RC lacks understanding of advice, says AFA

The Royal Commission interim report suggests that it [the Royal Commission] does not have a good understanding of financial advice, according to the Association of Financial Advisers (AFA).

In doing so, the AFA has said it cannot see any justification for the Royal Commission recommending a review of grandfathered commissions, let alone the removal of life insurance commissions.

As well, the AFA has signalled it will be making further submissions to the Royal Commission outlining the flaws in in the interim report’s position on grandfathered commissions.

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In a message to members signed by AFA chief executive, Phil Kewin, the organisation said that having reviewed the financial advice section of the interim report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry it was concerned that the AFA’s submissions had not been acknowledged.

“They [the Royal Commission] have specifically focussed attention on issues related to adviser remuneration, including such important issues as life insurance commissions, ongoing adviser service fees and grandfathered commissions,” it said.

“While we understand the myriad of complexities and issues with adviser service fees and grandfathered commissions we cannot see any justification for a review, let alone removal of life insurance commissions.”

“We will have more to say in our submission with respect to the flaws in the interim report’s position on grandfathered commissions. We will be working hard to ensure that the level of understanding of these issues is improved and that any recommendations in the final report are based upon a real understanding of the issues and the implications for ensuring the best outcome for clients.”

The AFA has asked members to read key sections of the Royal Commission interim report to inform the organisation’s response, particularly questions around the continuing of life insurance commissions, the direct sale of life insurance and approved product lists (APLs).




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The Govt or the RC has no idea what goes on in a good advisers office.

Yep....but why is that so? Isn't that an important function of professional associations? Just why do some advisers pay $1,000 a year in membership fees. Surely some wouldn't pay $1,000 a year just for some letters after your name. Just how effective are bodies like the FPA and why aren't they more effective. Could it be their relationship with product providers?

We can spend the next year or two arguing this again or we can accept that a lot of our current business model is structurally corrupt. Rather than arguing for something which directly links an advisers income to sales of product, lets use the time we have to develop businesses where our advice is valued and our clients (not product manufacturers) pay for it directly.
Because of the actions of some big players and a small number of advisers the reputation of everyone is tarnished.
Financial advisers need to be recognised for the advice they give and be seen as independent of the products they use to implement their advice. The model at the moment devalues advice and transfers the value to those who really don't deserve it.
Time to me on. Spend time trying to get some sense back into things rather than arguing for something which is now too damaged. Times have changed and we need to move with the times.

So Clem, the receipt of remuneration in the form of commission for quality advice delivered by ethical, compliant and quality risk professionals is structurally corrupt is it ?
You believe that the consumer will be better off from a cost perspective ( including product and advice ) if commissions were not an optional form of payment and that consumers were compelled to only have one option available to them ?
Either you don't have a clue as to what you are talking about, or you are one of the fixated ideologues who push for their own model to be enforced upon all others as a self-righteous , philosophical agenda, rather than considering that consumers should be provided with a choice as to how they pay for advice as long as that choice is clearly defined and demonstrated to the consumer.
The receipt of commission payment for risk insurance advice is not structurally corrupt Clem because following the changes imposed by the Life Insurance Framework, the insurance companies are now compelled to offer the same level of commission options and over the next 2 years these will decrease even further on a consistent basis across all insurance providers. The assumption that commission payments are conflicted is entirely incorrect as the basis for recommendation must be in the clients best interest and the level of commission between providers is consistent, thereby eliminating the potential conflict of receiving a higher level of commission from one provider over another.

It is structurally corrupt, not because it is a commission but because there is no transparency.

Except Craig under all forms of current legislation you have to fully disclose all benefits and remuneration in writing in clear language.

But that's not transparent? Definitely not as transparent, as say ISA funds that hide payments and commission arrangements and 'indirect member fees' but somehow Haynes has missed all that in his investigation? This has been a politically biased witch hunt from day 1.

Hah Hah Hah Hah Hah Hah Hah Hah,.......I have not heard anything quite as ridiculously naive as that from CraigG for some time.
So, if it's not corrupt simply because it is a commission. If the commission is entirely transparent (which they are 100%)
then it is a transparent commission and therefore NOT structurally corrupt !
It demonstrates the lack of understanding you have on this subject.

Grandfathered commissions are not transparent. There is nothing in the statements or disclosures that shows the client how much the adviser is receiving from insurance, investments and superannuation. We are not just talking about writing new insurance business here.

86 you had better re-read your post. You can't seriously be suggesting commissions are not a conflict of interest. LIF does not solve this, it simply means there is no incentive to sell one providers product over another. There is still an incentive to sell a product and more of it. That's a conflict of interest. If a conflict can't be acknowledged it can't be managed.

Clem nailed it when he said structurally corrupt. Commissions represent a structural conflict of interest and human nature ensures that translates to corruption. How much more evidence do you need?

In that case Jason, it must be also human nature to deliver advice to a client that doesn't really enhance their position or provide a benefit and charge the client a fee for doing it. The fee charged may not be relative to the value provided.
The incentive is to charge the client a fee in order to generate income, therefore there is a gain or benefit to the adviser by charging the client. It is a question of ethics. It is not unethical to receive commissions if the client has received appropriate advice for their needs, full disclosure has been made and the client has benefited from that advice.
Just because a fee is charged does not ensure or increase the likelihood the consumer will receive appropriate advice...this is a fallacy and is driven and promoted by those who have a philosophical issue.
Lawyers who take on class action or insurance claim cases don't do so unless they estimate they will have a very high chance of success and therefore be rewarded financially for winning.
Lawyers are regarded as a professional occupation and yet the incentive driving the success and end goal is financial in these types of cases where often a large percentage fee of the compensation is charged.

True, human nature will see some overcharge for their services. The manner in which an adviser is paid will not change that. As you say its a question of ethics and not everyone will behave ethically. But this is not a credible justification to maintain a structural conflict of interest with the people you consider your clients.

A fee will not 100% guarantee appropriate advice, but to say it will not increase the likelihood of appropriate advice is contrary to all the evidence highlighting that conflicted remuneration increases the likelihood of inappropriate advice. That position just doesn't hold water.

You continue to refuse to acknowledge that commissions are a conflict of interest in the context of financial advice. Your example of the class action lawyer only serves to illustrate that it doesn't really matter whether your fee is calculated on the basis of a percentage or is a fixed fee, as long as your interests as adviser/lawyer are aligned with the client.

You are overlooking that the lawyer is paid by the claimant/their client, not the entity being sued. If the client gets more, the lawyer gets more. Their interests are aligned. The fundamental issue is conflicts of interest.

When it comes to commissions on insurance or investments, no matter how you may position it in your own mind or to the person you consider your client, it is a matter of fact (not opinion) that you are being paid by the product provider, not your client. The more the product provider gets, the more you as the adviser gets. Your interests are aligned with the product provider and not aligned with those of the client. Your interests are in conflict with the client in regard to your remuneration.

The only way to remove this conflict is to not be paid by the product provider or on the basis of the amount paid to the product provider.

"The model at the moment devalues advice and transfers the value to those who really don't deserve it."

This is what the product manufacturers want. As advisers, whether risk only, holistic or non-risk, we deserve to be paid by the client directly for the substantial value we add; the fee needs to value what we do appropriately, it should not be determined by a third party, particularly one that provides the product. This is how professionals work, they are not commission agents.
My previous comment is not denigrating the capability of those who currently receive commissions - I do - but we have to get past this or we will all be out of business and our clients will be worse off. How many reports, inquiries etc does it take for this to be understood?

Clem, how do you offer the consumer the product and advice combined for the same current cost and enable the adviser to be appropriately remunerated for the value provided when the product providers will not reduce their premium cost enough to compensate for the cost of the advice. Consumers will not pay more than they do now for insurance...they are already struggling with significant and unsustainable premium increases.

Gee Clem, next time I go into Woolworths, Aldi or Coles, or even IGA, my preferred supermarket, I will ask for advice on which milk to buy. I will do the same when next I buy tyres, a tv, a shirt or a condom. Will I pay for this advice on top of the product? No. Imagine the supermarket lines if we all asked for advice on which milk was best for our needs. My point is, that I care which products I recommend for specific clients I have used hybrid commissions since 1995. There has been very little difference in my income whichever product I recommend, The same as a retailer. But ask most retail clients if they will pay for advice on top of the premium? Usually the answer will be no, other than some of the self employed (most of my clients) & high income earning employees. Yes, I do charge fees rather than commissions for some of these as I always discuss it. most still are happy to pay by commission when they realise that service package includes a no extra cost, nil fee, claims assistance service.

Incidentally, it has been decades since I bought a condom. I doubt that my adviser at the time, that professional Pharmacist or his successor today would be able to give me any practical advice as he or she's fact finding process wouldn't be as complete as mine as a financial adviser. Although if i was to be in the market for this Pharmacy product, I would require a written Statement of Advice, giving me warnings of the consequences of not buying his/her recommended product, why this product will be best for my needs and meet my objectives and whether or not he or she receives higher or lower remuneration for recommending and selling me that product. And me being me, I would probably reject his advice and buy a larger product than needed. But the mark-up (undisclosed unless a SOA was required) would be the same.

Cheers Clem. And good luck next time you buy a pharmacy product. or milk.

"Dead people paying for service and Life Insurance Premiums". Thus saith the RC!
Well premiums must be paid continually until someone notifies the product supplier that a death has occurred!. Similarly, an adviser must be notified if a death has occurred. In this current modern age oldies are so old when they die that very often NO DEATH NOTICE is posted in the Sydney Morning Herald. Therefore advisers who regularly check for deaths of clients every day have to wait until someone thinks to notify them and the product supplier. And the adviser and product supplier have a duty to wait for the death Certificate!!!! Otherwise it might be a fraudulent or mischievous notification!!
Get with it Commissioner and your eminent assistant QCs and SCs. It is a practical World out there!
Having observed the overnight expert SCs and QCs Assisting fiercely question relentlessly from copious written briefs prepared by some bevy of assistants, it is no wonder that McMaster collapsed and others had to plead ignorant or refer to their counsel. But it is inexcusable that those Assisting did not think more deeply about the practical everyday issues we all deal within in a conscientious manner.

Product commissions and professional are inconsistent. If you accept that as a broad principle then in the end you have to accept that being paid commissions will have to cease for financial planners to be considered in that light. In any event the AFA has zero credibility with the Commission after the Sam Henderson debacle so it's views will have no influence over the final outcome.

Ritchie, can you please explain then why specialist medicos pay general practitioners commissions for referrals in the form of holidays, televisions, dinners etc. If the Surgeon doing your heart or liver transplant is not professional, why the heck would you be on her or his table?

Old Fella, I think we are talking different things - the specialist is paying a referral fee or incentive out of fees payable by the client. Product commission is not the same. It seems like the whole industry is trying to find some justification for practices that are indefensible. I suspect all the discussion will be academic anyway. Fairly or unfairly the advice industry's reputation is in tatters and the die is cast in terms of what is coming.

Sorry Ritchie I also miss your point. More specifically, if the incentive from a specialist (in the example being use) is from "fees payable by the client" then where do commissions come from? Incentives/Commissions are a cost to the specialist/product provider from the fees/admin/member fees payable by the client - are they not? What am I missing?

There has not been one intelligent analysis from the CraigG, Clem, Jason and Ritchie club to explain exactly how the consumer will be better off with absolutely no choice whatsoever as to how they elect to pay for the advice and product combined in relation to risk insurance.
Clearly explain to me this:
Client seeks risk insurance advice.
Annual premium cost is $4000.
If insurance is placed, adviser will be remunerated via transparent, clearly documented commission currently at a maximum rate of 80%. ($3200).
Case has taken 10 hours of work from commencement to completion and 3 client meetings.
If the commission is stripped out of the product, providers estimate the net premium will decrease by approx 30%.
( ie $1200), resulting in an annual premium cost for the product only of approx $2800.
Client pays $2800 for the insurance product and is provided with an invoice for $3200 for the advice, research, strategy,
3 client meetings, discussions with several Underwriters and product team and follow up on pathology and medical assessments.
Cost to client is now $6000 for the same transparent, compliant, advice process if they had been able to pay for the advice via the current commission model. ( an increase in total cost to the client of 50%).
At this very moment, the increases in premium costs across the board are ensuring that clients and the public are questioning whether the expenditure on quality personal insurance is warranted.
I know what is coming in the next response.......reduce the adviser's fee to only $1200 for the 10 hours of work and the client will be paying the same cost as the commission !
Risk Insurance advisers have already had a significant reduction in commission levels as a result of LIF and is continuing to decline over the next 2 years.
So those who are uninformed and base their commentary on ideology and removing choice from consumers, clearly explain whether the significant under-insurance problem in Australia is going to better by increasing the cost of advice, isolating those who need insurance from receiving advice and pushing them into junk direct product?

Agent86 good use of numbers to make your point. But it only takes into account premium paid in first year. Subsequent premiums will also be say $2800 so after 3 years they would have paid initial advice fee of $3200 plus 3 x premiums @ $2800 for a cost after 3 years of $11600. This is better than having paid $4000 each year for 3 years. And for every year after 3 years they continue to be better off...

Your projections assume no yearly increase in annual premium cost or no annual review fee charged in the first 3 years.
Stepped premium basis makes up the vast majority of cases due to ridiculous break even points for Level premium and the ability of the insurance companies to increase the level premium rates,thereby not guaranteeing the longevity of premium benefits.
So, if we take the first yearly premium at $4000 (inclusive of adviser commission) and project that forward with a 10% premium increase each year based on a Stepped premium model, the second year will calculate at $4400 and the 3rd year at $4840. Total premium paid over 3 years of $13,240 and the adviser has received the initial commission of $3200,the second year renewal/review commission of $880 and the 3rd year at $968.
As you haven't projected the annual premium increase in your example or included the cost of the annual review, lets build that in.
First year cost to the client $2800 (product) and $3200 (adviser fee) = $6000.
Second year premium (+10%) = $3080 PLUS annual review fee of $880. (equivalent to 20% commission model)
Third year premium (+ 10%) = $3388 PLUS annual review fee of $968. (equivalent to 20% commission model)
Total cost to client over the first 3 year period based on net premium/fee for service model $14,316.
Total cost to client over first 3 year period using existing commission model $13,240.
Cost saving to client over the 3 year period = $1076.
In addition, the client has been able to afford and implement the required level and type of insurance at an initial first year cost of $2000 LESS than the net premium/fee for service model.
In this example, if the client could only afford a maximum TOTAL spend of $4000, either the level and/or types of insurance cover may then have to be reduced or diluted thereby exposing the client to greater financial risk in the net premium/fee for service model OR the adviser would place the appropriate level and type of cover required AND NOT BE ABLE TO CHARGE AN ADVICE FEE BECAUSE THE CLIENT CANT AFFORD IT !..........hence, 10 hours of advice, strategy , documentation and medical follow up negotiation and 3 client appointments for no payment.
Under the commission based model, the client receives the required cover at an affordable cost, the adviser receives appropriate remuneration both initially and ongoing and the cost to the client over the first 3 years is $1076 less.
On this basis, any proposal to remove the option of clients being able to pay for personal risk insurance advice via the existing commission based system under the LIF model is completely flawed and is not in the clients or consumers best interest.

The only reason the commission structure works out cheaper is because you added in advice fees equivalent to the commission payable. This isn't a given at all. In fact, one of the biggest complaints clients have about their advisers is that they get no service from the adviser.
If you take away your assumption that there would be extra yearly fees and just went with:
$2800 premium + $3200 adviser fee in first year
$3080 annual premium in second year
$3388 annual premium in third year
the total amount paid is $12468.
Compare this to the $4000 + $4400 + $$4840 in three years' of premiums under the commission model and they're paying $13240.
I.e. the client pays more under the commission model. The more years the insurance is held the greater this difference will be.
I agree the client has greater upfront costs under the no-commission model, but I think they save long term. And I agree that it wouldn't be fair for the adviser to do work for no reward. (We are not the only profession to have this problem, Real estate agents can also do an inordinate amount of work and not get paid a cent if the vendor changes their mind or refuses to accept what the market if offering for their house. But I digress.) I am in favour of a model where clients pay for the advice regardless of whether or not they choose to follow it, and this should be set out in the Terms of Engagement. Whether the fee is paid upfront or retrospectively would be up to the adviser.
But I think this would ultimately be in EVERYONE'S best interests to move to a model like this.

So your modelling allows for no annual review fee for the adviser on the assumption that there wouldn't be a review completed??.......what about if the client has a claim in the second year and they require significant input and assistance from the adviser (or are you also assuming that clients don't make insurance claims within the first 3 years of the policy commencement ?)...if they do have a claim, the renewal commission can help offset the advice and input from the adviser when assisting in the claim process.
Don't you charge for an annual review?
Or don't you complete annual reviews ?
Or do you complete your annual reviews for free?
Or don't any of your clients have to claim on their policy?
Or don't you have any insurance clients at all ?
What if the client wants to increase their insurance cover in year 2 ,the premium increase is an additional $2000.
Their circumstances have changed and so you have to complete a new Fact Find, SOA, application form, medical assessment and 2 client meetings plus travel to their home 50km away.......another 10 hours work.
The additional $2000 premium cost would at least allow the adviser to be remunerated for their work at $1600.00.
Strip the commission out and the additional premium reduces to $1400 and you issue them with an invoice for your advice for
$1600.00.....total cost to an existing client to increase their cover in the second year is now $3000 as opposed to the $2000 cost if paid via commission. (50% increase).
Your argument is becoming heavily tainted with your ideology rather than being realistic.
You have failed again in this example to address the problem of the maximum total initial cost the client would be prepared to pay and pushed forward with the assumption that clients would agree to pay 50% more than necessary to get the correct level and type of insurance cover in place in the hopes that they may receive a minor long term cost benefit.
What if the client cannot afford your 50% increased up front costs and decides to not proceed with your recommendations and then has to pay your advice fee, then contracts Cancer and dies 6 months later ?
Do you reckon that if they had put the insurance cover in place at an affordable cost level rather than deciding to avoid that decision because of the increased cost that your argument would carry any relevance at all when their family receives a lump sum payment to ensure their financial independence and dignity ?
In addition to that, they may have paid you your advice fee, decided against implementing the insurance because of the cost and then received no funds in the event of the death.
I am not arguing that fee for service risk insurance or a combination should not be available and may suit some clients.
I am arguing that by removing choice of a commission model, you are significantly disadvantaging the consumer who has a right to choose which option suits them best.
Irrespective of any case studies or calculations, you will continue to adamantly push your singular ideology.
The removal of remuneration via the commission model for risk insurance is a flawed argument, the level of insurance will plummet and many Australians will be left without adequate financial protection.
Providing choice and not removing it, is in the consumers best interest.

If all commissions for insurance are eliminated, the amount of life insurance will drop to near zero levels. Wont happen.

So, if I understand Steve correctly, people only take out life insurance after being convinced to do so by their adviser. And if the adviser doesn't receive a commission on the sale, the conversation won't even occur.
From here that looks a lot like selling "extras" with a new car.

If there are no commission life agents, the only insurance taken out will be via Direct Insurance phone sweat shops or via Group Insurance in super funds. Both failing to meet the proper needs of the consumer, and both have been pinged as failures at the BRC recently.

The problem with removing insurance commissions (or restricting them to $1200 upfront) is that no one will give insurance advice unless it’s packaged with full advice thereby restricting insurance advice to the high net worth clients who can afford to pay $5k minimum pa advice fees.

Independent insurance advisers will largely be forced to work directly for the insurers and will be paid wages and bonuses (instead of commissions but basically the same). Clients will get no choice of insurance provider and more importantly no help at claim time from their adviser. Clients will find it hard to change insurance policies to different companies as they either have to do the leg work themselves, go direct, or pay an adviser $5k to do it for them, which they will not do.

The only reason insurance advisers exist is because we are paid quite well. It’s not a glamorous job. No one at school ever said “when I grow up I want to be an insurance adviser”.

No commissions for insurance will be a horrible outcome for customers. The only ones who benefit from no commissions are the blood sucking lawyers who will take a commission from the insurance policy of around 30% of the claim payments

I can't afford to get out of bed and provide advice for less than $4,400.00. Given my liabilities as soon as I put pen to paper, the prospect of ending up before Hayne J or equivalent., the time taken to data collect, and then provide researched advice, $4,400 is the bare minimum, let alone the extra time negotiating with Underwriters, and taking a nervous client for their medical appointment. And who will pay that up front for a Life Premium package of say $5,000 per year which is about average?

Your model would work if all products went to a standard definition as defined by the AMA. Imagine then the insurance companies would form a new 'group pool' which was wholesaled to the individual companies. The insurance provider could then add on a % admin margin on top of the base premium and could use that margin for their admin, claims and sales staff. All clients would end up with the same product, paying the same premium and there would be a larger pool to cover the claims. Would be minimal need to replace product then. You could then do what you do well and see more clients and get them the protection they need. It should also reduce the compliance work around product recommendation too. Cost should reduce. More cover. Less churning.

Just loving how the large corporations have once again dodged a bullet and turned the focus onto individual advisers and their remuneration practices and here we have advisers debating fee v commission. What a trip back in time to the 1990's. Let's over look for a moment the $300K to $350K an insurance company must pay to get on an APL and all the strategies used to to give access or prevent access to the salesforce.

Anne, I think you might have a point on this one. The fact that ASIC allows product manufactures to hold an AFSL and then looks at the adviser for conflicts. ASIC will never cancel the licence of an CBA or AMP et al as their own funding now relies on them. Cutting commissions is simply a cost savings to the product manufactures. If you can remember the 1990's, products did their own paperwork back then - now we do. Back then they paid advisers to do it because it was cheaper than say CBA having staff to do it, now we do it and we are debating - should we have commission (product pays) or charge the client. If all commission are removed, AMP still controls it's approved list, as does CBA etc. Industry Fund will still only ever sell industry funds.

The problem is the Insurance Companies, not their brokers. Example: A funeral insurance company slammed at the banking royal commission for targeting Aboriginal customers was spruiking its products and handing out toys to children at the recent Koori Knockout.

I am pretty agnostic to this whole fee versus commission.

However, it is clear that simply removing commissions for advisers is the placebo PR 'remedy'.

It will be utterly ineffective unless the insurance companies are also forced via legislation to comparatively reduce premiums. Why else would this even be worth pursuing, if not to make the clients are in a better position?

This will never happen. Thus the whole process and supposedly sought after outcome is yet another political exercise in futility.

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