What’s so bad about commissions anyway?
If you ever chat to me about financial advice you’ll quickly realise I’m super passionate that financial advice should be independent and to be independent you can’t accept and keep commissions.
So what are commissions?
In the context of financial advice, commissions are payments to an adviser from a product provider (e.g. insurance company) for putting a client into a product that is based on a percentage.
A number of years ago such payments were banned on investment and super products which was a positive consumer outcome (although percentage based ongoing adviser fees remain, ahh another day!).
So if you go to your average financial adviser who recommends life insurance you might not “pay” for any advice or service directly rather you will pay higher premiums (around 43% higher in most instances) and the adviser will receive a commission of 88% of premiums upfront and then 22% every year. Insurance is valuable but isn’t cheap so if you have annual premiums of $1,000, the adviser will receive $880 upfront and then $220 every year for as long as the policy remains (often a long time). If this same cover was taken out through an independent adviser where you pay a fee, the premium for the same product would likely be closer to $700.
So why are they bad?
Firstly, like most things in life there’s no free lunch so although going to an adviser who receives commissions may seem cheap, you’re likely paying for it in some form (higher premiums) over the long run.
Secondly and I’d say most importantly is these commissions create a conflict of interest as the adviser gets paid more by recommending a higher level of cover that may not be appropriate (resulting in again higher premiums) or recommending a more expensive product or not considering a product as not all insurance options pay commissions (e.g. most insurance within super) amongst other conflicts.
I accept commissions are a part of capitalism and our society and believe it or not I don’t seek out an independent car salesman when I buy a car to make sure he doesn’t get paid more by selling me a more expensive car but I see the issue with advice and commissions is that the adviser is essentially the doctor advising on insurance level and products (writing a prescription) as well as the pharmacist profiting from the sale of product.
When I go to a doctor and she/he writes me a prescription I don’t think “wait a minute, they’re directly profiting from this prescription when a couple of days rest may well be the best treatment”. If there was a commercial relationship between the two, I no doubt would and there’s a clear separation there for a very good reason. The financial advice industry just hasn’t figured it out yet.