Wheels turning for ban on commissions

A veteran Australian retail fund salesperson explained to me once how the funds management industry worked in its early days, by which he meant the late 1980s.

"We would back up a truck to a financial planning business and offload prospectuses."

The financial advisers would then sell a truckload of funds to a clamouring clientbase, desperate for access to the new exciting investment opportunities. Along the way the adviser would pick up a commission of 10 per cent or more of funds placed - that was exciting too.

While the industry has evolved a little since then, its fundamental payment structure hasn't really changed. For the most part, financial advisers - it's true here as well as in Australia - are not paid directly by their clients. Instead, funds management and insurance firms collect and distribute revenue to advisers based on how much money their clients have placed with respective products.

The commission system is cause for perennial debate within the industry as well as an easy target for outside critics.

I've been following the arguments for long enough to know that it is not simply a matter of 'commissions bad, fees good' - paying a fee doesn't guarantee good advice. However, the current commission system is hardly ideal for either consumers, who may not be aware of and can't control the payments, or advisers, who leave themselves open to accusations of bias.

Last week the Australian Financial Planning Association (FPA) - which represents about 12,000 financial advisers - took the extraordinary step of recommending a phasing out of commissions for its members.

"Commissions are not paid directly by the client and cannot be switched off. They are paid until the client withdraws their funds or ceases life insurance cover. Commissions also bundle charges and make it difficult for clients to understand what component of the commission relates to advice, product, or administration," the FPA statement says. "Under the fee-for-service or direct-charge model the consumer is billed directly by the financial planner based on an agreement with the client."

Reaction from Australian advisers has been mixed as this blog on the 'Professional Planner' magazine website reveals.

Will New Zealand jump on the fee-for-service bandwagon? Well, Securities Commission chief, Jane Diplock, wants the trans-Tasman advisory industries to converge.

Australia is a long way from banning commissions, however, there are still plenty of advisers who want the FPA to back up the truck.

- David Chaplin