# Commission



## Freddie Kruger (5 Nov 2001)

Is commission a 'dirty' word or is it only when it is used in the financial services industry that peoples skin starts to crawl ?


----------



## Madonna (5 Nov 2001)

Well Freddie there is a lota fuss 100 miles up the road about <!--EZCODE BOLD START-->* DE*<!--EZCODE BOLD END-->commissioning and I don't think they're talkin' about Financial services.


----------



## Freddie Kruger (5 Nov 2001)

Madonna ?????

Are you sure you have not made a mistake in the spelling of your name and are suffering from the the effects of a hectic life? Perhaps this [broken link removed] is a more appropriate photo :lol


----------



## Madonna (6 Nov 2001)

[broken link removed]

Ah the hand of God!:lol


----------



## jem (7 Nov 2001)

Freddie 
You raise a good point here many, many businesses get paid commission and infact in reality margin is commission put in a different way. For example a clothes shop buyes a suit of clothes from one company and sells it on at a higher price the difference is the amount that the shopkeeper gets paid for selling that suit. Likewise someone sells an insurance product and he gets paid for selling it. Why the difference in name?
Many other professions also gets paid under the name commission travel agents, sales reps, auctioneers,music agents etc etc.

I would have to agree that it is just in the insurance world that commission has a bad name.


----------



## UDS (7 Nov 2001)

There's an important difference, though.  The clothes shop is acting purely in its own interest in selling you the suit of clothes.  It is under no obligation to sell you the suit that fits you best.  And the travel agent, auctioneer, etc, is acting for the seller - he has no duty to the buyer.

But the insurance broker is acting for the buyer, and is supposed to be protecting the buyer's interests.  Yet he accepts payments from the provider for selling the provider's  products.  You can see the potential for conflict of interest and duty, surely?


----------



## Freddie Kruger (7 Nov 2001)

*Re: Duty To The Buyer*

Hi UDS,

Call me old fashioned, but I would have thought that <!--EZCODE BOLD START-->* anyone*<!--EZCODE BOLD END--> who sells something or provides a service to someone else has to have a duty to buyer. 

If someone sold you a suit which didn't fit you (surely you would have tried it on) are you saying that you have to keep it?

I don't think that anyone who would operate a business like this would be there (in business) very long? 

The potential for conflict of interest is, one could argue, part of any sale.


----------



## UDS (7 Nov 2001)

*Re: Duty To The Buyer*

Ah, now, Freddie.  You're trailing your coat here, aren't you?  Brokers accept (and hold themselves out as having) a much higher duty to their clients than, say, grocers.  A retailer's duty is to provide goods which match their description, are fit for their purpose, of merchantable quality, etc, but if the retailer has a range of goods which satisfy these tests - and <!--EZCODE ITALIC START-->_ all_<!--EZCODE ITALIC END--> the goods he sells should satisfy these tests - then he is perfectly free to sell the one with the highest profit margin, and not the one which best suits the individual needs of the customer.  Indeed the retailer is under no duty to make any enquiry of any kind into the customer's needs, and typically doesn't.

Do you regard insurance brokers as being in this position?

<!--EZCODE ITALIC START-->_ "If someone sold you a suit which didn't fit you (surely you would have tried it on) are you saying that you have to keep it?"_<!--EZCODE ITALIC END-->

If it matches its description (e.g. is a size 40) and is fit for its purpose (e.g. doesn't come apart at the seams after three wears) then no, he doesn't have to take it back.  If I've bought a suit that doesn't fit me that's my lookout.  Of course, for the sake of good customer relations he may <!--EZCODE ITALIC START-->_ choose_<!--EZCODE ITALIC END--> to take it back, but he's not in breach of any duty to me if he doesn't.


----------



## Maradonna (7 Nov 2001)

*Re: A Question for Freddie*

Freddie, which of the following is the healthier scenario:

<!--EZCODE BOLD START-->*   Scenario 1:*<!--EZCODE BOLD END-->

<!--EZCODE ITALIC START-->_   My advisor tells me she is going to charge me €X for a consultation and other than that she will get no financial reward.  I now know that <!--EZCODE UNDERLINE START-->her<!--EZCODE UNDERLINE END--> financial interest has been taken care of and from this point her interests are totally at idem with my own, even to the point where she might recommend that I do nuffin._<!--EZCODE ITALIC END-->

<!--EZCODE BOLD START-->*   Scenario 2:*<!--EZCODE BOLD END-->

<!--EZCODE ITALIC START-->_   My advisor tells me the consultation is "free" as she gets paid commission.  Oops!  How much? She must certainly be very keen to make some sort of "sale".  Will she get paid more depending on the type of sale or even the company she recommends?  She tells me not to worry as any commission she gets will be fully disclosed to me.  Yeah, but how do I know there was not a better product or cheaper company which would have given her less commission?_<!--EZCODE ITALIC END-->

Well, Freddie, with your "old fashioned hat" on - which is the best scenario?:smokin


----------



## Freddie Kruger (7 Nov 2001)

Hi UDS,

One has to trail their coat, sometimes, to elicit a response. Now read my first post again. Some are frothing from the mouth already. Why does that word do that to people?

Why does everyone assume that you are going to get ripped off, if an advisor gets paid<!--EZCODE BOLD START-->* commission*<!--EZCODE BOLD END--> from a product provider? Unless, of course you are of the BB school of thought and, you think that there are only a handfull of honest advisors in the country?.  

Why does everyone assume that all advisors go for the jugular (highest<!--EZCODE BOLD START-->* commission*<!--EZCODE BOLD END-->) in recommending a product? 

A choice :- Pension Product 1 has a 1%/1.2% annual management charge with a limited number of index tracking funds available.

             :- Pension Product 2 has a .75% management charge, a policy fee of £3.50pm with over 20 sectoral funds to choose from.

Which of these offers the 'better value' or if you were advising someone what would your recommendation be? 

Any chance we could keep this on topic ie<!--EZCODE BOLD START-->* 'commission'*<!--EZCODE BOLD END-->.  

PS. Maradonna - Why dont you offer both to your clients and let them have the <!--EZCODE BOLD START-->*  choice*<!--EZCODE BOLD END-->.


----------



## UDS (7 Nov 2001)

Hi Freddie

I think the problem with commission is that it creates incentives for advisers to breach their duty to their clients – e.g. an adviser gets rewarded if he successfully advises the client to invest in product X but not if he advises him to go away and put his money in the Post Office, even though given the client’s circumstances and his needs and objectives the latter advice might the the best advice.  And if incentives are created then, human nature being what it is, sometimes people will respond to them.  I don’t believe brokers are any worse than anyone else in this regard, but I don’t believe they’re any better either.

Turning to the specific problem you pose, to my mind the first question to ask is what kind of investment the client wants to make.  Probably the most important service you can give to him is to help him make this decision.  If he wants to invest in tracker funds, Product 1 seems more attractive; if he wants a choice of actively-managed sectoral funds, Product 2.

Assume, however, that he is indifferent as between active and passive management, and betwween sectoral and more general funds.  Then I would look to charges.  You haven’t given enough information to say which of the two products will be cheaper for the client, but once you know his expected contribution amounts it’s not difficult to work out the relative effect of the two products’ charging structures on him.

Even if he <!--EZCODE ITALIC START-->_ does_<!--EZCODE ITALIC END--> have a preference, you might still want to model the two sets of charges.  If his preference for (say) index trackers was a weak one, and in his circumstances they were going to be significantly more expensive, he might decide that the extra cost wasn’t worth it to him and go for the cheaper product anyway.

The question of how much commission (if any) either of these products pays the adviser is of course irrelevant to the decision.  I assume that these are two genuine products.  As a matter of interest, do they pay commission to advisers, and is there any difference in the commission they pay?


----------



## Lucretia1 (7 Nov 2001)

Maradonna, 

I've a question for you.  Advisor goes the 100% fee route.  Client comes looking for advice on an SSIA product.  Advisor gets details, does lovely comparison of SSIAs and concludes that client should go to EBS.  Client pays fee.  

Client is chatting down the pub about his new SSIA from EBS with family and friends with similar requirements.  Client photocopies advisor's report and distributes it amongst friends.  Friends buy EBS SSIAs.  Advisor ends up in poor house.

How does advisor avoid poor house?


----------



## rainyday (7 Nov 2001)

Hi Lucretia - I guess it's the same problem for anyone selling advice (e.g. consultants, lawyers etc) and to a lesser extent for anyone selling intellectual property (e.g. software, music, videogames, etc). 

I'd guess that in many cases the advice may not be transferable, i.e. the best SSIA for me may well not be the best SSIA for you, as we (presumably) have different financial circumstances. So, the punter who hands out photocopies in the pub may well be misleading his buddies.

Of course, the advisor can always but a 'copyright' mark on his advice, which at least gives him someone to sue if the photocopies start appearing. Or perhaps the advisor should build some 'confidentiality' terms into the normal terms of business with the punters.

I hope you're not suggesting that the advisors are simply 'giving up' on good professional advise because someone might copy it and going for the highest commission option instead.

Regards -RainyDay


----------



## Maradonna (7 Nov 2001)

*Re: How does an Advisor avoid Poor House?*

That's an easy one Lucretia, ask me a hard one next time, this is the hand of God, you know. 

This particular advice was capable of being <!--EZCODE ITALIC START-->_    commoditised_<!--EZCODE ITALIC END-->, therefore there is no <!--EZCODE BOLD START-->*    added value*<!--EZCODE BOLD END--> in it, might as well read our Leader's DIY Guide.:|    

If advisors are to avoid the Poor House they will have to <!--EZCODE BOLD START-->*    add value*<!--EZCODE BOLD END-->.  They will have to give advice which is not capable of being commoditised and spread around the Pub.

<!--EZCODE ITALIC START-->_    Mithrandir_<!--EZCODE ITALIC END--> gave some good examples once, I can't remember where.  But in those examples genuine advice was dispensed which was not capable of being copied or commoditised for everybody.

SSIAs are like toothpaste, lots of varieties but really much the same and most people can make their own choice, price probably being as good a determinant as any.  If Dentists relied on earning a crust upon recommending a brand of toothpaste they wouldn't all be driving Mercs.8)    

I see <!--EZCODE ITALIC START-->_  RainyDay_<!--EZCODE ITALIC END--> slipped in before me.>:


----------



## UDS (8 Nov 2001)

*Re: How does an Advisor avoid Poor House?*

Maradonna is correct, but in addition I would say that this is a bit of a sideshow to the discussion Freddy is trying to have.  If the problem of recycled advice arises, it arises regardless of whether the adviser is remunerated by commission or by fee.

If anything, the point adds weight to the anti-commission brigade. If your point is that a commission-based adviser cannot recommend a non-commission product without cutting his own throat, well, there may be truth in that.  And that means that the commission-based adviser has a strong incentive to recommend what may be the wrong product, and incentive which may - only may - be overcome by his desire to maintain customer relationships or his innate honesty.

Then again, maybe that's the point you were making.  Sorry, I'm a bit slow this afternoon.


----------



## Lucretia1 (8 Nov 2001)

*Re: How does an Advisor avoid Poor House?*

Thank you for the replies RainyDay & Maradona, 

Yet you seem to be contradicting each other.  RainyDay is saying that advice given to one individual will not be appropriate for another...the extension being, I presume, that advice should always be sought.  

Maradonna on the other hand (of God) seems to be saying that as the advice can be commoditised, the punter should simply read a DIY book like that of Brendan Burgess?


----------



## Freddie Kruger (8 Nov 2001)

*Re: Indifference*

UDS,

Ooops! Product 1 has a £3pm policy fee.
Punter is 45 and is spending £500 per month to age 60

I agree with you points about 'human nature' being what it is and 'creating incentives to breach duty'. Temptation will be there, but surely some can resist.


----------



## Maradonna (8 Nov 2001)

*Re: Freddie's Question*

I've just had a blinding insight!8)  

If an advisor is dispensing commodities like SSIAs then there is no problem picking up a commission - quite harmless, nothing dirty about it, Freddie.  That's like a dentist getting a few bob for advertising some brand of toothpaste in the surgery.

But when dispensing advice isn't there something sleazy about the fact that her advice just might be influenced by what backhander she might get by way of commission depending on where the advice points.:hat


----------



## Freddie Kruger (8 Nov 2001)

*Re: Freddie's Question*

Define backhander? Bit bamboozled?


----------



## Maradonna (8 Nov 2001)

*Re: Some Definitions*

<!--EZCODE QUOTE START--><blockquote>*Quote:*<hr> <!--EZCODE BOLD START-->* <!--EZCODE ITALIC START--> "Define backhander? Bit bamboozled? <!--EZCODE ITALIC END-->*<!--EZCODE BOLD END--><hr></blockquote><!--EZCODE QUOTE END-->Freddie, add the following to your list of definitions which you so kindly provided for AAM a few weeks ago.

<!--EZCODE BOLD START-->* <!--EZCODE ITALIC START--> Fronthander<!--EZCODE ITALIC END-->*<!--EZCODE BOLD END-->

I put a cheque into the hand of my advisor for her fees.

<!--EZCODE BOLD START-->* <!--EZCODE ITALIC START--> Backhander<!--EZCODE ITALIC END-->*<!--EZCODE BOLD END-->

My advisor keeps her hand behind her back and gets it stuffed with commissions.

Still bamboozled Freddie?:|


----------



## CM (8 Nov 2001)

*Maradona*

Apropos nothing much at all (well kind of) - there's an even scaried picture of poor aul Maradona in the supplement (Arena?) with today's Examiner. Unfortunately (or maybe fortunately) I can't link to it as I have never been arsed enough to register in order to read de paper online.


----------



## Freddie Kruger (8 Nov 2001)

*Re: Maradona*

Dear Dear !! Maradonna

What glorified name do Bancassurers have for the money they pay to their sales reps and where does this money come from? Seems like it's none of the above.

Commission = Backhander . Nice to get the emotions out in the open. Obviously, heavily frothing at the mouth :lol


----------



## UDS (8 Nov 2001)

*Re: Indifference*

Hi Freddy

<!--EZCODE ITALIC START-->_ "Ooops! Product 1 has a £3pm policy fee.
Punter is 45 and is spending £500 per month to age 60"_<!--EZCODE ITALIC END-->

Haven't bothered to do the modelling (I'm not a financial adviser, you see, so I've no duty to) but it looks to me like !Product 1 is going to be the more expensive.

You didn't answer my questions about what commissions (if any) the two products pay?

<!--EZCODE ITALIC START-->_ "I agree with you points about 'human nature' being what it is and 'creating incentives to breach duty'. Temptation will be there, but surely some can resist."_<!--EZCODE ITALIC END-->

Indeed they can, and I like to think that most will resist, most of the time.  But my objection is to a system which sets up institutionalised temptation in this way.


----------



## Freddie Kruger (8 Nov 2001)

*Re: Indifference*

Hi UDS,

Product 1 doesn't / Product 2 does. 

Now, a favour from you? Would you ever update the 'Investment Race' or post a link to the site which has the relevant data for updating?:\  

BTW Do you think that the temptation should be taken out of the following

<!--EZCODE QUOTE START--><blockquote>*Quote:*<hr> We (IIF) estimate that over 42% of the cost of personal injury compensation is paid in legal fees and disbursments. In smaller cases legal fees can even exceed the compensation paid.<hr></blockquote><!--EZCODE QUOTE END-->


----------



## UDS (9 Nov 2001)

*Re: Indifference*

Hi Freddie

Yes, certainly, I'll update the investment race figures, but I can;t find the bl**dy thing; can you post a link?

As to the legal component in PI compensation, yes, it's too high and, yes, it creates an incentive for lawyers to foment or magnify claims and, yes, this is wrong.  To my mind the remedy lies to some extent in the hands of the IIF themselves - better claims management and a greater willingness to settle claims more than 10 minutes before the High Court hearing is due to begin would dramatically reduce legal costs.  The fact is that relatively few PI claims which are pursued to trial are unsuccessful, suggesting to me that the bulk of claims which insurers choose to fight rather than settle are in fact well-founded claims, and more of them should be settled at an earlier stage.  It may be that the insurers have good commercial reasons for not settling them - presumably they have - but a strategy of systematically resisting well-founded claims is inevitably going to increase legal costs all round, and I do not think the IIF can complain about this if it is a strategy which they are pursuing for their own commercial objectives.


----------



## CM (9 Nov 2001)

*Investment Race*

Is  it by any chance? Never understood what this Investment Race thingy was all about meself... :|


----------



## Freddie Kruger (9 Nov 2001)

*Re: Investment Race*

No. It's here  now


----------



## UDS (9 Nov 2001)

*Re: Investment Race*

No, that's on the old site and it can't be updated.  I've found the current version here:  

I've posted updated eurostoxx figures


----------

