The anti-commissions train... all aboard!

Of the past few months, many bodies within the financial planning industry have started to talk about banning commissions paid to financial planners (e.g. Financial Planning Association and Investment and Financial Services Association). The Federal government will focus on commissions in its review of the industry. It has been a talking point for many years but I guess the recent high profile collapses such as Storm Financial and tax-effective investments have made people focus on the quality of financial advice and the fees charged for it.

One argument for a commission based system (more often than not argued by financial planners themselves) is that commissions make financial planning advice more affordable because the client doesn’t need to pay. However, this argument fails to recognise the fact that clients are paying for these commissions indirectly in the form of higher fees. Therefore, instead of paying a once-off planning fee, they are paying higher ongoing fees.

In my opinion, there is no question that a commission-free environment brings about a more transparent financial planning experience. A fee-for-service based financial planning industry clarifies exactly who the financial planner works for (should be you, not the managed fund provider). Whether fees are charged as a once-off upfront fee or an ongoing trail style payment, is not relevant. Investors just need to ensure that the financial planner’s fee is not dependent upon the advice or product outcome thereby avoiding any conflicts of interest.

I don’t think that commissions should be outlawed. That’s probably overregulation. Instead, I think commissions should be (by law) capped so that the maximum commission a financial planner can receive from selling a product is one percent of the amount invested.