Central Bank changes to being an Independent Advisor

The Central Bank issued its feedback to a consultation paper on commissions. While we welcome some of the measures, we feel the reforms are clunky and do not address the issue of overcharging and transparency, something that can be solved in a much simpler manner.

Can’t be Independent if you receive commission

From April 2020, a firm cannot call itself independent if it receives commission. This includes commission payments for policies that are already in place. This is the massive change to the structure of any business and something than cannot be done in just 6 months, as most advisory firms have legacy commissions paid. At Bluewater, 60% of our income last year was from fees, and a lot of work that we do is only on a fee basis but we do get paid commission and in these circumstances, it suits our clients. I discussed this before in a previous blog called Time to get rid of allocation rates but let me go through it again.

Lets say you come to me with €100,000 to put in a pension. There are three different charging options available that I can offer you:

Contract 1Contract 2Contract 3
Allocation rate101%102%105%
Annual Management Charge0.5%0.75%1%

I can get paid €5,000 and you pay the highest annual management charge (I have never used this option). Or I can get paid €1,000 and you pay the lowest annual management charge. Now say I no longer receive commission payments, you will have that €1,000 (or you can chose the €5,000 option) invested into your pension plan. You will also write me a cheque for €1,000 to cover the fee. But the fee is from your net income, so you will have to earn €2,000 to pay my fee but you only get €1,000 extra put into your pension. In this circumstance, is is not more beneficial to have the advisor paid by commission instead of fee?

My argument is that there shouldn’t be any allocation rates. As a result, the life company doesn’t have to recoup commissions so the management fee will come down and there is only one option. If a client wishes to pay through their contribution or through a fee, it comes directly out of the money they pay. It will prevent advisors charging huge commissions and hiding it through the management fee.

Ban on payments linked to the volume of business placed

There used to be a commission called “override” which was essentially a bonus commission paid at the end of the year based on the amount of business that you placed with any one provider and how much business stayed with them. I had thought this had stopped already as we certainly don’t receive any.

I am aware of one firm in Dublin who paid for advisors and their partners to have a weekend in New York for meeting their sales targets. A product provider should not be setting sales targets for the broker market! I welcome such a ban being in place as this is a clear conflict of interest.

Ban on hospitality benefits

Insurance companies can no longer bring advisors for a game of golf or give them tickets to sporting events. This is to avoid conflicts of interest. When we are talking sporting events, we are not talking about being brought to the Monaco Grand Prix or the Champions League Final. It could be a Leinster match, an Ireland match or a round of golf (I don’t play golf, so was never invited).

Insurance companies bring advisors to these events as a thank you for continued business, they are infrequent and not an incentive to give business to a particular company. Advisors should also list these types of gifts under their conflicts of interest policy.

List all commissions across all providers

Advisors will have to list all commissions across all providers on their website and in their office as well as bring it to the attention of their clients. As a firm which has listed their fee structure on their website since January 2015, this is an absolutely ridiculous and pointless exercise.

When I get an agency to do business with a life company, I have access to all of the commission structures they offer for their products and there is a lot. One provider offers 34 different commission structures for one type of monthly premium pension plan. They have 4 different types of monthly premium pensions. Then there is single premium contributions, ARFs, investments and all their risk benefit products too. Multiple that by the number of providers in Ireland.

Never mind that an advisor might only ever use one or two of these different options, they will have to list them all. We will be looking at a document that is 300 pages long. Who is going to look at that? This is a complete waste of time.

Further research: Abolition of mortgage commission linked to the size of the loan

The Central Bank felt that mortgage brokers would encourage borrowers to take on more debt in order to get more commission. This is a fallacy. And believe me, borrowers don’t need encouragement to take on debt. When looking for a mortgage, they want to know how much they can get before they start house hunting. And with the Central Bank restrictions on lending (which we agree with), there is a maximum amount that people can borrow.

Further research: Restriction on advising where there is a difference in commission rates for products across different providers

As we have seen already with the 34 different options, insurance companies have the bases covered when it comes to commission rates. In other words, they all offer the same options. The Central Bank should be looking at life companies to reduce the number of charging options available. If we look at life cover for example, there are a number of different options available. It is important to know that the option picked by the advisor makes no difference on the price of the cover.

Option 1Option 2Option 3
Initial commission140%180%100%
Ongoing commission3%3% (after year 6)10%

If I was an employee on a sales target, I would opt for Option 2 every time. But as a business owner, I want to build up an ongoing value to my business so I will choose a lower up front payment and a higher ongoing payment, so will choose Option 3.

I am all for transparency and explaining the fees to clients. Our Statement of Suitability documents lays out all the charges a client may expect, shown as both a percentage and euro value. I don’t think the Central Bank has addressed the issue of advisors being able to hide massive commission payments through the smoke and mirrors that is the commission structures of pensions and investments in Ireland. This can only been done through banning allocation rates.

If you have any questions, drop me an email at steven@bluewaterfp.ie