DID you know that around 50 per cent of advisers would rarely, or never, recommend an insurance policy that did not rate highly in their software?
Did you know that advisers who rely solely on research house ratings to provide insurance recommendations to clients risk breaching their legal obligations?
Did you know that more than 90 per cent of advisers believe they understand their advice obligations well or very well, despite the fact that there has been little regulatory guidance on the role and use of research ratings in the formulation of client advice?
So how can advisers really understand their obligations?
MLC Insurance recently engaged independent research organisation Investment Trends to help us better understand the retail insurance market from an adviser’s perspective.
We also sought comment from the research houses and legal consideration from a leading law firm to provide a more holistic view of the situation.
The survey results summarised above highlight the challenges we face as an industry in generating and utilising research through the advice process.
The research itself involved more than 150 independent advisers, who completed an online survey on a range of topics including their attitude towards, and use of, risk research house software.
The survey results provide valuable insight into how advisers choose risk products for their clients.
First, let me say that I am an advocate for using research as part of the advice process to help connect the right product to the right client. However, there are varying types of research and ratings software, and this is just one source of information that should be considered when determining the right outcome for the client.
We thought it fitting to seek the views of some of the major research houses on how ratings software should and shouldn’t be used.
Research house Cannex said it should be used “carefully and selectively, as ratings are only one tool that can be utilised to achieve the best outcome for each individual client”.
It added: “They (ratings) should not be relied upon as the sole or major influence in any decision to recommend a product”.
Smart Comparitor added: “Any insurance product rating system should only be used by advisers to clarify their own understanding of what a product can/cannot do for their client.”
Research house IRESS said: “Advisers should be asking their clients questions that will enable them to ascertain what features of a product are important to them and setting software parameters (such as weightings, provision requirements, and so on) accordingly in order to provide a tailored result that meets the client’s needs. Once this result is obtained, the adviser should then use their own knowledge and experience to determine the most appropriate product.”
Interestingly though, only 11 per cent of advisers surveyed said they set weightings differently for each client and 56 per cent said they use the default settings that either their dealer group, practice or software provider set.
What does this mean for a client who may want a simple, low premium cost insurance product from a reputable provider?
Let’s assume the product that would deliver these needs is, because of default weightings criteria, rated at 60 out of 100 on the research software. Should the client be denied the product that is most appropriate for them based on generic criteria not relevant to their circumstances?
If an adviser has formed a reasonably based view that the product will appropriately meet their client’s needs, despite this rating, then this is the product that should be recommended.
Another critical element to consider is that the rating methods used by each research house are different. For instance, some research houses rate only product features while others include the cost of the premium.
However, there is little emphasis placed on financial strength or sustainability lead indicators for example, which also have the potential to greatly impact the client.
Further to this, the average policy will be in force for five to 10 years, yet most of the research house ratings only measure the cost in the first year and not the history of premium rate volatility or the ability to sustain current premium rates.
We commissioned a leading legal firm to investigate the legal implications that may arise from using research house software results as the sole basis for a client recommendation.
The legal view was that personal advice provided to a retail client must have a reasonable basis and be ‘appropriate’ to the client’s objectives, financial circumstances and needs.
Product ratings are based on a general set of factors and by their nature are not tailored to specific clients’ objectives, financial circumstances or needs. When used appropriately, product ratings can be a useful input into formulating recommendations.
However, advisers who rely solely on product ratings without considering the ratings in context of their clients’ specific circumstances can run the risk of breaching the ‘appropriate’ advice requirements under the Corporations Act (section 945A) and their common law duty of care to clients.
In publicising the results of this research, we are hoping to encourage the insurance industry, including research houses, insurance providers and advisers to work more closely to provide a better outcome for clients.
As the research houses themselves attest, it is important the ratings are not used as a proxy for the whole advice process.
Greg Einfeld is the general manager of MLC Insurance .
