Commission or Fees?

It seems it is only a matter of time before the payment of commission to financial advisers will be banned, and advisers will instead charge fees. Commission will be banned in the UK from 1 January, 2013 and in Australia there is a proposal to ban most commission from 1 July 2012. In New Zealand, the Committee of Inquiry into Finance Company Failures has recommended that Government “investigate the possibility of conflicted remuneration structures in the provision of financial advice, including consultation with Australian authorities on the model proposed in that country”.  Commission can vary between products and, whether true or not, there is a perception that advisers may place business where they receive the highest commission. Any adviser who receives commission cannot be considered to be independent. Unscrupulous advisers can increase their commission income by switching clients from one product to another. The payment of commission at the time of sale means there is no financial incentive for the adviser to follow up with their client to ensure the client is happy and that the recommended product is still appropriate. In effect, the client loses control of the relationship with the adviser. While clients may feel they are getting ‘free’ advice if the adviser takes only a commision, in effect, there is still a cost because commission is paid from product returns either directly or indirectly. On the other hand, fees are completely transparent, they are sometimes tax deductible for the client and can be negotiated. The payment of fees creates a relationship between adviser and client whereby the adviser has an ongoing obligation to service the client or the client may refuse to pay. A switch from commission to fees should result in an improvement of the quality of advice and the ability of clients to demand good service.