In my view, there appears to be an over-elaborate emphasis on the impact of commission in the provision of financial advice. We recently saw extensive rules and regulations published to bring law and order to the payment of a wide variety of incentives to financial advisors. Most of these, quite correctly, needed to be reviewed, in the light of what had become layers and layers of undeclared costs, ultimately borne by the customer.
In the article on the revision of retirement provision below, mention is made of protection being afforded to trustees who employ financial advisors working on a salary or fee basis. The implication appears to be that a commissioned advisor will not provide the same impartial advice as one working for a salary or fee. Whether this will mean superior or inferior advice, appears not to be a consideration.
As far back as 2006, when discussions around the remuneration models for financial advisors were first broached, the (then) LOA submitted certain figures as to the cost of retirement annuities. The national treasury (NT) questioned these calculations, pointing out that roughly two thirds of the cost of an RA went to the product provider.
If this is correct, then one has to ask what is being done to address the major cause of the problem. It appears that commission is receiving unfair attention.
A comment in the 2006 document entitled Contractual Savings in the Life Insurance Industry provides some insight into the thinking of the authorities on this matter:
“The triangular association – whereby the intermediary provides advice to the policyholder but is incentivised by the insurer, who then recoups such costs from the policyholder – is fundamentally flawed. A commission-receiving intermediary cannot, by definition, be thought to be truly independent.”
This document gave rise to the 50% reduction in upfront commission, and now forms the basis for new proposals to replace commission with fees, and whether advice is truly independent, or “restricted”.
In our input to the original discussion paper, we pointed out that advisors do not pay themselves commission. Incentives, devised by product providers, were used to procure business, even if it meant that the product sold may not really be the best one for the client. The source of the problem should be addressed, not the beneficiary.
The power of commission to sway advice was no more clearly evident than in the case of property syndications. Combine a willing seller with an over eager buyer, and you have a recipe for disaster.
While the current focus is on investment business, ominous sounds about other products are also being mooted.
In a way, it reminds me of the scientists who experimented with fleas. They taught one to jump, every time it was instructed to do so. They broke off one leg, but still the flea jumped. This process continued until, eventually, the last leg was removed. The flea did not jump.
This led to the conclusion that a flea hears through its legs.
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