As long as it’s fully disclosed, there’s nothing necessarily underhand about commission payments. It doesn’t automatically mean bad advice; advisers have a duty to prioritise their clients’ interests.
Where I think it gets murky is when the word “independent” appears in the marketing next to the word “free”.
I found numerous examples of companies that market themselves as providing “free” and “independent” 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.
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?
It seems like an extraordinary stretch of the word “independent”.
If I seek independent advice, surely my adviser should start with my situation and needs, and then search the market for the best option – not start with a list of providers from which they can be paid and find the best option within it.
That’s why one company stood out to me. Smiths Insurance and KiwiSaver receives commission and advises only on a specific list of providers – but for that reason specifically says “We don’t call ourselves independent.”
“I think if I said to you, ‘Nadine, give me $200 and I’ll look after you and I’ll put it [your KiwiSaver] anywhere,’ I’d feel very comfortable saying I’m independent,” managing director Craig Smith told me. “But if I’m getting paid a fee, I don’t necessarily think I’m independent because I’m being remunerated to give that advice and put business with them.”
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.
It wouldn’t comment on whether any company I identified complied with the law, and – astonishingly – told me, “The Financial Markets Conduct Act 2013 does not specifically define the term ‘independent’.”
However, the FMA’s Michael Hewes also said, “In the FMA’s view, consumers are likely to understand ‘independent’ to mean that an adviser is not influenced by financial incentives or conflicts of interest.”
If that’s what consumers understand “independent” to mean, it’s awfully hard to reconcile that with what so many KiwiSaver advisers are providing.
There is reason to question whether those commercial arrangements affect where clients end up.
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. “We get a lot of business from fee-charging financial advisers, but almost zero from commission-charging advisers.”
Stubbs raises a valid alternative: you can pay for advice directly. But what are the chances of people doing that?
Advice labelled as independent may not cover the entire KiwiSaver market. Photo / 123rf
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 “free” 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.
That’s perhaps the strongest argument for commissions: without them, fewer people may get advice. But Stubbs rejects the accessibility defence. “It is poppycock, and the FMA has been lobbied too effectively into an intellectually indefensible position on this.”
I’m not suggesting you shouldn’t get financial advice. Good advice can have immense value – especially if it gets you in an appropriate fund for your circumstances and stops you making disastrous knee-jerk decisions in periods of volatility.
But that disclosure document they give you shouldn’t 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?
Ensure you know why they’re recommending you switch to one provider over any other, and how much they’ll be paid if you do. If they’re getting a trail commission, ask what services they will be providing you each year to justify that payment. If you’re comfortable with the advice, the rationale and the commission, great.
But if someone promises you “independent” KiwiSaver advice, check that it really is by asking, “Can you recommend any KiwiSaver provider, including one that won’t pay you?”
Catch up on the debates that dominated the week by signing up to our Opinion newsletter – a weekly round-up of our best commentary.