Policy-makers misunderstand life/risk commissions

Life/risk advisers should not be viewed in the same manner as those providing investment advice and can’t simply replace commission revenue with fee revenue in the same way investment advisers managed to do in the aftermath of the Future of Financial Advice (FoFA) changes.

What is more, there was a real risk that the path being travelled by policy-makers would see more than half life/risk advisers stopping providing standalone life insurance advice.

That was the assessment of a new whitepaper produced by ClearView chief actuary and risk officer, Greg Martin  – Advice Culture and Remuneration – which argued that policy-makers needed to better understand the situation.

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They also needed to understand that advisers, when providing life insurance advice, could not simply replace commission revenue with fee revenue in the same way they had been gradually doing with investment advice, since the Future of Financial Advice (FoFA) regime commenced in 2012.

“For superannuation and investment advice, a client can fund an explicit advice fee from the capital within an investment portfolio or super fund arrangement,” it said.

“Where there is no associated ‘capital sum’, as in the case of an insurance policy, consumers need to transfer funds or pay out of their hip pocket. That’s an upfront cost of roughly $1,750 to $2,875 for a typical life insurance policy.”

The whitepaper said that, economically, it made sense for a life company to fund that cost in circumstances where the ‘cost of capital’ for an institution funding the upfront cost was significantly less than the value to the customer of making the equivalent upfront payment.

It said that to complicate matters further, with life insurance advice, a great deal of work was done before a policy could be issued and there was no guarantee that a client would proceed to cover.

“Institutions funding the upfront cost associated with securing life insurance is the reason initial commissions were originally invented,” it said. “According to the 2019 ClearView Adviser Experience survey, more than 80 per cent of advisers do not believe many clients will pay a fee for life insurance advice.”

“If life insurance commissions were banned or subject to further changes, 54 per cent said they would stop providing standalone life insurance advice,” the whitepaper said.

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Mike I am tied of the Commission argument< The real argument should be about value and the client's ability to make a value choice. It should matter not if a client chooses to pay the adviser via the commission route or a fee for service. The issue is having a process that allows the client to make this determination. I believe the following if legislated would solve the issue:
1: A true Zero commission life product priduced by every Life company that has an equivalent commission product.
2.Advisers must show the cost of both nil commission and commission over a 5 year period , the nil commission will include adviser fees.

The client may choose either payment method , and the regulator can be assured that the product was purchased based on value to the client. This is an easy solution so why isn't it happening?.

Thanks Ian - the real argument? Come back with your analysis when you have arranged a payment of $412000 trauma (anal cancer) claim for your client after in-force for only 18 months; no fee for the 6 months of claim processing (because it was inside the 3-years ND), but yes we got paid with upfront commission and only 1-year renewal. You may be sick of the commission argument, but I for one am sick and tired of being demonized by sanctimonious and virtuous commentators(including advisers)/bureaucrats and politicians who haven't got any idea of what the life risk advisers do for the clients that look after, let alone the nation's finances.

Ok Ian, I know you have done this several times previously.
A nil commission risk product would normally reduce the annual premium by approx 30%.
Let's take a $5000 annual premium example and strip the commission to nil thereby reducing the premium to approx $3500 in the first year.
Currently at an upfront commission rate of 70%, the adviser would receive approx $3500 initial commission.
Lets say the process of placing the insurance takes 3 client meetings, underwriting and medical follow ups, Statement of Advice and compliance document requirements etc resulting in a time commitment of approx 12 hours.
At an hourly rate of $200 this would equate to an advice fee of $2400 plus the annual premium of $3500.
This now equates to an initial cost to the client to implement the insurance cover of $5900.
This is an increase in initial cost to the client of 18%.
With the cost of insurance cover being a major obstacle to the take up of personal risk insurance cover in the first place, a significant increase in the first year cost to the client will be an even further deterrent to implementing the cover they need.

Yes, and if you elect to amortise the upfront fee over say a 3 or 5 year period to reduce the upfront burden the client may switch off the ongoing adviser service fee at any time and then walk away with a discounted wholesale product without having to pay the remaining advice fee.

And so in the first year, the adviser is receiving $1100 less in remuneration and the client is paying $900 more for the privilege.
In the first year, this seems to be a massive lose/lose outcome.

It'll never work....it's logical and makes sense...what sort of Parliament would pass legislation like that??

The Clearview representative is totally correct. But what led to policymakers' misunderstanding in the first place? One big contributor was the deception by the FSC cartel. Of which Clearview is a member.

It's great that Clearview has suddenly decided to be honest. Let's hope the other FSC cartel members follow suit and publicly recant.

The persistent and relentless obsession by the Govt in relation to commission is becoming discriminatory and unhinged.
The instigation of this obsession commenced with the ASIC 413 Report.....a deliberately manufactured assessment with a pre-determined outcome looking for the right result.
It was akin to a study assessing the prevalence of Cancer using a sample group of Cancer sufferers and then spouting the findings to the world.
From there the process simply became a work of deceit and ideological creation driven by the FSC in a bid to reduce a competitor (adviser) in the distribution of their product and to maximise profit and shareholder value.
It was a clear case of the misuse of market power and cartel like behaviour in order to gain an advantage in distribution.
Of course, that was before the direct insurance business was really investigated and still requires significant scrutiny.
The press releases issued by the FSC at the time, including their 5th Feb, 2015 submission to the Trowbridge Review told the story loud and clear as to their intended position.
The relationship between Sally Loane and Kelly O'Dwyer was always interesting , but prior to that it was even more suspicious as to why the FSC made direct political donations to O'Dwyer's Higgins Electorate conference in 2012 and 2013.
The process of LIF was flawed and based on incorrect data and was simply a case of O'Dwyer just caving in to something, rather than really assessing the benefit to the consumer.
The number of times O'Dwyer stated that reducing commissions would result in " enhanced consumer outcomes" without any form of justification was mind numbing rhetoric.
This is a journey that has been completely manipulated from the start to present day.
A healthy risk advice profession is good for all concerned including the consumer first and foremost.
With all the compliance controls, best interest duty and safe harbour provisions regarding advice and with strict overarching control processes from product manufacturers in relation to adviser submitted business , the level of commission payment to high quality advisers should be healthy, profitable and sustainable.
Quality advice isn't enhanced or increased by reducing the level of remuneration received for providing that advice to an unsustainable level.
If it is, it is destined to failure and that benefits no-one.

What a great summary as to how I see it. the destruction of a market designed to protect a nation of uninsured people. This leaves insurers providers in a tough position with far less new business likely. Ian bailey, it may work for you somewhat but thats not going to work well across the board and as Agent 86 responds with an example. maybe Ian hasnt seen the 30 or 40 years of experiences or is aware of the realities?

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