Risk insurance and the real value of financial advice

In the ongoing debate about risk insurance fees versus commission, it’s time to think about the adviser value proposition, writes Col Fullagar.

In a previous Money Management article 'What are the alternatives to risk commissions?' the issue of fees versus commission in regards to risk insurance advice was considered.

At the conclusion of the article, a rhetorical question was asked:

“If a fee-based remuneration model could be designed that:

• did not add to the adviser’s administrative burden;
• reflected well on the adviser, the adviser’s business and the insurance industry; and
• did not impact adversely on the adviser’s financial bottom line; would advisers be interested?”

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The proposed answer was a resounding ‘Yes’, which then led onto the premise that the issue is possibly not one of fees versus commission but rather the apparent lack of a viable fee-based model.

Whilst that premise is all well and good, it does not really bring the issue of fees and commissions any closer to resolution – or perhaps it does.

There is an important link that joins the concept of risk insurance fees and a viable model and that is an understanding of the basis on which a fee is to be charged.

Some contend that fees should be linked to factors such as time spent and the cost of delivery. In other words, if someone providing a service wants to earn $250 an hour and their expenses can be broken down to $150 an hour, their charge out rate would be $400 an hour.

If a particular function took 10 hours, the fee charged would be $4000.

A different approach might see someone base a fee purely on the value-add: ie, if they speak to a client for 15 minutes and give them an idea that will save them $40,000, they can justify charging a fee of, again, $4000.

Whilst both approaches are theoretically fine, neither of itself would appear to work in the world of risk insurance advice.

Firstly, if fees are to be charged, not just initially but on an ongoing basis, there has to be a link with the value-add because, quite simply, intelligent people are generally not willing to pay for something that does not represent real value and even if payment was secured once, the chances of repeat business would be increasingly low.

Secondly, however, the risk insurance advice process does not lend itself to 15-minute client conversations; there will need to be a significant time and resource allocation in order to achieve the necessary value-add.

Therefore, in respect of risk insurance advice, there appears to be a need to merge the two concepts and identify:

• the value-add services advisers provide within the risk insurance advice process; and
• what value can realistically be placed on those services.

When seeking to identify adviser value-add services, it is not necessary to go far to find them; however, the indicative list that follows will steer away from the traditional and tend more towards the boutique.

Not coincidentally, a number of the value-adds have been the subject of previous Money Management articles to which reference will be made.

Availability management

Notwithstanding the debate about whether “all policies are much the same these days”, what is beyond debate is that all clients are different and thus their ability to obtain appropriate cover requires careful attention.

Whilst the similarity of policies on a standard approved product list will enable generic product recommendations to be made, the diversity of clients will require the countless niche markets to be identified and researched so that all clients receive the necessary personal attention.

Where, for example, can the most appropriate policies and options be found for:

• older clients (22 per cent of the Australian population is over age 55);
• clients working in ‘home duties’, (5 million Australians are not in the workforce); or
• clients in casual or part-time work (20 per cent of Australian workers are in casual or part-time work)? (ABS 30 June 2009)

And what about:

• people working in the less easy to insure occupations;
• high net-worth clients; and
• clients with unique health issues?

Who is better positioned than an adviser to not only source the right product solution but, importantly, provide the client with the reassurance that a thorough market review has been undertaken?

Cover management

The myriad of benefit calculators available in the market might lead consumers to believe that interactive advice is unnecessary and their unique needs can be fitted into a formula.

For some this may be the case but two problems exist:

• without the benefit of informed assistance it may not be possible to know if the formula recommendation is correct; and
• the analysis of an optimal benefit amount recommendation for many simply cannot be achieved in any other way than by human intervention and analysis.

This is at the core of professional advice.

Decision management

Definition of a Statement of Advice?

“Creating the environment in which a client can make an informed decision.”

The skill of advice is not simply making a recommendation but presenting it in a way that enables the client to understand the basis of the recommendation and feel confident to accept the recommendation:

• Why is a particular policy and benefit appropriate?
• If cover is retained in an industry fund what are the potential issues associated with that cover?
• What is and is not covered?
• Decision management also includes the presentation of issues such as:
• What are the personal and business areas of risk exposure?
• What policy structures and ownership are appropriate and why?
• What are the various tax implications associated with the recommendation?

Many possess the gift of making the simple complex – a select few possess the opposite but greater gift.

Risk management

The risks associated with it are well known but we are guilty of doing it anyway; we tick boxes saying we have read the offer or responsibility terms and conditions when in fact we have not.

The adviser four-step is not a dance move, it is a significant component of the risk management value-add provided:

• Step 1 is for the adviser to identify the various statements the client may need to sign during the initial advice, underwriting and claims process.
• Step 2 is for the adviser to be aware of the terms of the authorities, confirmations and commitments contained in those statements.
• Step 3 is for the adviser to explain those terms that are material to the client in a clear, concise and consistent manner.

Finally, Step 4 is for the adviser to provide the client with assistance and advice if concern is expressed by the client about what they are being asked to sign.

Technical management

The catch-cry may or may not be correct, but the perception often is “the big print giveth and the small print taketh away”.

Disputes rarely arise out of that which is clear to and understood by all parties to a contract, particularly an insurance contract.

Whilst the popular view might be that all policies are the same, the reality is different; there certainly are subtle but material differences in policy terms and conditions.

Even if it was the case, however, that all policies were the same, this would not necessarily translate to all policies being clear to the client and able to be understood by the client.

Without the assistance of a professional able to identify, analyse and communicate potential contract issues, the client’s chances of becoming embroiled in a dispute with their insurer are materially greater.

In addition to the subtlety of policy wording is the equally subtle legal overrides of matters such as:

• when does cover under the policy start;
• what precedents exist that might influence the practical application of policy wording; and
• what legal rights does the client possess – for example, in regards to access to information held and explanations for decisions made by the insurer.

If risk management is undertaken appropriately, it will translate as risk avoidance.

Cost management

Sourcing the optimal rate or terms for a client with serious or multiple health issues, working in a hazardous occupation or following hazardous pursuits rarely happens by chance.

Sourcing is a factor of:

• the skilful presentation of relevant facts;
• knowing to whom to present the facts; and
• being able to negotiate the right outcome.

Few informed advisers doubt the value-add of field underwriting and its link to risk insurance cost management.

Field underwriting, however, is ongoing, and an adviser keeping abreast of changes in a client’s insurability, improvements or otherwise, again is an important aspect of cost control.

Adviser feedback would indicate that the major cause of policy lapsing is not the need disappearing but the premium being seen as too expensive.

A client, left to their own devices might be tempted to insure on a stepped premium basis in order to take advantage of the low upfront load only to find at age 50, premium rates are escalating well beyond their expectation and ability to pay.

Alternatively, the same client might be sufficiently wise to implement level premium cover – without appreciating there is an automatic conversion to stepped at a future date.

Without warning, premiums could unexpectedly increase many fold.

More subtle but no less important is the ability to discern not just the quantum of a premium rate but also its sustainability.

An appreciation of the factors driving premium rates will protect the client from unexpected rate rises unrelated to age increases.

Regular recommendation reviews linked to the adviser’s diligence and skill enables product adjustments to be made but also premium restructuring with, for example:

• the splitting of cover into both a stepped and level basis;
• effecting some Total Permanent Disability (TPD) on an “own occupation” basis with the balance on an “any occupation” basis; and
• the mixing and matching of various waiting and benefit periods within income protection insurance.

Lifestyle management

Clients not only have unique needs when insurance protection is initially put in place; their unique needs continue and change through their life:

• the client grows older;
• their family and work situation changes;
• their income and wealth grow; and
• their leisure activities develop.

Regular and comprehensive insurance reviews ensure the protection regime initially set up continues to provide appropriate protection for the client’s evolving lifestyle.

Policy management

If risk insurance is needed, there are few things more important than ensuring cover remains in force.

When it comes to the subject of policy lapsing and reinstatement requirements, however, dazzling arrays of inconsistencies exist in the market.

Uncertainty leads to mistakes occurring, in turn leading to disputes arising.

Who better qualified than the adviser to communicate with the insurer, clarify specific requirements and arrange for their collection, and then find out what gave rise to the problem and put in place procedures to avoid a recurrence?

Claims management

When the client is at their most vulnerable they will, more than at any other time need professional, impartial and informed assistance and advice.

Is a claim payable? If not, why not? How much is payable? What are the likely claims requirements?

The adviser is also the ideal person to:

• contact the insurer to confirm initial requirements;
• ensure all requirements are reasonable;
• provide the client with an explanation, arrange collection and despatch;
• act as a point of contact;
• be a calming influence if issues or delays arise;
• mediate in any disputes.

This is when the adviser can deliver on the concept of “peace of mind.”

Dispute management

Dispute management is not just about mediation, it’s about choosing the right insurer at the start.

The dispute resolution process is mandated in its character: ie, a dispute is referred initially to the insurer’s internal dispute resolution body and only if this is unsuccessful can the dispute be referred to the Financial Ombudsman Service (FOS) or the Superannuation Complaints Tribunal (SCT).

If these referrals are unsuccessful or if the dispute is outside the jurisdiction of FOS or the SCT, legal rights can be pursued through the Courts.

Whilst the process may be mandated, the manifestation of the process is vastly different between insurers.

One might be forgiven for thinking that not all insurers “get it” when it comes to dispute management.

Insurers should engage in an open and respectful process that recognises and makes allowance for the natural disadvantage of the client who will almost certainly lack the skill, the time and the financial resources possessed by the insurer.

Research, enquiry, experience and leverage by the adviser will increase the chances of the client’s business being placed with an insurer possessing the right attitude to dispute resolution; the client will be forever grateful.

Retirement management

Cost management will sometimes dictate that insurance is placed within a superannuation environment; however, immediately this occurs another need will arise – the need for a frequent and regular review of the position.

The client may well suffer selective amnesia if, as they approach retirement, it is discovered that their superannuation savings have been materially eroded by risk premium deductions.

The risk insurance adviser not only provides current lifestyle protection by virtue of the various insurances put in place, but also underpins the client’s future lifestyle by way of being vigilant, being on the lookout for any impact that risk insurance may have on the client’s superannuation nest egg.

If and when there is any threat to the latter by the former, adjustments to cover within superannuation can be made.

Summary

The challenge posed at the start of this article was to identify and value the services advisers provide within the risk insurance advice process.

The contention was it was not necessary to go far to identify them – with the implication that a myriad of them exist; the above represents an indicative sample.

Once the value-adds have been identified, the follow-on is to value these services.

This can be done quite simply because the value of these services is directly related to the value placed by the clients on their confidence that comprehensive and appropriate protection is in place for:

• their current and future lifestyle and that of those dependant on them;
• their assets, both capital and revenue; and
• their business.

What is the adviser’s value-add? It is:

• the significant investment of time, money and self they make in their business;
• the provision of extraordinary and unique services to their clients; and
• the significant real and psychological value these services add to the client’s confidence about the present and the future.

The matter of fees versus commission has been considered.

The adviser value-add has been explored.

All that remains is the framework of a viable fee-based model.

There is a sense of a sequel …

Col Fullagar is the principal of Integrity Resolutions Pty Ltd.