Eyes on ‘money for nothing’ advisers

The costs of insurance could drop if calls to end ‘‘money-for-nothing’’ annual commission payments to financial advisers who are no longer providing advice or service to clients are successful.

Trail commissions are paid to advisers by companies selling KiwiSaver, super funds, and life and health insurance to pay for ongoing servicing and advice to clients.

But concerns are surfacing that some trail commissions are being paid to advisers long after they have stopped providing support to clients, or who have completely lost touch with them. And in some cases trails are being paid to advisers on products they are no longer allowed by law to advise on.

Trail commissions can add a lot of cost to an insurance policy or super fund investment. A 10 per cent trail commission on the health insurance policy of an elderly couple can add up to $700 a year to its cost.

Though the issue has remained under the radar, Fred Dodds, chief executive of the Institute of Financial Advisers (IFA) expects it to surface in the review of the Financial Advisers’ Act, which is under way.

But it’s likely to get an airing before then as the Financial Services Council (FSC), the industry body for life insurers, will soon release a report on commission, though FSC chief executive Peter Neilson would not comment before its release.

Dodds said: ‘‘The Melville Jessup Weaver report, which is being done for the Financial Services Council, will have a whole lot of ugly stuff in it when it surfaces.’’

It is eagerly anticipated because of the involvement of John Trowbridge, an Australian whose report on commissions has led to hotly disputed changes across the Tasman. Dodds said the 2008 introduction of the Financial Advisers Act meant only more tightly regulated Authorised Financial Advisers could provide advice on ‘‘complex’’ products like investments.

Despite that some Registered Financial Advisers, who are more lightly regulated, are still getting trail commission payments on complex products they sold before the law changed.

Dodds said: ‘‘They (some RFAs) are still getting ten or twenty grand a year in trails.’’ ‘‘The FMA is aware,’’ he said. Financial Markets Authority spokesman Andrew Park said: ‘‘All these matters are being looked at as part of the review of the Financial Advisers Act. They are key issues of interest.’’

Another live question was whether accepting trail commissions without providing service and annual reviews breached Section 33 of the Financial Advisers Act, which requires advisers to exercise ‘‘care, diligence, and skill’’.

Park said anyone with concerns over the conduct of an adviser could complaint to the free disputes resolution scheme to which that adviser belonged, or come directly to the FMA.

The reason trail commissions can continue being paid after the advice relationship has ended is that they are governed by contracts between the adviser and the insurer or fund manager.

Insurance industry expert David Whyte said many experienced advisers agree commission agreement with their clients. ‘‘Whether the cost is met by all commission, a combination of commission and fee, or all fee, is – and should be – a matter between client and adviser to negotiate and settle,’’ he said.

Others believe trail commissions should be linked to ongoing advice and service.