Commission payments to those ‘placing’ financial services products started shortly after Adam met Eve. They have been with us ever since.
Initially, they dominated the retail insurance and investment markets. Until recently, the corporate superannuation market was serviced by professionals charging fee for service.
The growth of personal savings and superannuation, in an environment where dealer groups are free to place business wherever they like, has encouraged:
n high up front commissions to attract the business in the first place.
n perpetual ‘trail’ commissions to leave the business where it is.
n other assistance and ‘soft dollar’ incentives to foster ‘relationships’.
Why is commission growing in corporate superannuation?
Recently, intermediaries and commission structures have moved into corporate superannuation.
I suggest, in part, this is because of:
n financial services products being complex. Master trusts are almost labyrinthine! Often, the consumer does not totally understand them. One wonders if complexity is deliberate.
n the dependence of product developers on commissioned agents to sell their products. If this is the only channel to customers then they will not alienate it. Indeed, the aim will be to make the product attractive by increasing commission payable.
n ignorance amongst consumers about what is available and of the true all-up cost of the products put forward to them.
This is true in corporate superannuation. Customers from all walks of life and degrees of sophistication seek expert assistance to make sensible decisions that meet their genuine needs.
Disclosure only helps address concerns about commissions
Using intermediaries to assist employers ‘choose’ products places responsibility on industry (and government) to ensure everyone acts in the interest of their clients.
Part of the answer is full disclosure of any commission (in fact, any remuneration at all) by the intermediary.
Unfortunately, in this segment, commission-based remuneration and other incentives impact in ways that disclosure does not address.
It is the fish that John West rejects, that make John West the best!
A series of TV ads showed a fish buyer for John West in Canada rejecting Atlantic salmon. The message was clear. The only way to be sure of getting the best is by examining all alternatives, rejecting those that do not come up to the mark, and then selecting the very best.
This does not always happen. Are employers told of products available that don’t pay commission? Do commission paid ‘experts’ put them forward? Will the ‘expert’ favour products that pay the highest commission?
There is evidence to suggest some poor practices.
A case to illustrate
A company appointed someone to assist in selecting a master trust. The adviser expressed considerable interest in the level of ‘trail’. We know cases where a minimum is specified.
One financial institution offers two options. The first pays commission. The second does not. This institution suggested the second product was better. The expert (acting on behalf of the company) made it clear: put up the commission paying product or forget about it— they would not even be given the opportunity to present their commission free product.
The commission payable was a cool $60,000 per annum in perpetuity, which is not the highest we have heard of.
We could give many more examples.
We suspect that one reason why some of the better industry funds are never considered when companies outsource is because of their refusal to pay commissions or other inducements.
Products designed for the intermediary
Retail financial service providers depend on financial planners to win customers. This is not a bad thing. Access to good quality, independent advice fosters good investment decisions. We encourage it.
But it can mean an unhealthy influence on product design. Retail products have ‘attractive’ commissions — both up-front and trail. Most now allow intermediaries to ‘dial up’ commission levels. These products are ‘flexible’ and are now gaining currency in the corporate market.
Surprise, surprise! Financial products are complicated and fee structures not always transparent.
Towards a solution
We cannot right all wrongs overnight. But we can take important steps forward.
We should move away from service providers (product seller) paying ‘independent’ experts to help consumers select the right product. The expert should be remunerated by the consumer to remove bias and produce better outcomes.
And to those who argue consumers won’t pay for independent advice we say — wake up and smell the roses! They already do. Even if they do not know it!
— Wayne Walker is managing director of Rice Walker Actuaries.
