How Free is "Free"
Commissions must have been introduced a few seconds after the big bang. It certainly seems as old as time itself, and is a fixture of life. Or is it. ?
If anything came from the Banking Royal Commission, it would seem to be that the pursuit of commission was a key factor in driving unchecked greed and questionable behaviour. Look through almost any corruption or tainted financial scandal and commission would be at the centre. The reason is because of its hidden nature. Prices are not transparent and product choice is often vague or overwhelming. Those who advise and assist customers face conflicting, unclear incentives
In the majority of cases where commission is involved, then buyers are not fully appraised of the total cost of ownership. And therein lies the beauty and the danger of commissions (also called “soft dollars” because it is usually built into the final price) . It is nearly invisible and designed to not show up in the buyers face at all. An innocuous occurrence. But left unchecked it will over time erode your performance.
There are many cases where commissions are genuinely deserving and are a reward for creating or bringing value.
The question that must be asked is this. ” How relevant is commission in a digital age ?” where technologies have reduced transaction costs by multiple factors. Older transaction processes may have justified deep commissions but no longer. Digital channel like the internet have transformed commerce, and one of the key benefits of these channels is access to information. The internet’s power lies in its ability to disintermediate knowledge and deliver that same knowledge to all participants. It is exactly that power that will surely diminish the need for large commissions in doing everyday transactions where no new knowledge or benefit is gained. It is all about efficiencies and processes becoming commoditised and fees must reflect this in future.
Is it maybe time for commissions to come out of the darkness and be more fully disclosed. This way buyers and sellers are on an equal footing and all parties have full disclosure. As a depositor/investor, take this test to see how “free” your service is.