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Thursday, 15 July 2021

Checking on adviser commissions I have paid

As a consumer I was only vaguely aware of the extent of the 'commissions' being paid to 'advisers' by financial products I had invested in. I knew they existed, and because I bothered to read the 'fine print' of product PDSs, I also knew that the commission was paid to 'your financial adviser' (if you had one), but that if you didn't have an adviser (for example, if you applied directly to the product manufacturer) they didn't rebate the commissions, but simply kept the extra profit margin.

Eventually, back in 2013, I found out about a new 'commission rebate service' that would at least rebate to me 50% of the trailing/on-going commissions that product providers normally paid to financial advisers (or kept for themselves if there was no adviser 'attached' to an account). Getting half of the fees rebated was better than nothing! A few years later the rebate service introduced a flat $75 'account admin fee', which reduced the rebate to a bit less than half, but it was still good to get a large chunk of the 'trailing commissions' on my financial investment products and insurance policies rebated. Over the years the commissions that were built into the financial products (margin loans, managed funds and personal insurance products) were:

Year       commissions       admin fee      rebated*
2013       $1,197.66           $      0.00      $   598.33
2014       $   937.76           $      0.00      $   468.88
2015       $1,027.10           $      0.00      $   513.55
2016       $1,226.25           $    75.00      $   575.63
2017       $1,223.25           $    75.00      $   574.13
2018       $1,428.08           $    75.00      $   676.54
2019       $1,530.21           $    75.00      $   727.61
2020       $1,605.17           $    75.00      $   765.09
2021       $   309.11           $    75.00      $   117.06

* addendum - in the original version of this post I had accidentally put $596.33 as the amount rebated every year, rather than the actually figures.

Over nine years I had paid $10,484.59 in commissions, and had been rebated $5,106.82. Other product customers that had applied directly (without an adviser) or who had an adviser that didn't rebate part of the commissions, would have been $5,106.82 worse off!

But even after going through the process of finding and arranging for the commission rebate 'adviser', I still paid $5,467.77 for the following "services" (as listed in the annual Fee Disclosure Statements):

1. Getting a portion of commissions received by xxxxxx as your Broker for the products
2. Member account maintenance as requested and required.

At least I was getting something in exchange for the trailing commissions being charged - a lot of consumers had 'advisers' receiving trailing commissions that they had never even met (I remember my father, an airline pilot, complained once that there was an 'adviser' in Tasmania listed on his insurance policies, and he'd never had any communication at all with that 'adviser'), or who provided no ongoing service.

Prior to the Royal Commission revealing the extent to which Australian customers had been paying 'fees for no service' the existing regulations (requiring an annual Fee Disclosure Statement) were supposed to protect consumers by making them aware of the fees and commissions being paid. Except that, as in my case, if you had bought a product direct from the manufacturer you still paid the fees and commissions. And most advisers didn't rebate much (if any) the commissions paid to them.

Last year one of the reforms introduced due to the findings of the Royal Commission was that trailing commissions were banned for financial products, with the exception of life products (personal insurance policies). That is why the total commissions for 2021 dropped to only $309.11.

I have received correspondence for the non-life product companies stating that commissions had been turned off, and that the 'cost saving' would be passed on to me (the consumer) via lower costs (eg. lower margin interest rates, lower managed fund management fees etc.). Whether or not the benefit of eliminating commissions has been fully passed on to consumers is hard to know (I'd guess not, but I can't be bothered trying to work out how much has actually been passed on to me out of last year's reduction in commissions).

As I got registered as a financial planner (adviser) in late 2018 I could have filled in some forms to 'change adviser' to myself. I probably should have done so, as I would have received 80% of the commissions (my AFLS/broker group retains 20% of any fees and commissions I receive as their Authorised Representative). However, the amount after tax wasn't huge, and I would have probably needed to worry about providing myself with an annual 'Fee Disclosure Statement' (:

Now, that I'm (hopefully) about to get my first few paying clients as a financial adviser (and will need to process annual Fee Disclosure Statements etc), I may as well send in a 'change of adviser' form for my life insurance (Income Protection) policy, so that I will get 80% of the annual $310 trailing commission, rather than just 50%.

ps. Advisers (and insurance brokers) used to get 80% of the first year insurance premium, and then a 20% trailing commission. This was slowly reduced to 70%/20% in 2019, and 60%/20% from 2020 onwards. This lower commission regime for life products is one of the reasons (the others are the FASEA exam, the increased educational and CPD requirements and increased administrative burden of regulatory requirements) that many financial advisers/insurance brokers are leaving the 'industry'. There is also 10% GST added to all fees and commissions, and some 'clawback' provisions around the first year premium commission (if the policy is cancelled or cover amount reduced in the first few years).

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