Fees versus commission

2012-02-25 00:00

THE debate over whether it is better for financial advisers to earn fees or commission for selling investment products has been reignited following the collapse of a high-profile fees-for-financial-advice business in Asia.

Ipac, behind the concept of financial planning or coaching through its exclusive intellectual property licence to Old Mutual-owned acsis in South Africa, recently announced it is shutting down in Hong Kong and Singapore.

The Chinese don’t want to pay for financial advice — one reason given for ipac’s demise in China and Singapore.

Ipac’s closure will likely cause jitters among the financial services fraternity that has bought into, and even campaigned for, fee-based financial advice.

It will, no doubt, serve as proof for many that remuneration for advisers on the basis of commissions is the only way the financial advice industry can deliver essential savings and investment guidance en masse.


Ipac, fees in South Africa

Andrew Bradley, chairperson of acsis and chief executive of OId Mutual’s wealth businesses, remained convinced that fees are the only way to go for financial advisers in South Africa.

“We have always been of the opinion that the only long-term viable option is fees and not commissions. After thinking our local regulators would never get there, they have now stated their intention to get rid of commissions and move to fees by the end of next year. So we are delighted with our position on this,” said Bradley.


don’t want to pay

The debate is a heated one. On one side are those who believe financial advisers should receive fees that are explicit and linked to specific professional services rendered.

This is like the way in which a lawyer or doctor is paid. After all, say the fee chargers, working out and tweaking financial strategies for others and identifying the right life insurance and other money-related products is a specialised job critically important for our wellbeing.

On the other side of the debate are those who say it is better for commissions to be paid. They usually take the line that “the less said about the details, the better” to the clients who will ultimately pay for the commissions through their investments.

The logic in this camp is that people don’t really want to pay for financial advice. Left to their own devices, individuals are likely to take the wrong financial steps and therefore end up in financial trouble later, so rather let them pay commission and get the advice they need.

In South Africa there is the added challenge that so many people can’t afford to pay experts for financial advice. Life cover and other insurance and investments seem easier to buy if you don’t have to write out a cheque for them before you sign up for regular instalments.

While the argument for commissions sounds good on paper, in reality the financial services industry has taken advantage of its clients.

Commissions motivate advisers to sell specific financial funds and other products because of the lucrative income they generate and not what might be best for their clients.


Can advisers add value?

With advisers more like brokers, there are more conflicts of interest.

Financial intermediaries routinely receive regular instalments for decades after they have sold a product.

This money-for-nothing model is why commissions are likely to remain resilient. Fee-based intermediaries, meanwhile, will have to continue upping their game to show that they can add value for the money they receive. — Moneyweb.

Commissions, often secret and recurring, motivate advisers to sell specific financial funds and other products because of the lucrative income they generate and not what might be best for their clients.

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