Life/risk advisers need to look at diversifying their revenue streams because they may be facing an immediate 20 to 33 per cent drop in cash flow from 1 January, next year, as a result of implementation of the Life Insurance Framework (LIF).
Head of product at ClearView, Jeffrey Scott has used an upcoming column in Money Management to urge advisers to move to plug what is likely to be a serious revenue gap.
To illustrate his point, Scott has provided a case-study which states that, assuming a level premium of $1,000 per annum with no indexation, when upfront commissions are reduced to 80 per cent of first year’s premium (plus GST), advisers may experience a 20 to 33 per cent drop in revenue depending on the upfront commission currently being paid.
“By January 1, 2020, advisers may see their cash flow drop by up to 50 per cent against 2017 upfront commission income,” he writes.
Scott said that closer examination revealed it would take risk advisers between five to six years to generate the same net income after January 1, 2018 when commission rates fall to 80 per cent in the first year and 20 per cent ongoing.
“When commission rates fall to 70 per cent in the first year and 20 per cent ongoing in 2019, it will take practices roughly six to seven years to generate the same net cash flow they currently earn today,” he said. “That figure creeps up to seven to eight years from 1 January, 2020 with the introduction of hybrid commissions of 60 per cent in the first year and 20 per cent ongoing.”
Scott said advisers need to start thinking now about ways to prop up their revenue and manage their cash flow ahead of the looming LIF changes.
“LIF requires advisers to reconsider their business models, cash flow, potential clawbacks and client engagement processes,” he said.
