Clients suffer when financial advisers get kickbacks

Travelling through mafia-land in Sicily last week, I found myself admiring the rocky flat top hills that led to Mt Etna. I reminisced that it reminded me of Table Mountain in Capetown. My husband sourly pointed out he wasn't on that trip.

Whoops, still a sore point then.

I'd travelled to Africa business class with a bunch of financial "suits". We'd taken a cable car up the mountain and eaten at seaside restaurants where the sea and sky were so blue, it made me homesick for New Zealand. It had been a long cold stint working in the UK.

I'd dined at a fancy winery, transported in a vintage Bentley. The suits all trailed behind in pairs, in the back of various other classic cars. A helicopter ride over Capetown took my breath away and I swam in a big pool at the hotel.

It was the millennium. I was 30 years old and felt like a movie star.

But it does beg the question, why wasn't I with family or friends? What possessed me to jump on a plane with a bunch of suits for a luxury trip to Capetown?

To put it bluntly, I think I'd gone mad. I think the whole financial industry had gone mad. And at the risk of using a swear word (but this deserves it) we were so bloody entitled we thought it was okay. Nobody dared tell us we weren't.

This is what soft-commission smells like. For those who aren't familiar with the term, it's when one financial company entices-rewards-influences another firm or their own staff with lovely treats. Certainly not a mafia-style bribe – more of a civilised silent suggestion that we hope to see your continued support.

The reason we-the-entitled call it "soft commission" is it isn't received in hard cash. Therefore it's quite difficult to quantify on your schedule of fees and it's best we don't bother telling you.

While the years have made me far more circumspect, it would be ridiculous for anyone of my vintage to suggest we've not been knee-deep in the soft stuff.

Education explains nothing

In my case, I headed up a product development and research team at a large firm of financial advisers. We decided which investment funds made it on to our in-house panel and were sold to clients. There were strict policies in place about how we selected these and to this day I don't believe I was influenced by Cape-treat.

But the fund manager footing the bill probably did have my "ear" thereafter.

Whatever they got or didn't get, the entire concept was wrong. I cannot imagine an accurate fee disclosure; "This fund manager has an annual management charge of 1.25 per cent. It might have been slightly cheaper if the head of product development at our firm and several other firms, hadn't taken an educational trip to Capetown, paid for by this manager."

It doesn't roll off the tongue well. Push delete.

That's how these trips are often dressed up. As education. It's a smoking braai when you hear those words. Genuinely, education could be involved. Cape-treat had a two-hour informative session complete with croissants and hangovers. I can think of one or two cheaper methods.

Therein lies the problem for financial companies dishing out these trips.

Where is the line? How much "education" is acceptable? When do the presentations stop and the helicopters start? It's so subjective every chief executive and compliance officer should run a mile.

The New Zealand insurance industry has recently come under fire for soft commissions linked to sales targets. Some have stopped (well done AMP).

On a practical level, if soft commissions are just replaced by higher wages, bonuses or greater payments to advisers, the cost of your insurance premium won't fall, so who cares? Is it really affecting us?

Indeed it is. If there is any sniff an adviser or salesperson is influenced to sell a certain policy, a higher level of cover or switch policies, there is no way of proving client interests drove the decision. Transparency is crucial. Soft commissions come in many forms, not just a Fijian Lei. If insurers, fund managers or brokers pay for an adviser's business costs, marketing or training, it's a form of soft commission.

If they have to tender to be on a panel, it's soft commission. If they provide "free" research access to place trades through a broker, it's soft commission.

Listen up FMA

Here is one simple message for the regulator, our Financial Markets Authority. Stop asking for the practice to cease. Start regulating it.

Just put the word "no" into law.

Financial providers will thank you as it levels the playing field. Yes, it's a bit messy to draft a few exceptions and catch all the angles. No regulator gets it perfect, but it's time to start with a legal "no".

Janine Starks is a financial commentator with expertise in banking, personal finance and funds management. Opinions in this column represent her personal views. They are general in nature and are not a recommendation, opinion or guidance to any individuals in relation to acquiring or disposing of a financial product. Readers should not rely on these opinions and should always seek specific independent financial advice appropriate to their own individual circumstances.