It is great to know I can still push a few people’s buttons. IFA recently (issue 359) published a letter to the editor by an anonymous writer who was confused by my use of the term fee for service in an article I wrote in early April. It never ceases to amaze me how this subject can elicit such emotional responses from participants in our profession.
Both the Wikipedia and dictionary definitions of commission are “a form of payment to an agent for services rendered or products sold”. These commission payments are often on the basis of a percentage and for this reason many commission-based salespeople have confused percentage-based fee-for-service arrangements with commission-based sales. It could be said that it serves the commission-based salesperson’s purpose to confuse as it muddies the waters and deflects the attention from the real issue and the true difference between fee-for-service advice and commission-based sales.
A commission is paid to an agent for services rendered to the product manufacturer. A fee is paid by a consumer for services rendered to the consumer. The difference between fees and commissions can be summed up as the difference between the act of being a price maker with the client or a price taker from a third party. Someone charging a fee is a price maker. They determine the fee they should be paid and negotiate this directly with the client. A planner operating on a commission basis is a price taker and receives the commission determined by a third party while operating in their capacity as an agent for that third party. They are receiving a proportion of someone else’s fee.
I am making no value judgment on the superiority of one method of remuneration over another. I am simply striving to clarify once and for all the difference between the two methodologies of being paid for advice. I happen to believe the provision of advice should be functionally separate from product as I believe it serves to better eradicate any potential for any conflict of interest that can arise from differing levels of commission available or that there are many products that pay no commission at all.
The end result of an industry operating on a commission basis is the ludicrous situation where financial planners are seeing themselves pitted against non-commission paying industry super funds and arguing in defense of retail funds. It is not the job of the planner to argue against low-cost industry funds. It is the job of the planner to assess industry funds along with retail funds on their merits. This should be done dispassionately without any stake in the outcome of the analysis.
Whether the fee the planner charges for this work as a percentage of the dollars involved or a set dollar amount does not determine if it is a commission or not. Whether it is paid to an agent of the entity that is charging the fee determines if it is a commission. Let me use an example of another profession that charges a percentage. An architect can charge a fee for their work and this fee is a percentage of the cost of the job undertaken. The architect is acting for the client not the builder and he is paid a percentage fee by the client. It is still a fee.
Paragem managing director Ian Knox makes the point well when he says volume bonuses paid by product providers are really retention payments to keep business and market share. Knox says these commission bonuses can’t last as they have an adverse effect on the industry and on those wanting a fee-based industry. He is right and trailing commissions not tied to a service agreement with the client are simply payments to make the adviser work to keep funds with an institution rather than payment from the client for agreed services.
It is time we grew up as a profession and stopped having these meaningless squabbles over fees and commissions and focused on the provision of meaningful advice. If it is advantageous from a marketing perspective to advertise as a fee-for-service provider then we need to ensure the client is paying us and we contract with the client for our remuneration and not with a product provider. If it is more convenient to be paid by an institution then we need to be aware of the potential for conflicts of interest in this arrangement and be aware certain consumers may treat this arrangement with a degree of suspicion.
The largest proportion of our industry operates in an agency capacity with the large banks and life offices. The challenge for them is always going to be that the advice is as free as possible from the potential for conflict of interest, bearing in mind the ownership of both the advice and product businesses. They should be encouraged to further explore ways to do this so consumers are better served.
