Where's my cut?
Commissions have been an unavoidable fact of life in the financial services sector – pretty much since the dawn of time.
The problem is that they can incentivise financial advisers to sell you financial products – a life insurance policy, say – based on how much of a kickback the adviser gets from the product provider (usually a bank or insurance company), not on whether the financial product is the best fit for your circumstances.
Commissions also add to the costs you pay without adding to the benefit you receive, so it's safe to say they're a no-win prospect for the consumer.
If you've bought your health insurance through a third party such as a financial adviser, online comparison service or broker, for instance, part of what you pay is likely to be passed along to the person who sold you the policy as a sizable one-off payment, a steady stream of kickbacks (known as a trail commission) or both.
As it happens, about 50% of all insurance policies in Australia are purchased through brokers.
The long-anticipated Future of Financial Advice (FoFA) reforms were meant to do away with many types of commissions, but with the watering down of FoFA, some commissions remain.
While the FoFA reforms are meant to put an end to most "conflicted remuneration" schemes, the bad news is that insurance commissions outside of
superannuation are exempt.
Products that pay commissions
For-profit retail super funds usually owned by banks and insurance companies,
Most managed funds,
Life insurance arranged by a financial planner,
Home loans arranged through a broker,
General insurance - commissions can apply and vary widely, and
- Health insurance purchased through a third party such as a financial adviser, online comparison service or broker.
Products that don't pay commissions
Industry super funds,
Index funds, and
Investments that are traded through a listed market such as the Australian Securities Exchange (ASX), including shares, exchange-traded funds and
listed investment companies.
How commissions work
Commissions are more or less built into the financial services system. Most financial product providers in Australia are banks, insurance companies or super funds and these institutions use financial planners and advisers as their sales force.
So, if you've invested in a managed fund, life insurance policy or super fund arranged by a financial planner, chances are part of your money is paid to that adviser as a kickback - aka a commission.
Under the FoFA reforms, any such remuneration is not allowed to be "conflicted". In other words, the adviser is prohibited by law from making a recommendation based on the size of the commission he or she stands to receive rather than on the best interests of the client.
The most common payments are upfront commissions, which cream off a percentage of your initial investment and future contributions. Trail commissions, on the other hand, are annual payments based on the balance of your funds.
In some cases, advisers may be earning these payments by providing you with ongoing advice, regular appraisals of your investments and strategy, and other services.
But some people receive no services for these fees. CHOICE has spoken with members who indirectly pay commissions each month to a financial adviser they've never met, and in one case to a planner who had died - the commissions continued to flow from the member's default superannuation fund.
Reclaiming the kickback
In order to claw back at least a sizeable portion of what should rightfully be yours, you can transfer your "broker authority" to a commission rebate company - which will keep part of the reclaimed money as a fee.
These companies generally offer a no-advice service; they simply request details about you and your investments or policies, and contact the product providers to request entry fees be reduced (usually to zero) and future trail commissions be paid to them instead of your present adviser. The rebate company then shares the trail commissions with you - to varying degrees.
Finding the best-value rebate company depends on the funds they cover, which commissions and what percentage they refund, their fees and the value of your investments. Before transferring your broker authority to any company, make sure you read its Financial Services Guide, which explains the key things you need to know.
Super and managed funds
If you're in a retail or for-profit superannuation fund, you are probably indirectly paying commissions to a financial adviser. Retail fund providers
include large financial institutions such as AMP, AXA and Colonial First State.
The upfront commissions could be up to 5% from each contribution you make, but most rebate companies will "dial down" these entry fees to nil.
Superannuation trail commissions are usually about 0.5% of your fund's balance each year - or $500pa for a $100,000 super fund.
One industry insider we talked to said a trail of 1.1% or even higher is not unusual: "1.7% is the worst I've seen. It applied to a client who was
intending to move to an industry super fund after she hadn't seen her financial planner for a number of years."
Commission rebate companies compared
We've compared the annual trail refunds provided by these companies on different superannuation balances, assuming a 0.5% annual trail commission (see the table). Some of the best commission rebate performers for a superannuation balance up to $50,000 are
For a single fund with a balance of $75,000-$200,000, refunds can range from a very respectable $225 to $850 per year, but rebaters can also charge a fee as high as $150 per product, so if you register for commission refunds on two managed funds and a super fund, your refunds would be offset by a $450 fee.
So then, the two things you need to find out from any commission rebater are:
- How much of the commission gets rebated?
- How much does the rebater take in fees?
The kicker with some insurance products is the upfront commission, which can reach 130% of the first year's premium in the case of life insurance, followed by as much as a 30% cut to the sales agent every year thereafter. These costs are woven into the premium you pay. Brokers tend to be secretive about how much they're getting, and the size of the cut varies depending on the arrangement.
One rebater we talked to told us commission levels for health insurance hover at about 25%. Unless you take out a policy through a rebate service in the first place, rather than handing over the administration of an existing policy, you won't be getting any upfront commissions back.
However, by switching to a rebate service in midstream you can defray your premium costs by receiving a share of ongoing commissions, an opportunity you would have otherwise missed out on.
The good news is that life insurance commissions are set to be curtailed, but they will still be substantial.
- From 1 January 2018, a phase down period will begin that will see upfront life insurance commissions capped at 60% and trail commissions at 20% over the following three years. (But it's a bit of give with one hand and take with the other, since a 20% trail commission is a major increase over what's historically been applied.)
- However, arrangements entered into before 1 July 2016 will be grandfathered, meaning the old higher commission structure will still apply.
Mortgage brokers are usually paid an initial commission of about 0.6% of the amount you borrow. They also receive an annual trail of about 0.2% of the remaining loan balance. So, if you spent a few hours with a broker to arrange a $400,000 home loan 10 years ago, initially they would have received $2000-$3000.
If after 10 years the loan is worth $300,000, the broker would have continued to receive an annual cheque from your lender for about $600 - a pretty big reward for a few hours' work a decade ago (and they'd get more if the loan was interest-only).
Q Will my planner be angry if I switch? Could he/she contact me and complain?
Possibly. But rebate companies argue that if a customer is switching away from their adviser, chances are the adviser wasn't providing much of a service so
they've little to complain about. If you get a confronting phone call from a planner you've ditched, you can make a formal complaint to the Financial Ombudsman Service.
Is there a downside to these rebate services?
Some rebaters are small start-ups without much of a track record. They may struggle to be viable if investment commissions are banned. Another criticism is
that some rebaters are primarily financial planners looking for new customers.
However, rebate companies offering financial advice separately would argue
it's a valuable service to those who want it. Obviously, such advice should be provided on a fee-for-service (no commission) basis.
Q What are the disadvantages of leaving my adviser or insurance broker?
If you want advice, you'll have to pay for it separately. However, that's not necessarily a bad thing - you're more likely to get good advice if it hasn't
been tainted by commission payments that cause conflicts of interest. If you need to make an insurance claim, you won't have the adviser to help you -
you'll need to contact the life insurance company yourself.
Do commission refunds apply to other financial products?
The list is growing all the time, and some companies offer rebates for the commissions on real estate, cash management trusts, general insurance (home and
contents, travel, motor) and many types of personal loans. As always, make sure you read the product disclosure statement and understand the implications
before making any decisions.