So, with the turn of events in Australia focused firstly on AMP charging a fee when no advice had been provided, and now the Royal Commission looking at the wider industry over there, we are all aware that NZ’s turn may be just around the corner.
Pre-empting this in NZ, the FMA and the Reserve Bank of NZ have met with industry insurers and advisers to understand more on adviser and insurer behaviour, and how this relationship affects the advice being provided. Topics such as moving between product providers, conflicts of interests, and the influence of soft commission payments, seem to be where the focus is.
Many advisers could have the view that they provide open and honest advice to their clients and if they receive a trip because of the volume they write, then that is a bonus. That view is possibly valid. However, it isn’t the case that all advisers’ actions are reputable, as discovered from the recent report on adviser behaviour commissioned by the FMA. Two hundred advisers were identified as being higher “movers” of business and so were written to, to ascertain whether they were providing quality advice to their clients, and that client interests were paramount.
It was found that higher upfront commissions and soft commissions were influencers. The lure of incentives, such as overseas conferences, did seem to influence where the volume of business was written (not on all 200 advisers, but definitely some). The report identified that one adviser had moved the same client seven times within the last 15 years. As an RFA (registered financial adviser), they are not required to provide written advice and hence, no penalties could be laid against this adviser! You can imagine that wasn’t the outcome the new regime was trying to promote.
But soft commissions are not just about overseas trips. It includes discounts or subsidies, and any grants an adviser may receive from a product provider based on the quota of business reached or exceeded. Large upfront commissions also seem to affect adviser behaviour.
One approach advisers may consider to mitigate this is to look at spreading payments across the longevity of the product and/or client. This tactic may also take some pressure off cashflows and allow you to run a better business.
Whether the issue of “soft dollars” leads to regulatory controls on things such as acceptable upfront commissions remains to be seen.