Future Focus: 3 places investors still pay commissions
Make an informed decision about financial products you are advised on.
Many investors believe commissions disappeared from Australian financial life after the Banking Royal Commissions and FOFA reforms. While they became more tightly constrained commissions still exist with some financial products.
In the spirit of transparency into potential motivations for financial intermediaries it helps to know where material commissions remain. Understanding where commissions remain provides a guide for what to ask when a financial adviser or product agent recommends a product or service.
This week, I explore three areas where commission payments still exist – mortgage broking, life and risk insurance, and property sales for salespeople.
Mortgage broking
Mortgage brokers dominate Australia’s home loan market. According to the Mortgage and Finance Association of Australia (MFAA), brokers arranged about 75% of new residential loans in 2024. This is up from 44% 10 years ago.
Financial advisers who have in-house mortgage brokers, or who are qualified mortgage brokers themselves, can find the best rate as part of your holistic financial plan. However, brokers are typically paid by the lender, not the borrower.
Commissions are usually structured as a combination of upfront and ongoing (trail) commissions. For example, for my mortgage, my broker received $9,750 upfront, with $220 monthly ongoing.
The Best Interests Duty was introduced for mortgage brokers in 2021 under the National Consumer Credit Protection Act. The act is designed to ensure recommendations serve the best interests of \ borrowers. A mortgage broker must demonstrate that any loan recommended is in the client’s best interests even if a different lender offers a higher commission.
You should expect that all broker commissions are disclosed. These payments aren’t anything to cause alarm – these commissions are how the majority of mortgage brokers get paid. However, it is important to understand the incentives that are offered, and the comparisons that were made during the mortgage product analysis process.
Insurance
Commissions are alive and well in the insurance industry, but they have been heavily curtailed and are monitored closely by regulators.
The Life Insurance Framework (LIF) reforms in 2018 and 2020 capped commissions at 60% of the first-year premium and 20% for ongoing trail commissions. When I worked at a fund manager that had insurance available through superannuation advisers were receiving up to 125% of the first year premium upfront. This encouraged insurance ‘churning’ – moving individuals from policy to policy to collect the attractive payout. The incentive for this behaviour is lower due to the LIF reforms.
Advisers need client consent on personal advice given on life insurance before receiving a commission. If you have been advised to take on an insurance policy, you will be informed if the adviser is being remunerated by the insurance company.
For investors, the key is to understand how advisers are being paid and if they are being compensated directly through fees or via commissions embedded in their policy premium. Some advisers choose to rebate these fees back to the client as they are already receiving an advice fee. Ensure you understand how your adviser is being remunerated holistically.
Real estate, by salespeople – not advisers
Real estate commissions for advisers are no longer permitted. This change was made to rectify historical practices.
Prior to these commissions becoming regulated, real estate was an attractive business for advisers. If an adviser sold real estate to their clients it came with the potential for significant commission cheques. It was not unusual to see entire business models built around earning these commissions.
Real estate developers would partner with advisers for off-the-plan properties to avoid costly marketing efforts. The commissions on off-the-plan properties were less than it would otherwise cost to sell them and advisers collected hefty cheques. It was a win-win for advisers and for real estate developers.
This was particularly attractive in Australia where many investors sit on hundreds of thousands of dollars in their superannuation and property can be purchased in Self-Managed Super Funds. There was a willing market as most Australians were already comfortable with property after the multi-decade growth in prices.
The AFR reported that after new regulation some advisers failed to rebate part, or all, of the commission payments, disguising the windfall by disclosing payments as consultancy or marketing fees. The regulations were tightened in 2018, but the sheer lucrativeness of these payments ensured they did not disappear. The mixture of an asset that many people desire to invest in and attractive tax minimisation opportunities provide a healthy cohort of potential property investors. It helps that the commission cheques from developers were eye watering.
These commissions moved from the regulated to the unregulated space. There are concerns that individuals are being targeted by property salespeople that are masquerading as advisers or implying that their suggestions are qualified advice.
I recently wrote an article on the First Guardian collapse, and how investors can protect themselves. Similar tactics are being used with property.
Articles by Professional Planner and Independent Financial Adviser outline continuing grave concerns of history repeating itself, with financial advisers concerned for the outcomes of clients who have been targeted.
Alarm bells should be going off if you are approached by an agent that advises you to purchase a particular property with no qualifying questions or efforts to understand your personal circumstances. Until there is further regulation in this space, be hyperaware of tactics that may not be in your best interest.
Final thoughts
Not all commissions represent bad practice, and not all fee-based advisers are going to be free from conflicts.
As an individual, you deserve transparent explanations of your adviser’s remuneration, and clear explanations as to why you have been recommended a particular product.
Reforms have gone a long way to remove conflicts. Although responsibilities should largely be with the regulator, until bad actors are removed from targeting individual investors through regulation, it is important to stay vigilant.
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