FAIS et al, Bluechip Magazine, June 2005

FAIS et al: Are we really going to see a change in the ethics of business practices?

Disclosure letters, quotes, replacement forms, FNA’s, record of advice, licences, Inseta credits, back office support…. all these things a practicing FA needs to have in place in the new FAIS environment. But what will really change?

I still see ads in the papers seeking a motivated self-starter who wants to earn an above average income in the financial consultancy division of a leading SA Bank to apply to the address below. The individual must be able to meet sales targets and operate at a high level of activity….so the ad goes. No change yet in the approach by the drivers of the industry!

Not until these drivers; the giants of our industry; the financial consultancy divisions of our banks and tied agency divisions of our insurance companies, allow their advisors to operate as professionals instead of salespeople, will we see any real change. These tied agents / employees are given targets within complex incentivised sales systems that give greater reward when met (when certain vehicles and/or products and/or a specific company’s products are used) and that penalize the advisor financially if not met, regardless of whether he has acted in a client’s best interest or not. Example: An advisor will earn credits/commission for the number of policies sold, so it is not in his interest to invest a client’s money directly into unit trusts as that is not a ‘policy’. We have not even touched on how the policy pays life commission Vs. the unit trust direct investment, neither the fact that there are extremely few people whose average tax rate is above 30% and who would benefit tax wise from an endowment policy once the rebate and annual 11K interest exemption is taken into account! (This is often the line used to justify such a sale.)

If a bank broker underperforms on a specific target, he may suffer his commission split being altered in the Bank’s favour. So he has to find a need, (or manufacture one) in the client’s portfolio somewhere.

He has to find something to replace, or something to invest. He can’t just give him good honest financial planning advice and tell him to put his money into his debt or the money market if that’s best advice because the banks do not pay their advisors to give best advice, they only pay them half their commission. But a client coming into the bank may think that the advisor works for the bank and that he or she can get appropriate advice from them for free. Advisors in banks should rather be employed on a salary basis and banks should be custodians of honest and sound advice. There are exceptions to the purely incentive driven salesperson. Unfortunately they are just that….exceptions. These exceptions will, with client focused integrity, tell the bank to take their target and get lost!

The banks and the insurance agencies are not interested in really decent financial planning. If they dispute this, it can only be shown in altered policy practice for their agents and employees. The banks must stop being only interested in non-interest income at a client’s expense and the insurance companies must begin acknowledging business retained on the books and not just new business. Wherever advisors are under sales targets and a manager/agency owner has the ability to earn more money and / or bonuses based on the advisor’s performance, we exist in an environment that challenges integrity. It is only the IFA that can truly be committed, without fear, to a client’s need. (Not that all IFA’s are necessarily honest or running ethical practices, but at least their environment allows them the freedom to be non-target driven.)

The problem of ethical business practices gets compounded further by the vehicles used by advisors across the board, whether a linked agent as in the context of above or an IFA. Firstly, no recurring investment products through life companies should pay life commission. Period. Subject closed. Recurring investments must invest in month one with no hidden pretences to this or interest charged against commission paid. Insurance companies should sell insurance and investments should be done directly with investment companies or through platforms directly into underlying unit trusts paying as-and-when commission. Insurance companies are accepting life retirement annuities being replaced under the premise of underperforming investment funds. They are accepting endowment policies where money market, property and income funds have been selected as the fund choices. In 99% of these cases, the client’s tax rate and rebate would not make this the correct choice against the tax rate of interest income in the endowment policy. But the broker gets his commission this way. I ask whether or not the Financial Planner of the year competition checks to see if the candidates use investment platforms for products such as retirement annuities. The answer is no. How can an advisor be named a top financial planner in this competition if the vehicles are commission driven ones. A life RA rips the client off. Does the competition check for this? No. But then Personal Finance (29/05/2004) goes on to state that “these are the 6 best Financial Planners in SA”. That statement in itself is ludicrous when only 20-odd people enter. However, my point being the use of vehicles.

The controlling bodies need to change and the client needs education so as to know what to ask their advisor for. These factors will begin the change to ethical business practices being run in more than just 5% of advisor’s offices. Rewards, prizes, incentives, these will continue because the drivers won’t change. The man in the street needs to understand the vehicles at his disposal. The tenth edition of Blue Chip magazine notes how in Australia members of their Financial Planning Association may no longer accept any forms of alternative remuneration linked to product or volume sales.

Real separation of the professions of Financial Planner and Insurance Salesman need to begin to be understood. A real Planner should not need to have broker contracts to earn a living. But that brings us to fee based practices…

I do not believe that the industry at large and the client in general is ready for fee based practices. The industry because there are still some insurance companies that cannot enable us to discount commissions on their systems and because they are not yet mentally adjusted to enabling a fee based practitioner to have support when his sales levels are low. There are still some of these companies talking about only allowing contracts to stay in place if a minimum level of FYC business is placed with them each year. So targets are set again. As I said earlier, companies do not yet acknowledge retained business. I believe that BC’s should be rewarded for supporting retained business through their broker network. After all, an insurance company only begins making money off a policy after about 2 years.

The man in the street reads about finding a fee-based planner. However, often he will still need some education as to what he will be paying a fee for and why the fee will be a certain amount. A Planner going fee based needs to have a system in place for invoicing, for collection, dealing with unpaid monies etc. They also need to establish a costing structure with an hourly rate and possibly a maximum charge for certain tasks. A client likes to know that there is a maximum to what he’ll pay on an hourly system. Otherwise you will get the event of a client challenging why some task took so long. The move to a real fee-based practice is a huge mental adjustment for both the advisor and the client. A real fee-based practice does not take commission in lieu of hours worked. It does not tell the client how many hours of time he/she has just bought from the commission and try to track that time over the next 2 years. A real fee-based practice means that a client pays us directly into our bank accounts and we are not paid by the insurance or investment companies. We quote risk products with zero commission on them and we load investments with zero commission upfront. These are the places to move to. But we place ourselves at risk if we do not collect the alternative fee upfront. This in itself is a mindset move and you need to have worked out how you will position it to the client. Do not pretend you are fee-based if you are not. Do not call yourself a financial planner if you are an insurance salesman and do not do all the proper planning tasks. Decide who you are and where you are going.

In summary, not much is going to change in the short term in terms of establishing ethical business practices. Too many commission driven industry giants and insurance salesman will see to that.

Kevin Murray CFP Licensee
Independent Financial Planner