Commissions in do-or-die fight

ALMOST seven years ago to the day, an executive of the prudential regulator took aim at the financial planning sector, using a speech on corporate governance to label commission-based advisers as “conflicted”.

Outrage swept through the industry, with the then chief executive of the Financial Planning Association describing the comments as “outlandish and sheer conjecture”.

Fast forward to 2009 and the FPA board has formally passed a measure requiring members to transition away from commissions.

But FPA chief executive Jo-Anne Bloch, who took the reins at the industry body in 2006, stopped short of declaring commissions to be a conflict of interest for advisers.

“It has not contributed to increasing confidence and trust in financial planning,” Ms Bloch told WA Business News. “Our premise is not whether they are good or bad.”

There are about 1,000 FPA members in WA, 700 of them currently practicing.

Ms Bloch said under the threat of government regulation coming from parliamentary reviews in the sector, some members who were strong advocates of commissions had been forced to support the remuneration overhaul.

It seems industries always prefer self-regulation to government legislation.

Denys Pearce, managing director of Perth-based planning business Plan B Group Holdings, said although there were sophisticated arguments for different remuneration models, getting rid of the perceived conflict made sense.

“Our view is get rid of the problem,” he said.

“There will always be an element of the industry that will go down kicking and screaming.”

Plan B was one of the early adopters of a fee-for-service model, with its decision to get rid of commissions dating back to the late 1980s.

Commissions range from a few basis points to the 10 per cent upfront handouts given to advisers who recommended failed agribusiness providers Timbercorp and Great Southern.

One way or the other, the word ‘commission’ is on the way out of the financial planning industry; although the controversial remuneration structure remains firmly entrenched in life insurance products.

But the overhaul may be nothing more than smoke and mirrors.

The rarely understood platform rebates and volume bonuses have been completely left out of the FPA transition agenda.

A platform is a piece of software usually owned by the major banks that advisers use to direct money into investment and insurance products, while the platform provider takes a cut. Rebates occur when a planner or practices invest large amounts through a particular platform.

“The introduction of these hidden incentives [platform rebates] is the most backward step in the financial planning industry since exit fee products were invented. They are very substantial in dollar terms and a major influence on investment dollar flows,” highly regarded Queensland-based planner Neil Kendall said in a government submission.

Mr Kendall said the elimination of the rebates could lead to a 40 per cent reduction in the cost of platforms to consumers.

The country’s most successful listed financial planning dealer group, Count Financial, earned more than $60 million in fiscal 2009 from platform rebates and commissions.

One industry representative close to the parliamentary inquiry told WA Business News platform rebates and volume bonuses weren’t well understood outside of the industry and therefore there was little chance government would legislate against them.

Soft dollar payments are another type of ‘commission’ that reward advisers for recommending a particular product over another.

Further, there are suggestions that some product commissions are simply being relabeled as fees, with no benefit flowing through to the consumer.