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.
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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