One of the most contentious issues with financial advice is the way in which advisers are remunerated. There is a great deal of variation between advisers as to how they are rewarded for their services to clients and regulators struggle to achieve consistency and transparency of how much is paid by whom to whom. There are generally three parties involved – the adviser, the client and the product provider. In an ideal world, there would be no such thing as conflicted advice – that is, advice to buy or sell a financial product which is influenced by the level of remuneration the adviser receives on the transaction.
In general, most advisers selling investment products now work on a fee basis – either a percentage of funds invested, a fixed fee or an hourly rate. Fees are paid by clients. However, trail commissions paid by product providers still apply to some investment products, for example KiwiSaver and retail managed funds. Advisers selling insurance and mortgages mostly receive a commission from the product provider and these commissions can vary between providers.
On top of all this, advisers can receive ‘soft dollar’ benefits, such as free overseas trips for top performing advisers, free training and support and assistance with marketing costs. These incentives are used extensively by insurance providers to motivate salespeople in what is a tough area for advisers – selling products which people desperately need but are reluctant to purchase. The practice of ‘churning’ – that is encouraging people to replace their insurance cover so the adviser can receive up-front commission – still prevails, although thankfully with only a small percentage of advisers.
When you are working with a financial adviser, make sure you understand all the ways in which the adviser is remunerated and how the adviser ensures the advice given to you is not conflicted.