Commissions relate to 'mischief making': Sinodinos

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The Government is committed to removing the opt-in requirement for advisers’ clients, Assistant Treasurer Arthur Sinodinos reassured financial planners.

The requirement proved expensive for advisers to implement which clashes with the Abbott Government’s aim to strike the right balance of consumer protection and making sure affordable and competent advice is available, Sinodinos told a Liberal Party lunch in Sydney on Friday.

“This requirement has created practical difficulties while doing little to increase consumer protection.  Again, the cost savings realised by industry as a result of the removal of opt-in should be passed on to consumers.”

Sinodinos also said the Government wants to make sure a reintroduction of commissions would not encourage trouble-makers in the industry.

“The Government remains committed to ensuring that commissions do not provide the basis for mischief making and do not have a perverse effect on pricing that ultimately impacts the consumer and the provision of certain products to the market.”

Financial Planning Association policy and conduct general manager Dante de Gori told Wealth Professional the FPA does not support the return to commissions on general advice “in any shape or form”.

“We want to really make sure the government is committed to helping advisers and making sure there is scaled advice that gives people more access to planners without jeopardising the best interests duty.”

Sinodinos said the Government is taking into account submissions received on FOFA reforms, and its agenda for the changes comes about largely from feedback already received from the financial services industry.

“A strong financial services sector is vital to the strength of Australia’s economy. To allow it to flourish and so support Australia’s economic growth, we need to make sure regulation of the sector is effective and practical, and does not reach beyond what is necessary to protect consumers and support the industry,” he said.

The public can make submissions on the FOFA reforms until 19 February.

Industry representative bodies have indicated they are largely happy with proposed changes, but say they will make submissions to make sure minor tweaks are considered.

The exception to this is Industry Super Australia, which is worried the amendments will lessen consumer protections and bring conflicts of interest back into financial advice. 

“Industry Super Australia is concerned that these proposed changes will re-permit the payment of conflicted remuneration and re-open the debate about whether a financial planner is an impartial adviser or a sales rep,” ISA chief executive David Whiteley said.

The legislation is on track to be introduced into Parliament late in the autumn sittings, for debate in the winter sittings. The regulations are expected to be finalised in late March.


What will FPA say on FOFA?

 Sinodinos announces FOFA consultation

Top industry issues of 2013
  • Best Interest on 6/02/2014 12:32:48 PM

    Commissions per se are not 'good' nor 'bad'.
    It's how they are applied.

    Commissions paid by a vendor if they are used to offset the cost of advice for a client actually benefit the client - the client pays less, whilst the adviser still gets paid for their work.

    Commissions that unduly influence the adviser to use a product whilst neglecting whether it is in the best interests of the client, or commissions that are received above and beyond what the client pays and causes the adviser to be overpaid for their work, are 'bad'.

    It's how the commissions are applied and disclosed that makes them 'good' or 'bad'.

    Try telling a client it's in their 'best interests' and the Government is 'looking after them' when you are forced to charge them $4,000 now instead of $2,000 because commissions are removed and they can longer be used to offset their adviser fees anymore.

  • alleycat on 5/02/2014 5:21:18 PM

    @ Pat
    Smile all you like.
    Yours in no less transparent than mine.
    Our clients have always been put in the position of determining whether what we receive or charge is fair and reasonable, before any work is done.
    On the basis of financial planning, our ongoing remuneration has always been disclosed up front and ongoing as is required by law on a percentage basis that, the more the client earns the more we do at a much a fraction of the returns to the client. We have never ever had a client complain that we have aligned our interests with theirs. In fact they are very comfortable with the idea.

    Value is not measured in the commissions we receive but in the delivery of services that meet reasonable client expectations.
    Charging a fee for service given my earlier comments doesn't make anyone any less conflicted than a commission adviser, if abused.
    The test of what is fair and reasonable is judged by the client and not by you and not by me.
    It 's rather funny but that's what's called in part, "in the client interest."
    It has nothing to do with how either one of us is paid. It's a shame if you can't discern the difference.
    What distinguishes you and others of a similar view is that we don't take the perceived "holier than thou " view that ours is the only way.
    The one really important question that always crosses my mind is, do those who used to charge commission who now charge a fee for service model, receive more or less.

    You don't have to answer the question because I think the answer is rhetorical !

  • Pat on 5/02/2014 10:27:27 AM

    Keith, you misread my comment - the statement about making up stories was directed to Peter Corrie's absurd comment that fee for service is unprofitable. Not yours.

    Despite alleycat's silly little accusation, like you, we give advice and our time away for free, if necessary. We write off time or simply do not record it. I have also had clients say that they have seen tremendous value in the fees we charge them during dire market environments.

  • Pat on 5/02/2014 10:19:38 AM

    Ahh, alleycat - you give cause for much mirth.

    If you bothered to read my comment, which is obvious you did not, you would note that I was referring to Keith's commenthat he uses ongoing commissions to cover the initial cost of advising struggling individuals - at no point did he refer to pro-bono advice.

    But, you know what, old chum? We do give our time away for free, write off time as required including when helping clients with their insurance applications.

    But, unlike you, we don't assess our value by virtue of the commissions a product provider will pay. We don't assess our value on whether or not we can sell a product. We don't assess our value based on how many hours we can sell.

    The value we provide is based on the work we do for clients including the improvement in their ability to achieve objectives.

    Unlike you, our clients employ us and have absolute transparency and control over what they pay us. If they don't see value, we either work to ensure they get value and they see it or they fire us. If they fire us, we stop getting paid.

    Perhaps it is time you started giving some real thought to your arguments and point of view.

  • Keith L. on 5/02/2014 10:17:33 AM

    Pat, I have no problem with the fee for service model and if you wish to exclude the commission method of receiving payment, even though some of your clients may prefer that method, that is your choice and I defend your right to make it.

    I do resent and emphatically deny your accusation of not speaking the truth and making up stories. There have been any number of times I have elected to assist people knowing they were in no position to pay a fee and providing any product to them would be entirely inappropriate in the circumstances. Apart from a feeling of satisfaction at being able to use my skills to assist a person in need, I usually do not receive any other remuneration.

    There have been times when a box of chocolates or bunch of flowers for the staff is provided and on rare occasions, referral business. Although even rarer, the financial reward in these circumstances and the greatest cause for satisfaction is when the person you helped later gets on their feet and becomes a paying client. No story Pat, it actually does happen.

    There are some things we do in life that provide their own reward and that reward is not always financial. So sorry if you have never experienced this satisfaction Pat.

  • alleycat on 5/02/2014 9:32:00 AM

    @ Pat
    Unlike you pilgrim, sometimes some of us don't charge for everything we do. We are not quite that avarice.
    Meeting the needs of some clients is not about selling a product but seeing what pathways and options a client may take in order to solve problems and be comfortable with the process.
    You run your business the way you see fit but taking a pompous view that yours is the only way, is nothing more than self serving.
    How do you strike your fee for service ?
    Is it $100, $200 or $300 per hour ?
    What makes you think you're worth what ever fee you charge ?
    Do you hold one University degree as the basis of your charge, Is someone with two University degrees entitled to charge twice as much as you ?
    Do you think with that analogy someone with 2 University degrees who charges twice as much believe that his/her advice is twice as good as yours ?
    How does a client verify your billable hours ?
    Do you charge clients to settle insurance claims ? How when clients probably don't have enough money to pay much of anything which is why they took out insurance in the first place, just in case.
    Your payment model is just as conflicted as any commission model,.. if abused.

    The biggest conflicts in our profession/industry don't lay here, but in the fact that if your license is is owned by a Bank, an Insurance Company, a Fund Manager or the ISA, take another look at your APL !!!

  • Pat on 4/02/2014 5:02:05 PM

    So, Keith, what if the struggling individual's needs are not to be met by selling them a product? How do you get paid?

    Peter Corrie, you say: "whereas fee for service usually are not sufficient to cover overheads or extra admin."

    What a load of rubbish. We have been charging pure fee for service on everything (no commissions on selling funds, insurances or mortgages) for almost a decade and have been able to easily cover overheads and extra admin. You are obviously making up stories to defend the commission model. Good for you, but you are not speaking the truth.

  • Keith L. on 4/02/2014 2:03:10 PM

    It cannot be something in the water or some airborne evil contamination which is causing it but there has to be some catalyst to the unanimous break out of common sense in the comments thus far.

    Knowing fee for service was going to be inflicted upon us, for two years leading up to the inevitable I offered my client the ability to pay me utilising commission or a fee for my service identical to the amount of commission I would receive. Surprise, surprise - with only one exception, they all elected to pay using commission.

    In the past have used on-going commission to reimburse up-front costs far exceeding initial commission to help some struggling individual get their finances back in order. A choice made by the client and acceptable to me. A choice denied by the purist purveyors of biased or inflexible thinking that label a particular payment method as conflicted.

    Like the Innocent Observer, I too use services that involve commissions. Unlike the car salesman, real estate agent and shop assistant on a monthly bonus arrangement, I disclose what I receive. If the FPA, ISN and others think receiving payment for service in a disclosed manner is conflicted then they would have to also agree that any profitable activity - particularly in the case where commission percentages or margins are not disclosed - is also conflicted. What rubbish! We are an educated market driven economy and to espouse otherwise is tantamount to advocating a communist society.

  • alleycat on 4/02/2014 10:44:28 AM

    Hi Peter,
    I'm like "Batman", not too many know my true identity..... lets keep it that way.
    Here's the thing, does anyone think that those who used to receive " commissions", but now elect to charge a "fee for service" receive more, or less than they did before.
    It's a rhetorical question !

    Clients are not stupid. If they see value in your relationship, they will stay with you.
    Why you need to legislate "in the clients best interest" makes me wonder how you survive in any business,... if you don't.

    Until they manage to create the perfect human being, all the legislation in the world will not eliminate human frailty, imperfection, greed and corrupt behaviour.

    For those who believe otherwise, please count those caught so far, despite the plethora of legislation imposed on the profession/industry since FSR in 2000.

  • PETER CORRIE on 3/02/2014 8:22:55 PM

    The Liberal Party and Arthur Sinodinos are on the right path supporting our industry. The sooner they can get some of the appropriate FOFA reforms through the Senate the better. Mischief making however is possibly a comment a politician should not make.
    Dante de Gori of the FPA seem to be on the wrong path in regard to commission on general advice .Commissions create an incentive reimbursing advisers for their ongoing efforts, whereas fee for service usually are not sufficient to cover overheads or extra admin. Any business without incentive or realistic rewards do not usually produce a lot.
    As advisers we should have the freedom of choice and discretion charging commission or fee for service based on an agreement with a client as to the most suitable arrangement.
    It would seem that we are heading toward a politically freer and flexible system and better outcome for the Financial Services industry .Lets hope so.
    It seems like Mervin Reed and Alleycat who I met recently are on the same wave length.

  • Innocent Observer on 3/02/2014 5:16:33 PM

    Thanks to a mainstream-media beat-up, the Industry Super Australia('s very effective advertising/brainwashing campaign) and the FPA's desperate attempts to be avoid being ostracised by the media bandwagon, we now have a situation where the average person on the street must think that any financial adviser who takes a commission or volume bonus is a crook.

    Despite the endless debate, in this country we have very well regulated advice and consumer protection mechanisms (mandatory PI, civil & criminal avenues and restitution). The incidence of corrupt conduct is, I would argue, less than that of the legal, political or accounting professions.

    That said, there have been occasional breaches of public trust, and these shouldn't be downplayed. And of course we should always strive to be better. But turning this pursuit into a single-issue debate on whether or not commissions should be allowed as a means of payment is simply ridiculous.

    I charge fee-for-service not because I am better than the guy that charges commissions, but because that's the way I decided to run my business and price my advice. That was before Labor, under the guise of FoFA, took to trying to destroy the many small financial planning businesses being run by honest, hard-working and exceptionally well qualified and experienced advisers (at least that's what it looks like from my glass house).

    Also on the matter of commissions, as a consumer of MANY products and services that have commission priced into them, I don't have a problem with paying commissions. In fact they provide me with greater utility and flexibility. In most cases commissions are a means from which advisers or companies can recoup costs from loss-leading products.

    Think of it this way: if you didn't pay a commission expense on your home's electricity bill, you might save $10/month. But if we wanted to change electricity providers you might be facing a $300 transfer charge, which essentially locks you into your current provider (unless you want to cop the $300 expense). Personally I'd prefer to pay the additional $10/month and use my powers as a consumer (to shop around, negotiate) to find the best deal and switch where and when it makes sense to. As with any insurance or risk adviser operating on a commission basis, you need to keep the customer happy to recoup your expenses.

    Continually focusing on the evils of commissions assumes that all clients are stupid and all (commission-taking) advisers are greedy. It's wrong and is not the way we should be presenting the lifelong profession of many exceptional advisers.

    Ok, rant over.

  • alleycat on 3/02/2014 12:07:17 PM

    If the FPA and the government were "fair dinkum, they'd introduce a scale of fees that's appropriate for the advice sought.
    How that was paid whether by commission or fee for service would be immaterial.
    The one thing that distinguishes one adviser from another should be the quality of advice, the outcome that clients should come to expect.
    It's BS to say that fee for service removes conflicts, it's just as flawed and open to abuse just as much as commissions are.

  • Rosemary Johnston (PIAA) on 3/02/2014 10:30:39 AM

    This is a very broad issue that is based in the demonstration of the client's best interests test. How do financial planners take commissions from the vendor on one side and then try to show the independence of the advice on the other.

    Credibility for the advice is very clearly demonstrated by clean client's best interests principles (with no work arounds). Financial planners appear to be losing credibility with only 10% of clients acting on their advice, as reported in a survey last week. Ensuring a healthy financial planning sector is vital. Would client usage rates and rates of adoption of the advice be a good starting point for measurement? What else do we need to measure?

  • Mervin C Reed FAICD FChFP on 3/02/2014 10:16:27 AM

    It is interesting that the FPA is sounding more and more like a mouthpiece for the Industry super funds network. The FPA does not like commissions - well so what! This means the FPA takes away choice from the client. So we have the FPA in effect lessening consumer choice and siding with the Industry Funds. Well done FPA - wrong way again as usual. Too much of we know what is good for planners by people who are not planners.

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