Commission on risk products II

Media 24's Adri van Zyl provided more detail on the issue we speculated on last week in an article entitled "Advisor commissions could change" in Rapport on Sunday. Please click here for an English version of the article, en hier vir die Afrikaanse weergawe.

It would seem that the national treasury's concern with the commission does not lie so much with the commission as such, but with the churning that is becoming a major issue. Since the reduction of commission on investment business, risk policies became very popular as a means of keeping the cash flow going, and churning old-style life cover products is as easy as falling off a log.

In the article on Liberty above, it is quite clear what impact churning can have on a product house. Similar sentiments on the negative impact of churning are also echoed by Old Mutual and Sanlam. Treasury's concern appears to be more with whether the client suffers as a result or not, and this is an issue that needs serious consideration.

A reader, Johan van der Merwe, raised two issues after last week's article. Johan specialises in estate planning, and often comes across risk policies that do not serve the client's needs as is shown after a thorough analysis. He would be shirking his responsibility in terms of the FAIS Act if he did not replace it with what the client requires.

Secondly, Johan raises the contentious issue of price, stating that very often risk policies are replaced because some products are just so much more expensive than their competitors, and by replacing the policy, you are in fact saving your client money. Johan feels that, if the commission on risk business is made the same as on investment products, the only winner will be the product house who will pay out reduced commissions.

I sense the same lack of insight here that applied when the decision was made that an advisor may not receive commission for assisting a client with a Section 14 transfer. One wonders whether some see us as salaried staff?

My own view is that regulation has been put in place to ensure that a proper needs analysis is done before a product is recommended. If an advisor deviates from this prescribed procedure, he is acting illegally, and the product house should not accept the new business; in fact, they should report him to the authorities.

The latest investigations by treasury would seem to indicate that they do not trust their own legislation to do the job, and are considering falling back on the old tried and tested method; punish the advisor.

We all know that there are advisors out there whose sole objective is to look after their own interests and who have no qualms about side-stepping the law to do so. The FAIS Act was introduced specifically to weed them out of the industry, and should be applied for this purpose, and not to punish the honest broker who has served his client loyally for many years.