- No (69%)
- Yes (27%)
- Not sure (5%)
Taking our cue from Asteron Life’s 2 for 10 commission offer, which channels advisers to hybrid commission incentives, our latest poll is keen to explore your views about the future of upfront life insurance commissions. We’re asking whether you believe upfront commissions should remain a valid remuneration option for advisers.
In this debate, we are deliberately using the term ‘phased out’, rather than ‘banned’, because the impetus driving the question relates more to economic and operational considerations than it does to philosophical concerns.
Thousands of risk-focused and holistic advisers have delivered immense value to their clients over many years, with great integrity, and in their clients’ best interests, without legislation requiring them to do so. They have been paid mostly by way of upfront commissions by life companies that have supported and perpetuated this method of remuneration. This is how Australia’s life insurance industry has operated for generations. But has the time now arrived to have this conversation?
A brief summary of arguments that support the retention of upfront commissions includes:
- Why fix something that isn’t broken?
- Upfront commissions represent a valid and fair level of payment for services provided, also taking into account:
- allowance for adviser’s time and effort serving the interests of clients and prospective clients whose life insurance proposals are rejected or do not proceed
- allowance for the free and un-funded support for clients by their adviser during the usually difficult and often stressful, drawn-out claims process
- Increased financial difficulty for risk-focused advisers commencing their careers to achieve a ‘critical mass’ in building the viability of their business
In more recent times, however, there is an emerging case for the removal (phasing out) of upfront life insurance commissions in favour of hybrid and level options, whose arguments include:
- More advisers have now determined the actual cost of the advice they provide. They are therefore in a better position to price the value of this advice, and see hybrid and/or level commissions as viable options that will increase the value of their business in the longer term.
- More advisers are charging fees for services provided, both pre-commencement and at claim time, thereby diluting the need to fund this activity out of upfront commissions
- Industry sustainability – can life companies afford to continue funding this method of remuneration as an upfront cost of doing business, and remain viable, profitable organisations?
Some advisers and other industry stakeholders may suggest we are asking the wrong question. Rather, they would canvass whether all commissions should be banned, in order to remove any shred of ethical compromise brought about by what is seen as conflicted remuneration, either real or perceived.
But for the time being, our question focuses on whether the days of upfront commissions are numbered, or whether this long-established remuneration option should be retained for advisers well into the future.
We will value any measured contributions you may wish to make to this debate, and will ensure that your voice will be heard…
The most valid reason for not phasing out upfront commissions is that it would reduce the competitive tension between insurers.
If all commissions were level or hybrid, the work involved in switching from one policy to another would cost the adviser money unless the adviser charged the client.
Insurers would therefore have less incentive to ensure that their pricing was sharp and that their product features and terms were competitive. It would also lead to far less innovation as the need for insurers to differentiate would be reduced.
Commercially, I far prefer levels and hybrids and, with offers like Asteron’s and TAL’s that incentivize policy sustainability, feel that more and more advisers will similarly prefer levels and hybrids.
However, I do want that upfront option available lest the companies that I currently deal with all of a sudden offering quality products and/or their premiums cease to be competitive.
2 big problems with hybrids:
-It takes 5-10 years to outweigh upfront. This industry changes several times a year// Client’s circumstances change and 5-10 years is a long time to wait for any benefit.
-Other advisers/banks/online can get one signiature from a client to have our future vested income stolen away.
Combined- not enough future reward to cover the risk of hybrids- its a no-brainer
Interesting comments but what about the long term viability & value of your business ?? I bit the bullet in 2005 & went Hybrid without exception on all risk business. That first year I doubled my production, it was a mindset !
I now have a business worth double what it otherwise would have been & recurring revenue that has taken the emphasis off new business (still doing plenty of it though) & allowed affordable/profitable servicing of the existing base.
To me, THAT’s a no-brainer !!
Mark interesting and I agree with you however if we all agree to level or Hybrid the Insurance companies will next abolish commission altogether so what will your business be worth then?
Mark these words one of the Major 3 are responsible for the ASIC commission thing and the Churning thing, the same institution once cancelled commission to all Mortgage Brokers that lasted 3 months.
If you look around you will see the push on commissions is from the banks who do not want to share this with you the adviser.
So lets look at it this way fee/commission et etc, the banks charge you a fee for service bank fees they are commissions but called fees.
TAX, well the more you earn the more they charge, its tax or a fee or commission what’s the difference nothing but the name, the way its received is the same.
Bank fees Bendigo bank charges me $8 a month service fee why do I put up with it cause I’m to lazy to do something about it, its a commission.
Last week I went OS I saw an ANZ money exchange at the airport, we will charge you an $8 fee that’s it, I trusted them its the ANZ for Pete’s sake, only to learn that they stiffed me on the exchange rate,, the market rate was 29 to 1 ANZ paid me 27 to 1 deception or not? business the ANZ calls it.
So if the company is not sustainable what happens well unlike my business I have to go without, Hu could you imagine telling the CEO of an insurance company his income is about to drop 50% all heel would break out. Sorry but you 5 million dollar income is only going to be 2 million this year and the executives will also have to accept pay increases, god forbid for insurance companies to take executive pay cuts to save the business and make it sustainable that would be a crime.
During the GFC when the Federal reserve had to bail COMPAINES out some refused to give up company JETS gee AIA paid executives a bonus with Federal Government relief funding.
Its always us the adviser that gets the blunt end of the stick, VB is a word of the past, I wonder if Bill Shorten would take a pay decrease for 5 years to help the Australian economy get back on track no instead they are looking to increase superannuation for politicians.
With lapse losses being continually felt by insurers it is not surprising questions regarding the sustainability of upfront commissions arise. However, the cost to the insurers of hybrid and level commissions exceeds that of upfront commission over the long term (businesses that have moved to hybrid and level commissions often testify to this). So, if the industry moves to a more costly model, guess what – prices go up.
Upfront commissions still have a place in the market, especially where advice is being provided to people who cannot afford to pay higher premiums and who want to have some cover in place. If upfront was to disappear for those people then no adviser would want to write the business.
I’m sorry but while there are valid arguments for hybrid, stepped and level commission structures, the argument for Upfront outweigh them ten fold in my opinion.
Unexpected early claims, changes in occupation (forced and voluntary), divorce rates, changes in personal circumstances and life insurance companies changing the rules (don’t get me started on that!!) have taught me to get paid early for the detailed efforts and hard work I put into making sure my clients risk insurance solutions are spot on.
Why should advisers be penalized for these issues when they weren’t our fault?
Not every client I work with is set up using Upfront Commission – but the majority definitely are for these reasons.
Like an earlier comment says – if it ain’t broke, don’t fix it.
New advisers starting up from scratch would also find it very difficult to survive with premium structures other than Upfront; I know I would have when I started 6 years ago.
The commission structure we have now including the hybrid works well. Churning is obviously concerning the life companies as they have often not amortised the comm. before the case falls over.
one way to throw a log between the churners legs would be for all companies (life) to adopt a policy of changing adviser BUT the benefit of advice given and product written in the past stays with the originator. Then if a policy fails the new adviser can be questioned as to why. Life companies don’t follow up their losses, I have reported suspected churns and they don’t want to know. THAT SAID ;
charging A FEE FOR THE SALE OF LIFE ASSURANCE SHOULD BE REGARDED AS CONFLICTED .IT WOULD BE OPEN SEASON.
Cases could be stolen by lies lapses or churning with no consequence to any one. WITH NO ONGOING COMMISION the life company would not officially know who the agent is as it would be unlikely to need to be in contact with a life company unless you needed something
no ongoing commission etc.The company would still know the client until he is induced to lapse in favour of another company or superfund. No commission MEANS NO COST TO THE CLIENT.I’m sure some of these bright sparks would soon work out ways to pay a premium that included a payment to them as well.
The wrong question is being asked as phasing out upfront commissions will not stop claims and policies lapsing, of which the vast majority are for reasons that have nothing to do with advisers.
The one certainty in all our lives is that the cost, in time and expense of running a life risk adviser practice,, is substantial and even if advisers were paid nil to write Insurance policies, unless the retail Life Companies fix their inefficiencies, processes, admin and claims area, by making it more efficient and easy to use and cut down on red tape that stifles advisers abilities to run a profitable practice, then profits will continue to fall for life companies and advisers and the wrong decisions will continue to be made by reactive managers in Life Companies who do not understand how clients think.
It is really a simple argument. If what takes weeks and 20 hours work to complete today can be simplified by bringing in efficiencies that reduces the workload to 10 hours, then of course upfront commissions could be phased out. The suggestions by ‘some advisers and other Industry Stakeholders’ that all commissions should be banned is so dumb that these people need to be removed from our industry and put in a padded cell as they are obviously a danger to themselves and everyone around them.
Killing the goose that lays the golden eggs in order to satisfy today’s hunger pains , will not fix the problem in the long term. The solution is simple. Find out why lapses and claims costs are rising, then fix these problems and the rest will fall into line.
SPOT ON Jeremy!!
Jeremy is 100% correct
Upfront commission is not the issue,the insurers have not moved quickly enough to the trends being experienced in relation to claims under the group insurance area
The losses are now being felt whilst AA levels were being reduced for the sake of large premium volumes!
Commission disclosure gave rise to a power shift from the adviser to the client and their referrers (ie accountants, mortgage brokers etc).
The commissions being paid by life offices are fair and reasonable, on most policies with premiums of 0 to $5,000. Above this level of premium, the justification for remuneration becomes difficult.
Industry research will show, due to commission disclosure, the larger the premium the greater the chance that the client or third parties will become attracted to a share arrangement with the adviser, which leads to a lot of forced churning.
Most policies, regardless of complexity and size, will take on average 20-25hrs to complete, a premium costing the client 30-40k, and in AMP’s case remunerating the adviser $45 to $60k is hard for the adviser to justify as ‘well deserved’ or “earn’t”, thus it leads to a commission share arrangement.
ASIC, and the life offices need to respect the fact that many lapses that occur through churns have taken place due to client pressure, not “greedy” advisers. Most advisers are self employed people, who need to make rationale decisions, that at present, are really only hindering the bottom line of the Life Offices, not the client, who they are serving!
If a client understands that by moving from 1 insurer to another, he could negotiate a 50% rebate on a $50,000 premium, most clients who are in business would be angling at some sort of arrangement with the adviser!! “saving money is making money”
What is the adviser meant to do, walk away from $25,000 – $30,000? By churning the policy, who is he really hurting, other than the life offices bottom line. Subject to a clean bill of health from a medical passed and with underwriting satisfied for the new insurer, the client is actually better off, especially is its an apples for apples move! So under the “best Interests Duty of 7 steps, has the adviser actually committed a crime, or done the wrong thing? i don’t think so, but morally, its certainly debatable!
It is a perfect storm scenario, initially constructed, and now being felt by the life offices themselves. as a 20 year adviser, i have witnessed, BDm after BDm, pushing and pleading for new business, they have been focused on the new business targets they needed to meet, AMP have even offered upfront commissions of 130% with 12 month responsibility periods!!
The churners will argue that they are operating within the industry rules! The industry needs to address the rules that have allowed this perfect storm to gather such momentum, which has seen drastic profit declines as well as threatened government intervention!
The reality is one party can’t operate without the other, a balance needs to be achieved, where the advisers are still motivated enough to strive and pursue the new clients, and the life offices need to reconfigure their remuneration models, factoring in client motives as well as third party interests!
Ive said and written many times that the upfront commission system closely approximates my cost of providing and implementing advice on an hourly costed basis.
Level comms which pay me in future years for the work I do today make no business sense.
The alternative of charging clients a fee is short sighted in that it will almost double the 1st year cost to clients in acquiring appropriately advised cover. Many clients will opt for the TV spruikers and industry funds with their multitude of limitations, better than no cover but not so good for those who find out too late they aren’t adequately covered.
What needs to be better explained by those promoting the argument is the incidence of churning. It would seem most any switch to another insurer is termed churning. In my experience of 30 years in the industry, where churning does exist it is limited to a small number of advisers who should be readily known to the life offices. The problem is those who loose the business never really know why and those that gain the business have little incentive to rock the boat – at least for a while.
The nanny state Government is gone so can we please all just accept we have a responsibility to conduct business fairly and move on from this debate.
I started phasing in hybred/level commissions in 2006 and as much as it hurt initially my business has only grown and strengthened with the additionial year to year cashflow that these higher ongoing commissions have created. We write our risk business to stay on the books for the long term and have a very low lapse ratio so writing hybred/level can only assist, especially when funds under management are under pressure in times like the GFC. Write for the long term, fully disclose and continually service are the ingrediants to a growing business in the hard times that we have experinced in the past 6 years.
Here come the greedy banks and insurance companies again and they will probably get there way. They are only looking to make more for themselves and have all insurance go direct. They don’t give a stuff about the quality of product they provide to consumers. They want to eliminate advisers because they have found that they don’t know how to make a buck out of this business without completely controlling it.
Just because the insurance companies are losing money via claims they shouldn’t be attacking those that provide the business to them. The sensible thing to do would be look at where the majority of claims are coming from and charge premiums accordingly. So if 40% of your claims come from ‘mental health claims’ simply charge more if the client wants this included or exclude this from your product. Why would you go and attack the income of your workforce to fix a product issue.
If you want a strong diversified industry that provides clients quality advice you need to reward advisers accordingly. If we go down the path of slashing commissions on risk you simply end up with the cheap and nasty direct insurance industry with profits going to a minimal amount of shareholders, and huge job losses in the advice industry.
Is this what the FPA and the government are gunning for. Sadly the answer is probably yes because it’s easier for them to manage a smaller group of companies. They seem to love monopolies, and duopolies. Unfortunately this is at the expense of the consumer and the workforce. You only have to look at the damage that Woolies and Coles has done to not only their own sector, but it’s know having a knock-on effect in the farming and agricultural sectors.
I don’t disagree with the choice of hybrid/level commissions entirely, but that should be a choice. Hybrid commissions are OK for a well established business, but if you are new to the industry getting paid for your work immediately and not over a 5 year period is extremely important. 20% of commission in year 1 does not even cover your initial admin expenses. Unlike the elimination of commissions on the investment side, this loss of income can’t be replaced by charging a fee for service. Therefore the only winners are the large corporates who can sustain their business even while making a loss over a 3-5 yr stretch.
This move is not unlike the tactics of Woolies & Coles eliminating all the small players(e.g. Bakers, Deli’s, Butchers, Fruiters, Fuel stations, and now newsagents & Chemists are their current targets). If you want the advice industry to be cheapened by the big corporates then ‘give-in’, if you don’t then you need to fight this move. Once the corporates are allowed to dominate there is no turning back, and workers and consumers are the losers. Shareholders are the only winners. This move is absolutely ‘anti-competitive’ and a nail in the coffin for small to medium business owners.
Think about seriously
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