s ultimately more tax-efficient.
This argument has some legs, and to address it effectively will require a change in Government policy allowing tax-deductibility for fees paid upfront for financial planning advice. That’s not a bad idea. How do we get that one off the ground?
Argument 4: “Fee” means “one size fee” fits all.
Fees can and should reflect the complexity and quality of advice provided. No one (least of all me) is suggesting that every client should necessarily pay the same fee. That is one option, of course, but common sense dictates that depending on the extent and the complexity of services provided, fees should vary from client to client. Some planners can justify higher fees because they’re better at what they do than others. That’s how a market works. But the crucial thing is that the client pays for the advice, not for how much they end up investing.
Argument 5: Commission-based remuneration automatically equates to bad advice.
No, it doesn’t. The quality of advice is not what we’re arguing about here. What we’re arguing about is what the client should pay for: the advice they receive, or the amount of assets they possess? I’m arguing that the client should pay for the advice, and the amount of assets they have to invest should have no automatic or direct bearing on the amount they pay. If “high net worth” means “more complicated advice and solutions are needed”, then intelligent fee structures can accommodate that. Existing free structures, in use in financial planning firms today, do exactly that.
So is there really a case for banning commissions altogether?
Perhaps not altogether – in the example above (Argument 2), where the commission system may be harnessed solely as a payment mechanism, for example, it can be a useful and constructive instrument.
Maybe there’s a middle ground, where we can use the existing commission system, with its existing infrastructure and efficiencies, but still achieve the aim of operating on a professional basis, where planners are paid for their skills and expertise (for their advice) rather than for how much they can sell.
This is the third of four blogs by Simon Hoyle on why Storm proves that the commission system is fatally flawed.
Next Tuesday’s blog: Has Storm put you in the Government’s sights?
*Can the commission system play a useful role even in the fee-for-service world? Click on the comment button below to join the debate