informed decisions blog

Blog- The War on Commissions (The Green-Grocer Version!!)

4th December 2017

Paddy Delaney

This week we are aiming to share some slightly different insights, and reveal some major news in the world of Financial Services in Ireland! Last week the Central Bank released a proposal which is due to come into force next year (subject to Dept. of Finance), which is aimed at maximising the protection consumers get when it comes to buying any financial products….we have dissected all the Publications released by Central Bank to determine the details, and it’s an interesting one!

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The Green-Grocer!

Indulge us for a few moments, trust me it’ll make sense shortly! Imagine that you are walking down the road after getting off your bus from work, and you notice a shiny new green-grocer shop on the corner. It’s called ‘Gerry’s Independent Stores’…sounds good to you!

You walk in and the friendly green-grocer welcomes you with a big smile, a warm welcome, and inquires as to how he can help you… are taken aback at his hospitality and part of you reckons ‘I’m gonna be sold something here’….therefore you reply in the usual way and state that you are ‘just in for a look’!

The shelves are stacked high with produce, so much choice of all your staple items, different versions of everything……you are confused with the level of options and so ask for some help with regards picking the 8 items you actually do need, milk, bread, broccoli, ham, cheese, yoghurt, apples & grapes (you healthy divil you!).

Before you know it the kind shop keeper picks out a version of each of the 8 items, in addition he tells you that he has a special rate going on the eggs, asparagus, Mars Bars, and Ice-Cream and he encourages you to buy those as well. You reckon that you actually probably could use these other items so you agree to buy them.

You go to the counter, pay for your stuff and happily head on off home with your shopping for the next few days done, and away home to make the dinner!

How Did The Green Grocer get Paid?

It is only the next day that you hear from a mate that the Green-Grocer actually makes more profit on certain options than on others. He picked the options for you that result in him getting the most profit. He also invited you to buy more stuff, because it turns out he gets a large bonus from the provider of the eggs, asparagus, Mars Bars and Ice-Cream if he sells a certain amount of it. In fact, he actually also get a holiday every year if he sells certain amounts of it to his customers. He might also actually get support to pay for advertising and marketing if he agrees to only sell that particular producers product….how do you feel now? Some people might feel like that is what they expect, others might not care less, while others might feel that they were being encouraged to take and buy stuff that might not have been the things that they needed or wanted! Again, how would you feel?

How Are Financial Advisors Paid?

It will be no surprise to majority of you to hear that most Financial Advisors & Intermediaries, Banks, Brokers are paid in a similar way. Majority of Brokers, Banks & Advisors (also known as Intermediaries- i.e the seller of products on behalf of a product producer) get paid commission when they sell a certain product. It is also known that some get paid more for selling a certain product, and indeed get paid bonuses if they sell a certain amount of certain products from certain providers….all very certain!!

It appears to us that the Central Bank are on a mission to increase the transparency that you the consumer has in regards how your ‘Green-Grocer’ is paid by the providers. In fairness that makes total sense. As we keep banging-on-about here, the focus of the industry has for too long been lazered onto selling products as opposed to delivering the real outcomes that consumers need and want….more often than not a product is required, but it should not be the starting point of the conversation!

What Will Change For You, The Customer?

In essence what the Central Bank appear to be aiming towards is a situation where there is a full and clear menu available to the customer as soon as they look up the ‘Green-Grocer’ online….you the customer will be able to see exactly what the grocer is paid from each provider, in advance of you actually going into the shop.

The impact of this would be that the next time you go into ‘Gerry’s Independent Stores’ you will know how much Gerry will make if he sells Brocolli A, Brocolli B, or Brocolli C…..again all about improving the transparency for the shopper.

Also, when it comes to mortgages, the Green-Grocer is currently paid a % of the loan that the customer takes out (Green-Grocer being bank/broker/any intermediary), so the more you borrow the more commission the grocer gets…..well they are looking to put an end to that it seems, by introducing a cap on commission which the grocer gets, irrespective of the amount being borrowed….again our take is that The Central Bank are aiming to reduce the chance of a consumer being ‘given’ more of a loan than they need, which would mean that the grocer gets a bigger commission. Them days appear to be at an end.

Is Gerry Independent??

As you have heard, Gerry’s store is called ‘Gerry’s Independent Stores’……however if you are looking at how he is getting paid and the bonuses he can make by selling more product from a certain provider etc, then you could argue that he is not independent!

If the Central Bank’s recommendations come into force in full next year Gerry will have to remove ‘independent’ from his store name! The Central Bank appear to be very keen to ensure that only a grocer who is receiving no form of commission from a provider can class themselves as independent. Meaning if you go to an independent store once these recommendations come into force that you will have to pay out of your own pocket for the advice and recommendations. If they do state that they are not chargin you commission but that they are charging you a fee, which is being paid to them out of your products, via the provider, this will be classed as not being independent from the provider, and hence not independent in nature.

How Can I Get Independent Financial Advice in Ireland?

In simpler terms only a grocer who does not take commission of any sort, whose only income is the income he or she gets from charging a fee directly to the customer, will be able to call themselves independent under the new Central Bank recommendations. That is quite different to what is and isn’t classed as independent in today’s world of financial advice! If you think about it it makes lots of sense to only allow an advisor who is totally, financially and otherwise, independent of the product provider to be able to call themselves independent……

How Will This Impact On Us Getting Financial Advice?

Some are saying that it might reduce the number of financial advisors in the country. Others are saying that financial advisors who typically have lots of providers to choose from will reduce the number of providers to just 1, so as to remove the need to choose between different ones based on something other than the commission. Others say that it will open consumers eyes to the level of commissions that are being paid, and will disillusion them about financial advice altogether.

The last point, from our perspective would be a huge shame. The benefit of true financial advice and financial planning is usually way way beyond the cost associated with it. The avoidance of huge mistakes, the putting in place of plans which support your long term goals and lifestyle aims is worth so much more than the cost, again usually! We, for what it is worth, hope that the impact will be the rise of much more customer focused approaches from more and more of the industry. If that happens, and much like the investment markets nobody knows, then the recommendations will have been a rampant success.

We’re hoping.

Thanks for reading.

Paddy Delaney

QFA | RPA | APA | Qualified Coach



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