Debate about conflicted remuneration is a waste of time according to Nistico Sen adviser Maurice Nistico, and an unwelcome distraction for the industry.
The Adelaide adviser and Masters of Financial Planning student recently submitted a report arguing the industry should stop pretending there is an answer to the question of which form of remuneration advisers should be forced to employ.
All forms of remuneration have merits and all are flawed in some respect, Nistico says. As long as the clients’ best interest are adhered to, it’s up to the adviser to uncover the payment system that works best for their business and their clients.
“Well intentioned advisers can serve their clients’ needs well using commission, assets under management percentages, hourly rates, retainers, flat fees, or a combination of them all,” Nistico writes.
There is no ideal method of remuneration, the adviser explains, or perfect fee schedule.
“All remuneration models can lead to a conflict of interest,” he states. “Commission only may create the incentive to encourage more sales rather than advice. Advisers compensated by percentage-based fees may be biased towards accumulating more [FUM]. Advisers charging by time spent may be incentivised to work very tediously. Retainer or flat fee advisers may be incentivised to work as quickly as possible to allow more time for more clients.”
Nistico quotes Australian Financial Complaints Authority deputy chief ombudsman June Smith, who in her own 2009 PhD thesis argued that no one form of remuneration correlated with higher ethical reasoning.
“Unethical behaviour arising from remuneration sources is not related to the level of cognitive ethical reasoning of the decision maker,” Smith stated, adding that behaviour is influence by other “contextual factors” such as the ethical climate and culture within licensees.
No perfect answers
Speaking to Professional Planner, Nistico says there is “no perfect answer” to the remuneration question.
“That’s why I originally became interested in the topic,” he says. “I saw the topic as an ongoing distraction.”
The remuneration issue is often discussed in the context of professionalism, which the adviser believes is misplaced. He refers to Western Sydney University dean Michelle Cull, who has argued that professionalism should be linked to the advisers’ faithfulness to the clients’ best interests only.
Concerns about Standard 3 in the FASEA’s Code of Ethics – which says advisers shouldn’t adviser, refer or act where a conflict exists – are also misplaced, he argues, because the authority itself has clarified that its concern is with “actual conflicts”, and it doesn’t seek to ban any type of remuneration.
“Product based remuneration – in the context of complying with the FASEA Code as a whole, and with the client’s full and informed consent – should be viewed then as a funding mechanism, and not a quasi-conflicted form of remuneration,” he says.
Ultimately, advisers should be able to decide which model works best for them, he believes. As long as their intent is right, the method of payment is irrelevant.
“Remuneration can create a conflict,” he says. “However, it is the Advisers intent that creates a conflict of interest.”
Maurice has articulated very well what is obvious when you read and understand what he is saying.
If the Regulators could see that the client should be able to determine what best suits their needs and let them do it in an easy to understand format, then the chaos and Billions of dollars lost via extreme red tape and over zealous Regulation, would have been avoided.
Thanks for this piece Tahn.
As far as I’m concerned Maurice Nistico has done more for commissions in one articulate and brilliantly referenced piece than the AFA has done to support remuneration diversity.
Bravo!
This sounds very sensible.
The key to a ‘conflict of interest’ is whether it creates a competing interest, competing with the best interests of the client, a competing interest that changes the behaviour of the adviser to the detriment of the client.
An example is a product provider incentivising ‘advisers’ in any way, however subtle, to prefer inferior products of the product providers. The conflict is very simple to see: How much do these advisers favour inferior products, inferior from the point of the view of the client?
Or, to put it simply, ideological discussions about adviser payments are bunkum. What matters is the evidence in client outcomes and we have two of those:
a. Reducing adviser commissions has caused immense harm to insurance companies and clients through underinsurance. Eliminating it will only benefit industry funds whose currently less competitive products will be in a near-monopoly position.
b. Products providers incentivising their commercial salesforce led to the excesses shown in the Royal Commission.
Let’s look at outcomes and, please, respond. It is getting urgent.
I prefer to charge flat fees but ultimately, in an efficient market, the client will decide. The government needs to stop treating everyone like children and let adults make decisions for themselves.