What happens to the commission of intermediaries who resign, or whose contracts with product providers are cancelled?
The latest FAIS Ombud newsletter contains an example which throws some light on the subject.
Ombud Case study: Are You Getting What You Paid For?
This Office has, in the past few years, experienced an increase in the number of complaints involving the failure by financial advisors to provide ongoing financial service and advice to their clients, despite receiving commission to do so.
The law
In terms of Section 7(4) of the General Code of Conduct:
A financial service provider (FSP) who has provided advice to a client, or is rendering ongoing financial services to the client in respect of one or more financial products, must on a regular basis (but not less frequently than annually), provide the client with a written statement identifying such products as are still in existence, and brief current details (where applicable), of:
(a) any ongoing monetary obligations of the client in respect of such products;
(b) the main benefits provided by the products;
(c) where any product was marketed or positioned as an investment or as having an investment component, the value of the investment and the amount of such value, which is accessible to the client; and
d) any ongoing incentives, consideration, commission, fee or brokerage payable to the provider in respect of such products.
Case Study
According to the complainant, he had been paying on-going advisory fees on his retirement annuity policy, despite not having seen his advisor for the past five years. Upon enquiring, the complainant was surprised to learn that his broker resigned from his employer and that he had a new broker.
Aggrieved by not receiving ongoing financial services from his advisor, the complainant requested a refund of all advice fees charged on his investment over the last 5 years, which was refused by the respondent. This triggered the complaint to this Office.
Upon receiving the complaint from the FAIS Ombud, the respondent first dismissed the complaint and refused to refund any fees, arguing that the complainant had received quarterly statements. The respondent also stated that ‘it must be borne in mind that the relationship between advisor and client is not solely the responsibility of the advisor’.
It was pointed out to the respondent that the administration fee charged against complainant’s investment should ordinarily cover the cost of issuing the quarterly statements. Further, it was pointed out that it would have been impossible for the complainant to have established a relationship with his new advisor, without the latter being introduced to him. Furthermore, it was unacceptable that the client’s investment was charged for a service that had not been rendered to the client.
Against that reply from this Office, the respondent promptly offered to settle the matter by paying to the complainant the amount of R5 000, which was accepted by the complainant.
Some Observations
- This is an excellent example of what the fair treatment of a customer is not. In terms of the General Code of Conduct, clients are to be kept in the loop when there is a change of intermediary. Good old-fashioned manners and business etiquette require the same.
- After intervention by the Ombud, one client is satisfied, but what about others who may have resigned? In fact, what is the situation in the industry, given the huge staff turnover it is renowned for?
- Are “orphan” clients always assigned to another intermediary, and, if so, do they get the commission credited to them, or do providers pocket the commission?
- In my days, we used so-called orphan leads to try and generate new business. If unsuccessful, most of these leads were simply dumped. There was no attempt at establishing a new relationship with the client. Has things changed since then?
Commission is often treated as the root of all evil – see article below. Reduction of commission is often seen as the cure for many evils, and the best way to improve the lot of clients.
Perhaps an investigation into what happens in all instances, similar to the above, will reveal a very different picture from the one currently held on the impact of commission on the customer’s well-being.
