Time to crack down on advisers’ soft incentives
Over the past week the central North Island reverberated to the roar of performance engines at the 2018 Targa North Island rally.
About 125 classic and contemporary race cars went hell for leather through 400 kilometres of closed public roads and 600km of ‘‘touring’’ roads.
That events like this can still take place is a reassurance that the fun police aren’t yet in full control.
It draws on a broad catchment of participants, from retired property developers with professional race teams through to old bogans like me with a few mates and some parts from the local wreckers. Likewise, cars range from Porsche GT3s to BDA Escorts and soupedup Fiat Bambinas.
I’m lucky enough to have done six Targas over the past four years. Given the vagaries of weather, metal fatigue and operator error, every Targa is a crap shoot.
This year we started well in our potent little Honda EK9, with the misty mornings and wet roads suiting the lithe Civic as we sprinted from Taupo to Havelock North.
Day two was less kind, as the cambelt on our high-revving little mill shredded itself. Game over.
Well not quite. We decided the best thing to do was trailer the deceased Honda back to Wellington and pick up my mate Darryl’s Mazda RX3 historic race car, then return to Havelock to get it scrutineered, liveried and back into the event on day three.
As well as allowing us to complete the rally, the rotary engined Mazda was a real crowdpleaser, enticing conversations wherever we stopped with its ‘‘braap, braap’’ exhaust note.
In Dannevirke, an old Mazda dealer told me one of the reasons rotaries sold so well in petrolstarved 1970s New Zealand was regional sales managers would give bottles of Johnnie Walker to every salesperson who sold one.
This technique – known in the trade as a soft incentive – has been around since Adam was a cowboy.
And, in the case of selling rotary Mazdas, it isn’t necessarily a bad thing (though you couldn’t pay me to drink Johnnie Walker).
But some soft incentives can be worth tens of thousands of dollars.
So rather than being an informal little nod for a job well done, they start being a serious chunk of renumeration change.
Culturally it’s become particularly endemic in the insurance business, both for traditional fire and general agents but also for those peddling life insurance and health policies.
Hot-shot salesmen and woman get egged on by regional sales managers and chief executives to surpass their sales targets so they can get treated to luxurious weeks away in places like Tahiti, London, Banff and Las Vegas.
Soft commissions were outed last week by the Financial Markets Authority, which found that nine life and health insurance companies spent a staggering $34 million on non-financial incentives.
These arrangements serve the interests of the advisers, with no discernible benefit to consumers.
Indeed, it’s unclear whether consumers are even aware that their recent life policy renewal may have just moved their adviser from the luxury room to the waterbed suite at the Tahiti Hilton. Conflict of interest, much? You bet.
Old-time insurance brokers would likely say it’s something that everyone in the industry has been aware of and passively accepted.
But suddenly, following Australia’s royal commission into the banking, superannuation and financial-services industry and a cacophony of other findings, the acceptance appetite is likely to have changed.
The part I have found astonishing is that rather than ’fessing up and cleaning up, some insurance companies argue the toss.
It’s been reported this week that only blue-chip operators OnePath and AMP have decided to pull the plug on the practice of soft commissions (and both did this before the report).
Other insurers, including Asteron Life, NIB, Sovereign, Partners Life and Fidelity Life have yet to make a call, and some even suggested that the glamorous offshore soirees have an important educational role to play.
Others maintain they rely on advisers to manage conflicts of interest around soft commissions.
To me that sounds just a bit too cute, and corrodes the brand equity of the organisations saying it. You know you can’t trust a poacher to act as gamekeeper.
Clearly these companies haven’t woken up and smelt the coffee across the Tasman, and more recently the local brew from barista brothers Rob Everett and Adrian Orr.
Particularly not the unnamed insurer – according to the FMA report – responsible for a third of all soft commissions uncovered.
The wankel rotary engine in the Mazda RX3 relies on a dead straight central shaft to keep everything in balance and trued up. The insurance industry could use it.
Mike ‘‘MOD’’ O’Donnell is a professional director and writer, and an amateur rally driver. His Twitter handle is @modsta and his team won the Peter Brock Spirit of Targa Award at last week’s Targa Rally.
For most couples, the biggest financial challenge is finding the deposit to buy a first home. However, the minute that is achieved, along comes the second biggest challenge; paying off the mortgage. The sooner, the better.
Mortgage payments are usually the biggest expense in a family budget and, when they are out of the equation, money can be invested to create even more, or spent to enjoy life.
It helps to know the shortcuts to mortgage repayment so as to get there faster.
It starts with the initial house purchase. Many young couples make the mistake of borrowing to the limit of what they can afford to pay.
This means there is no surplus in the budget to enable the mortgage to be paid off more quickly. If mortgage reduction is high on your priority list, buy the cheapest house you can bear to live in, and set yourself a target of repaying the mortgage within a short time.
Once you are debt-free, you can start saving to buy a more expensive house while remaining debt-free.
At purchase time, you may have costs such as a mortgage establishment fee, lender’s mortgage insurance and legal fees. Rather than adding these to the mortgage, pay them up front to keep your mortgage balance lower.
At settlement time, you will be asked how you want your mortgage to be structured. A good mortgage broker can help with this. Your decision will affect how quickly you can repay it.
Lenders apply different conditions to early repayment. Ideally, you want a mortgage that will allow voluntary additional repayments without penalty, either as a lump sum or increased regular payments.
There will usually be a limit on how much you can repay without penalty on a fixed-interest-rate mortgage.
Part of your borrowing can be a floating-rate mortgage with no penalty for early repayment. You can also use an offset facility allowing your savings to be offset against your floating rate-mortgage when calculating interest. This will help minimise repayments.
Try voluntarily increasing your regular payments gradually. It’s a lot better to take small steps than to take a big leap and fail. If you are lucky enough to get a pay rise, use the extra to increase your mortgage payments.
Don’t be afraid to negotiate a pay increase if you have been in your job for a while. Extra income from bonuses, part-time work, a home-based business or taking in boarders can also go straight on the mortgage.
If your interest rate decreases, keep your payments the same to pay off the principal quicker.
Interest rates are the lowest they have been for some years and will increase over time, so pay off as much as you can now. Shop around for the best available rate and make your mortgage payments fortnightly rather than monthly, as this will help reduce interest costs over the life of the mortgage.
Having clear goals helps motivate you to get rid of debt and stay focused. Imagine being mortgage-free.
Be disciplined. You may have to make do or go without in the short term for long-term gain. Forget flash cars, buy second-hand furniture and eat out at cheap and cheerful cafes. Your biggest expense after your mortgage is usually food, so cutting back on groceries could free up extra dollars.
Monitoring and celebrating your progress is essential. If you are a visual person, draw a tree with leaves that each represent $10,000 of debt. Whenever your debt reduces by $10,000, colour in a leaf and celebrate with a small reward. Have a monthly meeting to review your progress at a nice cafe´ . Your annual budget should include a holiday, because life isn’t just about the future, it is to be enjoyed now. The advice given here is general and does not constitute specific advice to any person. A disclosure statement can be obtained free of charge by calling 0800 273 847.