The age-old debate about the validity of commission payments
- On 21/02/2019
- Royal Commission
The purpose of commission
Many industries pay commission to distributors of products. Manufacturers benefit from the variable cost – no sale, no payment – which can be built into the product’s price. Sales people also like commission as their income is not capped, and good ones can earn high levels of income.
One of the advantages of traditional commission structures is that the consumer is unaware of how much the distributor is receiving for their work, and the cost is built into the price of the product, so consumers don’t have to pay a separate fee.
Prior to recent reforms in financial services, commission was the dominant form of remuneration for sales people. Stockbrokers, general insurance brokers, life insurance agents and financial planners have all been paid commission for selling, and many have received trail (renewal) commissions to stop churning the product. The mortgage broking industry grew from similar structures.
Commission was paid independently of any financial advice provided to the consumer and could vary substantially between products. If a consumer received poor advice, they had to seek redress from the licensee of the adviser, not the product manufacturer. A good example was Storm Financial where badly advised consumers were placed into geared investments. They could not sue the institutions that lent them the money, nor the investment platform, nor the product manufacturers. Their complaint was against the Storm Financial dealer group (licensee).