COMMISSION OR COMISERY … THAT IS THE QUESTION?

A new word that may well have more than one meaning!  The first use has been well published by one organisation who define it as “the feeling you get when you’ve paid too much commission!”

Before I leap into my point however, I would like to first say that I know many very professional, competent, capable and knowledgeable finance brokers.  I have had long associations with them and regularly refer clients to them when it is their skills and services that will fix the client’s problem.  In fact their existence today is even more critical given that the banks have in many ways abandoned their traditional relationship with their customers.

This week the AFR’s Banking and Wealth Summit questioned the appropriateness of paying finance brokers a commission as it is “potentially illegal and will need to be dismantled if there is to be any serious shot at reform”.  In the same paper it announces that APRA is targeting banker bonuses and their appropriateness, particularly when the recipient has failed to meet targets or ethical standards, quite understandable.  In recent years the insurance and the financial products industries too have suffered from a variety of concerns relating to the manner in which members within those industries have been paid.  Again the fundamental issue has revolved around the payment of commissions and the appropriateness of those commissions given the potential levels of conflict that may arise between what is the right advice for the client, and on the alternate, the return to the adviser.

Thus an alternate use of the word when you realise ‘Comisery’ may well be the feeling that you get when you realise that your primary source of income is based on commission payments and that your industry, or source of income, is under real threat.

When clients approach advisers, including finance brokers, they are anticipating the receipt of proper and full professional advice, that ALL relevant options have been canvassed.  This is one issue that these professions will need to deal with going forward.  By way of example, someone approaching a broker will have an expectation that the broker will consider ALL available loan offerings.  This belief is significantly supported by much of the advertising that is conducted.

However in an industry where the broker’s income is generated from commissions then an adviser is clearly limited to only those products that pay a commission in the first place.  The consequence of this is that an adviser may well be disinclined to advise someone of an alternate product where there is no visible means by which they will be paid, i.e. commission, resulting in the need to bill the client and the client resultantly going somewhere else.

This regrettably is because the industry is built around certain expectations, one example being that the borrower does not pay, it is the lender who pays.  There could easily be a situation where an adviser is better to recommend a product that does not pay commissions, and charge a fee to the client because the overall advantage to the client is financially more beneficial.  If you doubt this concept then simply look at many (NOT ALL) of the auto loan products that have been on the market in the past.  Alas, one problem is that regrettably many advisers do not have full access to information about ALL relevant and available products, from all quarters.

In the long-term the industries that will succeed will be those that constructively harness expectations, professional knowledge, expertise, and independent advice to clients in order to genuinely meet a client’s honourable needs and generate a fair return.  It is well acknowledged that there are many clients who will seek finance, products, or advice that they are not entitled to, or should not properly receive.  It is the job of the true professional to weed those out before they become problems to both themselves, and just as importantly, those around them; be they family, creditors, customers or government.

With the rapidly increasing abilities and capabilities of information technology and all the related systems surrounding it the shortcomings of traditional systems, methods, behaviours and practises are becoming increasingly more evident.

The true question for all industries going forward will be are they willing to get in front of the problem, or are they intending to insist on the maintenance of old methods simply because that’s the way it’s always been done.

One thing I am confident of though, is that those who do not move quickly to adapt and honestly understand what the future requires will certainly experience the… MISERY… associated with going forward in a whole new environment.