Is it time to bring back adviser commissions?

Michelle Levy has recommended that product providers such as banks and super funds provide personal advice to Australian consumers. She says this will help more Australians access advice, particularly in a world where financial advisers are far too expensive.

Accessibility and affordability of advice are the ultimate goals of Levy’s review. Nowhere in her final report does she suggest a return to commissions being paid to financial advisers. But back in 2014, Ms Levy thought commissions weren’t such a bad idea at all.

In a blog post for Allens dated 20 August 2014, she writes:

“It is possible that FOFA may have had its day. If ASIC has its way, financial products will need to be suitable and instead of financial advice being in the best interests of the customer, the financial product will need to be. If that is the case, does it matter if the person ‘selling’ it doesn't act in the best interests of the customer or if they are paid a commission by the product issuer?”

The Quality of Advice Review (QAR) chair goes on to say:

“If I visit a Toyota dealership, I expect to be sold a Toyota — I know the salesperson is not acting in my best interests and I suspect they will get a commission. But provided the Toyota does the job, there is really no reason to complain. If it doesn’t, Toyota is responsible for fixing any defects. If I want to know which is the best car for me, I will ask an independent expert, I won’t visit my Toyota dealer. Why should buying a financial product be different?”

Why indeed. Now, almost nine years later, the third recommendation of Ms Levy’s final report opens up a discussion for commissions to be reinstated:

Ms Levy recommends that the Corporations Act 2001 be amended to provide that personal advice must be provided by a relevant provider where:

a) the provider is an individual; and
b) either:

i) the client pays a fee for the advice; or
ii) the issuer of the product pays a commission for the sale of the product to which the personal advice relates.

The final part of this recommendation needs clarification. To me, it seems that Ms Levy is recommending that the relevant provider, such as a financial adviser, can provide personal advice and be remunerated by either the client or the product provider. There is no specific mention of the product in question being life insurance in this recommendation.

Elsewhere in her final report, Ms Levy states that fees charged by financial advisers “will always be out of reach” for some people and, even when they are not, not everyone will want to pay a financial adviser.

“Financial advisers themselves want to provide comprehensive advice to clients with whom they have an ongoing relationship, as they have studied and trained to do, rather than to provide incidental or piecemeal advice on financial products.”

I disagree with the above comment. Sure, financial advisers want to provide comprehensive advice to clients. But they also want to provide incidental or piecemeal advice on financial products. They just can’t, because they don’t have commissions as a revenue stream to underwrite the cost of providing those types of advice.

Banning commissions is what caused financial advisers to stop providing piecemeal or product advice. Studying and training has nothing to do with it. It’s pure economics, and one of the main reasons why advisers now target wealthier Australians. The majority of Australian consumers would like piecemeal or product advice from a financial adviser, but they can’t get it. The model has been designed this way.

Now it looks as if product providers will step in and begin providing the piecemeal advice that advisers were forced to stop offering when commissions were banned.