Advisers earn their life/risk commission, says FSC

The Financial Services Council (FSC) has told the Royal Commission that advisers undertake a significant amount of work to justify the commission which attach to life/risk policies.

In a submission filed with the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, the FSC backed the use of commission-based remuneration and argued “life insurance policies, by their very nature, ought to be treated differently from other products”.

“We believe that consumers should be able to access financial products through any means they wish to. It is therefore important that Australians who prefer to obtain life insurance through an adviser can afford to do so and that the advice helps those consumers generally achieve more appropriate levels of cover, a better-quality policy and the benefit of thorough medical underwriting at the time the advice is given,” it said.

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“… life insurance advice involves advisers undertaking a significant amount of work to establish a policy by helping the consumer through a lengthy application and underwriting process, and then on an ongoing basis,” the FSC submission said before going on to outline the process as follows:

• The advice process involves the financial adviser understanding their client’s objectives, financial situation and needs, and then determining which insurer and insurance policy is appropriate for the client.

• The underwriting process involves the financial adviser assisting their client to complete a lengthy policy application (including fully explaining the client’s duty of disclosure) and then help their client navigate through the full underwriting process, which can entail obtaining extensive medical information over a number of weeks or months. Often this will involve the financial adviser having a number of further discussions with both their client and the life insurer.

• Providing ongoing advice as the consumer experiences life events which change their need for life insurance – for example, changes in work patterns, earnings or borrowing (say, after moving home), starting a family or relationship changes.

• Helping consumers arrange a will or nominate beneficiaries.

• Advisers can also play an important role in the claims process.

“If one assumes that premiums increase when life insurers pay commissions to advisers, in effect the upfront and ongoing commissions structure enables consumers to avoid paying adviser service fees (ASF) and instead pay a slightly higher premium over the life of the policy,” the submission said.

“This enables the consumer to afford the advice. If this argument is accepted, it might be thought that ASFs should not replace commissions, and instead they be paid over the life of the policy in equal amounts added to the premium each year. However, the adviser would not be rewarded at the commencement of the policy for the effort the adviser undertakes which is concentrated at the time of application for the policy.”

“Thus, the risk is that, if the caps on benefits/commissions are reduced to zero, people seeking advice would be required to pay for it upfront directly, rather than spreading the cost over the life of their policy. This would restrict access to advice on life insurance for low to middle income households, arguably, who are amongst those that need life insurance the most,” the FSC submission said.

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It's difficult to read some of this, the FSC were the most active in lobbying for reducing commissions and helped ASIC. Have they decided now that their own original research was flawed!?

Makes you think, what their angle is? I suspect the Banks want to peddle general advice insurance online (more aggressively) and pickup the commission from the Insurer. Also robo advice, and pickup the commission.

We truly are in trouble if the FSC is supporting us.

Well written Mike, the article hits the nail on the head. Anyone not working as an insurance adviser please take note, as most people still don't understand what a risk adviser does. You can probably add strategy and technical guidance to the list above as well. If lawyers or accountants charged for the work insurance advisers did from start to finish, nobody would seek insurance advice as the cost would be in the thousands of dollars! This doesn't even factor in any work involved at claim time to ensure clients receive their benefits which can last for months or years!!

Hopefully common-sense will kick in and the life insurance advice industry will see the need for commissions. As a financial adviser I've given all my clients the option between fee for service or commission paid from the provider, not on client has opted for the fee for service as they cannot justify paying two fees. Our role is to educate clients on the importance to hold appropriate cover and make sure this is structured correctly, often we lose money as we cannot choose who our clients are and you can spend over 15 hours which will only make us $400. On the upside we can make sure which in the in balances out the revenue we make. Risk Insurance Advisers are the ones who are often providing the best advice and unfortunately the regulators have allowed direct sales which lead to poor out comes and we as advisers get penalised for this. At the end of the day the consumers who seek advice see the value and would testify to this.

This is a complete U turn from the FSC's adviser bashing and deliberate misinformation of recent times.

Perhaps they now realise their strategy of trying to switch from advised insurance to dodgy direct is a dead end.

The FSC make me sick to my stomach!
They got the LIF passed by not providing accurate data to ASIC so that they could screw over advisers and sell more junk direct insurance the result to be all about their members greedy profit and stuff the customer and the adviser.
Lets also not forget that Sally Loane when on the stand of the Royal Commission could not actually answer the question put to her on why commissions were paid.
What's happened now is that the RC has put their plans on direct insurance into disarray because they can't now sell it without their dodgy practices which means they won't make any profit.
The second thing that's happened is their members business from advisers has plummeted by 20-40% depending on company because advisers cant afford to write new business and they have realised this will get worse as the LIF commission rates fall (customers simply don't want to pay fees for risk advice).
Lets also look at the practices of the FSC members this year. They have all been cutting premium rates for new risk business but not for existing customers therefore actually trying to encourage a churn issue that was not their in the first place. And its still not working as their adviser business continues to fall.
This means the FSC members have to do a back flip in the LIF commissions in order to survive themselves.
Little wonder the FSC are now highlighting the virtues of commission for risk advice!!!

On the 5th Feb, 2015, the FSC produced their submission in response the Trowbridge Review of Retail Life Insurance.
This report adamantly recommended the reduction of the payment of Life Insurance commissions so that " the upfront commission for life insurance advice is no greater than ongoing commission on an industry wide basis.This level should be lower than current market rates for level commission arrangements, for example in the region of 20%".
They also claimed that the then Hybrid commissions options which are right now the equivalent Upfront commission option at 80/20 should be banned and that removing these would improve the quality of advice.
Well, considering the ASIC Report 413 findings that indicated when either Hybrid 80/20 or Level 30/30 commission options were used, the advice success rate was determined at 93% and the advice fail rate was only 7%, the proposal from the FSC to reduce commissions to a 20/20 level only in order to improve advice outcomes was completely flawed and not based on any supporting data whatsoever that determined if the commission levels were to be reduced further than the then Hybrid commission models of 80/20, there was any improvement in the quality of advice at all.
The FSC also not only wanted to reduce commissions to a level 20 percent only, they also wanted to extend the responsibility period out to 2 years on the level commission and have the clawback apply to the proposed additional adviser service payment as well.!!!!
In later media releases, the FSC then went further in stating they believed that Life Insurance commissions should be and eventually would be eliminated entirely, even though LIF had not had any time in which to be assessed in relation to quality of advice.
The FSC were effectively attempting to have Life Insurance commissions eventually banned in order to provide a benefit to the FSC Life Insurer members who saw a large and profitable opportunity in the Direct Insurance space.
To say this approach was conflicted, misguided and manipulated is an understatement of massive proportions.
There was clearly an agenda to use market power to destroy a distribution channel (ie. advisers) livelihood and remuneration base to gain an advantage.
It was a misuse of market power and one in which the ACCC should have had the courage and determination to pursue
the detrimental effect and impact on advisers businesses across Australia.
After the damage that has been inflicted on these businesses by the previous stance the FSC had taken....for them to now state the information contained within the article is simply appalling.

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