KEY POINTS:
I have never taken a commission in my life - that is unusual given I have been a financial adviser for more than 20 years.
In fact, I have never thought taking a slice of a transaction is a good way for a professional to be paid, and that it leaves an "adviser" open to accusations of conflict of interest and being "just a salesperson".
Financial advisers will not win the respect of the public and be considered professionals until they are paid in a better way.
Commissions paid by product providers blur the line between salesman and trusted adviser - you can be a salesperson or a trusted adviser, but it's hard to be both at the same time.
The investment advisory industry has its problems. There has always been some mistrust of investment advisers, which has deepened following the failure of more than 20 finance companies.
Many now wonder why so many advisers were keen on recommending finance companies which paid generous commissions, and not banks, which do not pay commissions.
Not even the best advisers are beyond suspicion when they use commission as payment.
Commissions are an inappropriate way to remunerate a professional - how would we feel if cardiac surgeons were paid more because they used a particular brand of pacemaker, or if engineers charged according to payloads of bridges they design?
The trouble with commissions is the "professional" only gets paid if something happens. There is, therefore, always going to be at least a suspicion they are recommending a course of action not because that is the right thing for the client to do, but because that is where the greatest commission lies. The suspicion may be unfounded, but will be there.
The commission system of payment is often unfair. It works on a percentage of funds invested - the more an investor has, the greater the "adviser's" payment. However, is there more work to advise on a $20,000 investment than a $100,000 investment? There is not five times the amount of work.
Advisers usually act in good faith and true professionals put clients' interests first regardless of how they are paid.
But even the best investment adviser will find it hard to win complete trust while slicing off a piece of the action.
There is no reason why investment advisers cannot adopt the hourly rate form of charging used by lawyers, accountants, doctors and so on. Some investment advisers already charge in this way, but many are still wedded to percentages.
One day, all financial advisers will wean themselves off the commission method of charging clients. They will find clients appreciate paying a known fee for a service, that there is no hint they are conflicted in the advice they give, and their expertise and service are taken more seriously.
When investments and markets go bad as they inevitably will, advisers who have charged a fee for service rather than a commission find the job of explaining their actions easier.
Investment advisory will not be a fully recognised profession until the basic business model sees firms charge a fee for their service and staff draw salaries.
Each week best-selling financial author Martin Hawes will share his strategies to help you grow your wealth. You can email your personal finance questions to mhawes@wealthcoaches.net or andrea.milner@heraldon sunday.co.nz On the web: www.wealthcoaches.net
