The Central Bank published a Discussion paper on the payment of commissions. They are looking for people’s opinions on the payment of commission to intermediaries. This is a topic that is always hotly debated. I am going to look at some of the problems with commissions and some solutions.
1. Too difficult to understand the different options
When it comes to pensions and investments, there are so many different options available for the same product. The variation in structures are around allocation rates and annual management fees, something completely alien to most people. No wonder they get confused.
2. There are too many commission options for products
Between all the different insurance companies, there are over 20 different commission structures available for the each product, with widely different commission structures available.
One product may pay an advisor €5,000 and another €1,000. The former will have an ongoing fee twice the size as the latter. Over the long term, which is going to cost you more?
What people need to understand is that if you are getting advice on a financial product, it has to be paid for. If you are paying by commission, the money paid out to the advisor is being recouped from your plan over time, so you pay ultimately.
3. Advisors remuneration packages are skewed towards high commissions
Most employees who work in financial services are on a relatively low basic salary with a high bonus structure based on sales. Your focus is on sales, not providing advice.
Bonuses are usually based on the commission paid for setting up the policy, so are you going to charge the €5,000 commission or the €1,000 commission? This has created a clear conflict of interests that needs to be addressed.
1. Simplify contract structures
Each product sold by an insurance company should have one charging structure. None of this getting an additional 5% added to your policy. This will keep things simple, easy to understand and will reduce ongoing costs as the insurance company doesn’t have to recoup advisors remunerations. If a client wants to pay by commission, it is simply deducted from the money they invest.
2. Promote that good advice has to be paid for
In their discussion paper, the Central Bank cites “subsidised cost of advice” as a benefit. That is you will not be charged for advice because the advisor will be paid a commission.
If the only way the advisor will get paid is by selling you something, how often do you think you will be told “What you are doing is absolutely spot on, just keep doing what you are doing and everything will be fine”. This is where good financial planning differentiates itself from selling products.
3. Enforce the Consumer Protection Code
All authorised bodies have to adhere to the Consumer Protection Code. There are some very clear rules in this Code.
If these duties are followed, people will get good advice. Of course, people can give into greed, but that is where good enforcement by the Central Bank is required.
4. Change the remuneration packages for adviors
There needs to be a change in the remuneration packages for advisors. A move away from short term sales and high commissions to long term client relationships where the client is happy to pay for good advice.
The easiest way to do this is to alter the advisor’s sales target from the implementation fee only to all the income generated by that advisor in a given year. This will include “renewal” commissions earned in year 2 onwards of any product they sell.
For me, the method of payment should be up to the client. Both fee and commission options should be explained to them and the long term differences between the two. They can then make an informed decision on how they want to pay.
I would also be against an outright ban because I believe it is a good method of payment for those who don’t necessarily have enough disposable income to pay an advisor’s fees but still wants good advice. A total ban on commissions will limit their ability to get good advice.
What do you think about commissions? Should they be kept, banned or simply made easier to understand? I am interested to know what you think.
You can contact me directly at steven@bluewaterfp.ie