The Financial Markets Authority (FMA) has sounded the alarm bells for the second time in two months over insurance companies providing soft commissions to financial advisers.
The main form of remuneration for financial advisers who give advice on life and health insurance in New Zealand is commission. The commissions paid by insurers to advisers include monetary and non-monetary benefits. The use of non-monetary commissions, also known as soft commissions, is the concern here.
Soft commissions are incentives or benefits such as gifts, prizes, trips, professional development such as training or software, events including conferences, sponsorships, payment of membership fees and loan to advisers.
In March 2018, FMA's first report on this issue showed that among the sample of advisers those were reviewed, some failed to recognise that these incentives would cause a conflict of interest in providing advice to their clients.
Half of the advisers were not aware of or were in breach of their obligation to exercise care, diligence and skill when providing financial advice.
The risks that clients dealing with advisers who do not receive complete information about the benefits of a policy are increased when they are not aware of the rewards an adviser is receiving for selling the product.
In the recent FMA report released last week showed nine life and health insurance companies spent $34 million over the past three years on soft commissions.
About half the money spent on overseas trips and nearly half of the soft commissions required the adviser to meet a sales target to sell a dollar value or number of the insurer's products.
Insurers earned $377m in revenue over the past three years for new product sales, meaning 9 per cent of the revenue was shared with advisers in the form of soft commissions.
This is in addition to the monetary commission paid to advisers by the insurers.
There is an increasing concern that soft commissions present a real conflict of interest for advisers, as remuneration or incentives provided by insurers could influence an adviser in giving advice to clients.
Financial advisers may put their own interest ahead clients, so they can get overseas trips and gifts for new business.
Risks to clients:
Some of the potential risks of advisers not exercising care, diligence and skill, and failing to place the interest of their customers first are:
• recommending a product or value of insurance cover that is not suited to customer needs
• failing to properly analyse customer needs and instead focus on selecting product that provide a soft commission
• failing to exercise due care when dealing with vulnerable clients
• recommending that a client replaces their policy with another policy so that the chance of the adviser receiving a soft commission increases.
Potential harms from conflicted advice:
• a client may be over-insured or under-insured
• a client may have a policy with less favourable terms such as exclusions or increased premiums (where the policy is being replaced), or with features that do not meet their needs. This may affect the client's ability to claim on the policy at a later date
• clients overall may pay higher premiums due to insurers paying soft commissions to advisers
FMA director of regulation Liam Mason said, "We are concerned that insurers are designing and offering incentives that potentially set advisers up to fail in complying with their obligations."
However, the chief executive of Financial Services Council, which represents insurance companies, Richard Klipin said, "soft commissions were a reality of the industry, and clients needed to look out for themselves."
While we can only expect insurers to positively embrace the FMA'S call to reconsider the number and nature of soft commissions provided to advisers, it's definitely worth asking your adviser a raft of questions like . . . "In the advice you are giving me today are there any benefits you are going to receive?"
Registered financial advisers are not obliged to disclose their commissions to clients unless it is requested, and clients often do not realise they have rights to ask these questions.
It is very important to have an authorised financial adviser (AFA) by your side who is obliged to place the interests of their clients first.
Stewart Group is an independent financial advisory business and introduced a "no soft commission" policy in 2003, which means we work for our clients' interest, not those of an insurance company.
• Don Stewart is the founding principal of Stewart Group, Authorised Financial Advisers, and Associate Life Underwriter of the Institute of Financial Advisers (IFA) with over 50 years' experience in delivering insurance advice in New Zealand.
• Stewart Financial Group is a Hawke's Bay-owned and operated independent financial planning & wealth management firm based in Hastings. The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from an Authorised Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961.
