As long as it\u2019s fully disclosed, there\u2019s nothing necessarily underhand about commission payments. It doesn\u2019t automatically mean bad advice; advisers have a duty to prioritise their clients\u2019 interests.<\/p>\n
Where I think it gets murky is when the word \u201cindependent\u201d appears in the marketing next to the word \u201cfree\u201d.<\/p>\n
I found numerous examples of companies that market themselves as providing \u201cfree\u201d and \u201cindependent\u201d KiwiSaver advice but then disclose that their recommendations are restricted to specific providers with which they have agreements, and from which they receive fees and\/or commission payments.<\/p>\n
Can you really be independent if the universe of products you can recommend has already been narrowed to companies that have commercial arrangements with you?<\/p>\n
It seems like an extraordinary stretch of the word \u201cindependent\u201d.<\/p>\n
If I seek independent advice, surely my adviser should start with my situation and needs, and then search the market for the best option \u2013 not start with a list of providers from which they can be paid and find the best option within it.<\/p>\n
That\u2019s why one company stood out to me. Smiths Insurance and KiwiSaver receives commission and advises only on a specific list of providers \u2013 but for that reason specifically says \u201cWe don\u2019t call ourselves independent.\u201d<\/p>\n
\u201cI think if I said to you, \u2018Nadine, give me $200 and I\u2019ll look after you and I\u2019ll put it [your KiwiSaver] anywhere,\u2019 I\u2019d feel very comfortable saying I\u2019m independent,\u201d managing director Craig Smith told me. \u201cBut if I\u2019m getting paid a fee, I don\u2019t necessarily think I\u2019m independent because I\u2019m being remunerated to give that advice and put business with them.\u201d<\/p>\n
I asked the Financial Markets Authority whether it had any problem with advisory firms calling themselves independent, when their recommendations were limited to providers who paid them.<\/p>\n
It wouldn\u2019t comment on whether any company I identified complied with the law, and \u2013 astonishingly \u2013 told me, \u201cThe Financial Markets Conduct Act 2013 does not specifically define the term \u2018independent\u2019.\u201d<\/p>\n
However, the FMA\u2019s Michael Hewes also said, \u201cIn the FMA\u2019s view, consumers are likely to understand \u2018independent\u2019 to mean that an adviser is not influenced by financial incentives or conflicts of interest.\u201d<\/p>\n
If that\u2019s what consumers understand \u201cindependent\u201d to mean, it\u2019s awfully hard to reconcile that with what so many KiwiSaver advisers are providing.<\/p>\n
There is reason to question whether those commercial arrangements affect where clients end up.<\/p>\n
Low-fee KiwiSaver provider Simplicity does not pay fees or commissions to advisers who refer clients. Founder Sam Stubbs says that, in its experience, the impact is stark. \u201cWe get a lot of business from fee-charging financial advisers, but almost zero from commission-charging advisers.\u201d<\/p>\n
Stubbs raises a valid alternative: you can pay for advice directly. But what are the chances of people doing that?<\/p>\n
Advice labelled as independent may not cover the entire KiwiSaver market. Photo \/ 123rf<\/p>\n
FMA research published earlier this year found affordability was the most commonly identified barrier to getting financial advice. When consumers were offered different advice models, 34% preferred \u201cfree\u201d advice where the adviser received commission from a product provider. That was even after being told explicitly that it could create a conflict of interest.<\/p>\n
That\u2019s perhaps the strongest argument for commissions: without them, fewer people may get advice. But Stubbs rejects the accessibility defence. \u201cIt is poppycock, and the FMA has been lobbied too effectively into an intellectually indefensible position on this.\u201d<\/p>\n
I\u2019m not suggesting you shouldn\u2019t get financial advice. Good advice can have immense value \u2013 especially if it gets you in an appropriate fund for your circumstances and stops you making disastrous knee-jerk decisions in periods of volatility.<\/p>\n
But that disclosure document they give you shouldn\u2019t just be given a cursory glance and thrown in the bottom drawer. Make sure you know the limitations of that advice: can they scan the entire KiwiSaver market and come up with a recommendation, or can they only recommend a provider from a specific list?<\/p>\n
Ensure you know why they\u2019re recommending you switch to one provider over any other, and how much they\u2019ll be paid if you do. If they\u2019re getting a trail commission, ask what services they will be providing you each year to justify that payment. If you\u2019re comfortable with the advice, the rationale and the commission, great.<\/p>\n
But if someone promises you \u201cindependent\u201d KiwiSaver advice, check that it really is by asking, \u201cCan you recommend any KiwiSaver provider, including one that won\u2019t pay you?\u201d<\/p>\n