Why Commissions Are Not The Problem

Before you pick up your spears, let me make one thing very clear.

Suncow Wealth is a Fee-For-Service practice, we do not do commissions.

As such, I am not here to defend those practices who operate on a commission-based model. They can fight their own ugly battles, of which there are plenty right now.

Instead, the purpose of this Moowsletter is to identify the root cause of those planning firms who have been exposed in the Royal Commission (RC) and how consumers can better protect themselves.

And while we’re at it, I should also decipher the difference between fee-for-service and commissions.

Fee-for-service is just a flat fee or a fixed payment usually made on a periodic basis. It’s a bit like a phone ‘plan’. You know exactly how much you’re going to pay each month unless you go ‘over’.

Commissions are a percentage-based fee and the reason they have such a bad name is because the more assets you have under management (AUM), the more you pay. They’re like a ‘second tax’.

The reason we prefer fee-for-service at Suncow is because it’s much more transparent and clients can see exactly what they’re paying for.

And even though commissions could be likened to something that stinks and sticks to the bottom of your shoe, that’s not where all the problems are stemming from in this RC.

The problems are much more visceral and harder to find, unless you know where to look.

Meet…

The Two Dogs
The problems creating most of the pain for consumers could be likened to two dogs hiding in the bushes waiting to pounce. The first dog is…

Vertical Integration – this dog has teeth like knives and should be put down asap. It bites like this.

For the banks to maximise their profits, they’ve created their own factory of financial products (investments and insurance) and then flogged them down the channels through their bank branches.

But the problem is, it’s made their financial advice biased and a blatant conflict of interest. The client’s best interests have been made secondary and the banks put first. And on top of that are the commissions, but it’s not really the commissions that have created all the damage. It’s the blatant bias created by vertical integration.

Let me give you two good examples of bias that have come to my attention this week through a very good friend of mine.

Said mate works for a boutique fund manager who I’ll simply refer to as ‘Best Blokes Funds Management’.

Recently, Best Blokes approached AMP about recommending one of their funds to their clients, but AMP asked for a ‘distribution’ fee in return. Best Blokes made it clear they don’t do business that way and said ‘no’ to AMP’s request.

Instead, AMP chose another fund who was willing to pay a ‘distribution’ fee even though their performance was inferior to Best Blokes…and then happily recommended it to their clients.

And then there is MLC. Said mate ran into the same problem with this mob as well.

MLC is owned by NAB and when Best Blokes approached MLC, they knocked back Best Blokes fund because…wait for it…they were worried Best Blokes performance would show up the NAB investment managers, even though their clients would have been better off.

But I’m tipping it was both. MLC were worried about their own precious managers being shown up plus the loss of fees.

And then we have this dog…

Incentives – this one isn’t as obvious and can be even harder to detect, suffice to say, it’s alive and well and riddled with fleas. I’ll touch on this one in a later Moowsletter and show you how to flush the incentives and vertical integration out.

Unfortunately, vertical integration and incentives make commissions look like angels. Commissions just make something expensive (potentially), it’s the other two that have created all the damage because they drive a very different behaviour.

Put simply, ‘commissions’ and ‘fee-for-service’ have almost become a veil for the real issues. Meaning, an adviser could masquerade as a fee-for-service adviser but still be driven by incentives and vertical integration.

Therefore, and dare I say it, any discussion about commissions almost becomes extraneous, unfortunately.

But I promise to show you how we can navigate our way through this mess. I’ve got a cute little ‘sketch’ you can hang on the wall at home above your bed. It’s a real special!

Have a great weekend!

Adam

p.s. Last week I said this week’s Moowsletter would be, ‘Who’s the Man in The Suit’ but it ran for pages, of which this is an extract. ‘The Suit’ might make an appearance next week. Also I apologise the last two Moowsletters have been a bit negative however there have been some important distinctions to make about where innocent consumers are being done over that I think people should be aware of.