Commission is the foundation for extending financial advice to South Africa’s poor

On 20 August 2013 a subsidiary of one of South Africa’s largest insurance companies announced that it would do away with the commissions paid to its tied agents – and to brokers who opt in – for selling financial products on its platform.

Financial advisers who use the Old Mutual Wealth platform will have to negotiate a fee-for-service with their clients. This fee may include an up-front advice fee and an on-going advice fee which can be either a fixed rand amount or a percentage of assets under management.

While the wealth manager’s decision may be applauded by those who view commission as an unnecessary evil in the financial advice remuneration space, these commentators may have forgotten that most large insurance and investment houses have operated a ‘no commission’ approach on single premium investments for many years. The statutory commission on single premium life policies is capped at 3% payable up front only.

The type and quantum of remuneration that should be paid to financial intermediaries for financial advice is a hotly debated issue that will be fully explored when the Financial Services Board’s Retail Distribution Review paper is published in October this year. Whatever the outcome of the debate there is no doubt the eventual remuneration solution will comprise a mix of commission and fees.

“You cannot pass judgement on the commission paid to an intermediary by a financial product supplier without considering a wide range of factors,” says Justus van Pletzen, CEO of the Financial Intermediaries Association of Southern Africa (FIA). “You must distinguish between investment and risk products, whether they are single premium or a recurring monthly savings plan, ascertain the type and quantum of commission paid and also consider the financial means of the consumer.”

The Old Mutual Wealth ‘no commission’ solution – which is by no means unique or new – should be viewed against the backdrop of its targeted high net worth client base. These investors – who typically have R5 million in investible assets – will have no problem in paying advice fees running into thousands of rand. They will not struggle with a negotiated on-going advice fee or the monthly administration fee of between R100 and R500 (to be charged by Old Mutual) either.

“High net worth consumers have a great deal of surplus cash at their disposal to negotiate terms for financial advice,” says Van Pletzen. “That is why they are referred to as investors rather than savers.” He added that the FIA was concerned that any drive to abolish commission on these savings products, while having no impact on the wealthy, would create insurmountable obstacles to the poor.

A ‘saver’ is someone who typically battles to scrape together a few hundred rand at the end of each month to commit to regular contribution savings products. “If you tell a saver that he must pay an advice fee of R1, 175 in order to purchase a five-year endowment of R450 per month, the transaction is most likely going to fall flat,” he says. “The commissions that are viewed as toxic by so many pro-consumer commentators are actually funded by the financial institution and serve as a kind of lay-bye for financial advice which savers welcome.”

Institutionally funded commission, as opposed to client negotiated fees, is only paid in two very narrow investment product lines namely monthly funded Endowments and monthly paid RAs issued by insurers. These commissions are already regulated by statute.

It is this commission structure that enables savers in the low to mid-income market to obtain quality financial advice on an equal footing with high net worth clients. Effectively the product suppliers are undertaking to pay the consumer’s advice fees for them to be recovered over time from the monthly contribution paid for the product.

The statistics speak for themselves, in the 12 months ending December 2012, the savings part of the life insurance industry reported 625,000 new endowments and 247,000 new RAs, generating new savings commitments of just under half a billion rand per month.

Without well trained rewarded and motivated advisers these new savers would not have emerged. Commission paid at the statutory cap would have provided the adviser with an average of between R900 and R1, 500 for his or her efforts.

“We should view commission as a funded fee,” concludes Van Pletzen. “Instead of tar-brushing commission as an evil we should look at ways to ensure the fair application of commission from one product and supplier to the next, thereby ensuring fair outcomes for consumer and adviser alike.”

“Commission is a non-negotiable component of remuneration in the intermediated distribution model because, without it, there will be absolutely no way that either intermediary or product supplier will make inroads into the underserviced segments of the market where consumers are most susceptible to debt and a poor savings culture.”