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A Commission Ban in the United States, Could It Happen?

By Karen Schaeffer, CFP

The United States may be the birth place of financial planning but at times it feels like some people here just want to march in place while the rest of the world is busy growing the profession. I recently read a short article by Laurence Barton, Ph.D, the president of the American College, explaining how expanding the fiduciary standard will harm consumers. Really? His concern is that requiring variable annuity sales people to act in the best interest of their clients will drive more financial services professionals to a fee-based model.

And, as if everyone already knows this, he concluded that fee-based planning leaves the average investor without an advisor.

A Bold Approach to an Age Old Issue

What he didn’t mention was that the status quo leaves us with too many unsophisticated investors being sold products they don’t need by people who can only be compensated for if they sell the product.  It seems our profession deserves another look at this business model. How about a bit of effort around finding better ways to deliver advice to those who need it most?  Within the last couple years, commissions have been banned in several countries.  It may be too early to know what problems have been solved and which new ones have been created by such a ban, but I must say I admire a bold approach to an age old issue.

2 Clients, 1 Obvious Issue

Call me cranky, but two new clients in the same day shined a bright light on the issue.  Both were seeking a second-opinion to proposals they had received from a local advisor who promotes himself as a retirement planning specialist.  The first person was advised to invest 50% of her money in annuities; 30% into commission-based mutual funds and to leave the balance in cash.  Her intuition was telling her that 50% into annuities seemed rather high and she was concerned about the irrevocable nature of the investment once she annuitized.  Score one for common sense.  Turns out she shouldn’t put ANY money in annuities.  She recently retired from the Federal Government after a 30+ year career and her pension is easily covering her expenses and should continue to do so with reasonable assumptions for the rest of her life.

The next client I saw had a similar reason for seeking advice but the recommendations were even worse. They had been told that most of their money should be invested in unlisted REITS and the balance into a mix of commission-based mutual funds.  Unlike the first client, these folks are likely to be entering retirement with inadequate funds.  Although they have a Federal Government pension, it is much smaller and will need to be supplemented from their investments sooner rather than later if a second career doesn’t pan out. Aside from a vague familiarity with the Government’s Thrift Savings Plan, they had virtually no investment experience. Once again, the proposed portfolio was totally inappropriate but chocked full of high commission “solutions.”

I know that commissions are not the sole problem; unscrupulous salespeople who have neither a requirement nor the desire to put their client’s interests first play a big part. Of course, lots of competent, ethical financial planners are giving good advice to their clients in a commission environment and scoundrels do exist in the fee-based world. But, there is so much more room for mischief in commission-based products. Consumers don’t understand them and the conflicts are too easy to hide. And when someone concludes commissions are necessary to make sure the average investor gets advice, let’s just say it makes me long for a dramatic shakeup.

Should We Ban Commissions?

What if the ban-commission movement washed up on our shores?  Maybe then, the securities and insurance industries would start training their sales force in the benefits of full disclosure, obscene compensation structures would evaporate and advisors and consumers could start the real process of determining the value of financial planning in the market place.

Do I think it could happen?  No.  I’ve lived in Washington D.C. long enough to know big and dramatic regulation rarely happens and when it does; unintended consequences often derail the best intentions. But, I do think the status quo is holding back our financial planning profession.  If another country has found a better model, we should be interested — there’s a huge U.S.population that will benefit.  I suggest we stay tuned.

4 comments to A Commission Ban in the United States, Could It Happen?

  • Interesting post; I tend to agree on many points. I am a fee only advisor and think that the most important thing is consumer education when it comes to selecting an advisor vs. more industry regulation. The more complex the regulatory environment gets that costlier it gets for independents like me to run our shops. In any event, you mention several countries have banned commissions. I am curious to know which ones?


  • Lance Barton’s assertion that fee-based planning leaves the average investor without an adviser is not an insignificant point, Karen. We actually have two problems to solve, and the solutions to both are conflated with the commissions issue. The first problem could be solved by regulatory guidelines designed to get consumers advice without the conflicts inherent in commission sales, but it will be fought tooth and nail with comments about denying advice to everyone. So, the second problem’s solution is to get advice to more people. But, since “advice” has been used as a loss leader to get the opportunity to sell a commission-generating product, you can see the obstacle it has created. I believe if you remove commissions, you will eventually eliminate the confusion about what advisers do, and they will garner trust. However, we can’t ignore the need for advice for more people. So, solve these problems together and you may succeed. Solve the first with regulation. Solve the second with technology, web social networking and workplace packaging. We have begun educating consumers about the possibility of getting “real” advice online from advisers they know, like and trust. We can get workplace advice packages together for employer purchase and support, perhaps subsidized at first to get early adoption. Then, when advice communities start to form around efficient online adviser services, the profession will transform. Commission changes alone won’t work. Resolving to expand into serving “the rest” while re-establishing trust through giving advice at a reasonable price might.

  • Phil Billingham

    Great post Karen – I agree with the analysis.

    Couple of points. Firstly, Commission is going, at least for Independent Advisers in some cases, in the UK, Australia, Holland and South Africa. So some pretty major advanced economies.

    Turning to the ‘removing advice from the masses’ argument, there is a case to be made that much advice would actually not be required IF we could simplify and detoxify products, so people could buy / be sold simpler, cheaper, safer products with good disclosure via technology / internet / workplace etc. For many people, Financial Planning is ‘Spend less, Save More, Insure the breadwinner, make a Will, Come back when you’ve done all that!’

    Banning commission does not make everyone suddenly Ethical. It does remove a massive conflict of Interest and a source of distrust in Financial Services.

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