Fudging on commissions

Consider the following statement:

You do not pay my commissions. The life insurer pays them. This means my commissions do not cost you anything.

This type of comment, or some variant on it, is made more frequently than you might think. And it is wrong on many levels. The main level is that this type of statement is misleading. As well as the general commercial prohibitions on deceptive and misleading statements (see, for example, the Australian Consumer Law), ASIC RG 175.195 explicitly states that an SOA must not contain a misleading or deceptive statement. So, why is this statement misleading or deceptive? Isn’t it correct to say that commissions are paid by the insurer? No, it isn’t. The insurer is little more than a medium through which the adviser’s remuneration passes. This is made clear by the fact that insurers allow the amount of commission to be ‘dialled down,’ with a corresponding reduction in the amount paid as premium by the client. There is a clear nexus between the premium paid by the client and the commission paid to the adviser, and to suggest otherwise is to mislead the client into thinking that their premium is not affected by the adviser’s remuneration. Relatively unsophisticated clients – that is, the clients that the compliance and regulation system is deliberately designed to protect – might ‘fall for’ a statement like the above. But more worldly or sophisticated clients will not. They will ask themselves ‘does the adviser really not know that there is a link between the premium and the commission?’ If the answer to that question is yes (i.e. the adviser does not understand the link), then the client will simply not trust the adviser. If the answer to the question is no – that is, the client thinks that the adviser does understand the link but is trying to claim that there isn’t one, then the client will decide even more quickly not to trust the adviser. So, statements like the above will do nothing to enhance the adviser’s practice. They break the law and they will lose the client’s trust as soon as that client works out what the adviser is saying.

The Dover Group