IFAs Face Extinction if Upfronts Dropped

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A significant change to adviser remuneration in the life insurance sector would put independent advisers at risk of extinction and subsequently reduce consumer choice, Synchron has warned.

Synchron Director, Don Trapnell
Synchron Director, Don Trapnell

Responding to the Trowbridge Interim Report on retail life insurance, Synchron Director, Don Trapnell, and Independent Chair, Michael Harrison, have argued that the removal of upfront commissions would make it extremely difficult for independent advisers to meet their operating expenses.

Using modelling based on practices within the Synchron network, the submission highlighted the significant upfront costs borne by risk-specialist advisers when placing client business. It suggests that a move to level-only commissions would mean the cost of acquisition would be far greater than the revenue generated, driving many advisers to exit the market.

“…we estimate that a change to a 30% level commission model would mean that at least 50% of our advisers would leave the industry,” the submission stated.

Mr Trapnell and Mr Harrison noted that the impact of a mass exodus of advisers would be most keenly felt by consumers.

…a 30% level commission model would mean that at least 50% of our advisers would leave the industry

“We acknowledge that from a consumer viewpoint the commission rates are perceived as being too high, however, there appears to be insufficient recognition of the value and cost of advice…

“The Financial Services Council report titled Apathy to Action surmised that less than 5% of Australians have adequate life insurance. Whilst it concluded that the industry needs to reposition to meet consumer needs, it is clear that few Australian’s buy adequate life insurance through non-advice channels.”

The submission also points out that consumers with limited assets could be priced out of the advice market if upfront commissions were removed:

Synchron Independent Chair, Michael Harrison
Synchron Independent Chair, Michael Harrison

“It would be a pity if younger consumers or those wishing to purchase smaller policies had no access to advice, or only access to restricted advice from vertically integrated suppliers who have the opportunity to cross subsidise their costs.”

As an alternative to restricting adviser remuneration, Synchron proposed that product manufacturers could be more innovative with product design, by building products which convert from stepped to level premiums over time, or offer a claims preparation payment, similar to the general insurance industry.

“If a change of legislation is to occur, consideration should be given to requiring product providers to accept replacement business without ‘restart’ conditions such as non-disclosure and early suicide exclusions. This would discourage book buying.

“Consideration should also be given to requiring all companies to report lapses on the same basis,” Mr Trapnell and Mr Harrison said.



29 COMMENTS

  1. It has been years to get to this point, where we may be getting some traction around having a intelligent conversation with all the parties, as up to now, it has been a uphill battle trying to educate all and sundry about the real costs of providing advice and clients lack of interest in paying for those costs.

  2. How true, at last a sensible view, what business is it really of anybodoies including the idiots that came up with the idea to reduce our incomes? What they take a pay cut? In some cases I get paid nothing for claims, preparation and guidance. Zurich made a claim so impossible it’s taken 2 years so far to argue the point. OnePath is just so difficult to ge any help out of it take less time to walk to China and back than it does for OnePath to respond let alone get any response.

  3. This is garbage ! We are independent advisers and our business has never been better and we don’t take commissions on Risk! I think it also interesting that general insurance brokers survive on way less commission than life risk. However let’s not keep arguing about commissions, keep them but have properly priced Nil commission products as an alternative and let the client decide. If a client wants to pay the life risk adviser via higher premiums for the rest of the policy term so be it, we have now got rid of this argument. If the client wants to pay a fee for the work then that is their choice. The smart thing the writers of the report could have done is suggesting this as the best alternative, I’m sure we would have the consumer groups on side as the argument is now consumer choice.

    If these alternatives are not put forward we will see an ever increasing amount of direct business done, consumers want risk cover and will pay as we can see from the growth of the direct business model . It will soon be a case of shopping with the smart phone asking the adviser if he can beat such and such and why not. Would it not be better to have the same price and then advise what you are going to charge for as a fee ? All the extra work now has specialist value and can be charged as such. If we think of the theory of evolution we see it is the adaptors that survived. Are you a survivor ?

    • Hey Don, are you an adviser in the insurance industry. So after you present your SOA many of your clients say, gee you get high commissions. Is this what they say to you? Well I have presented( personally face to face) thousands of SOA, and in that 1000, not 1 client mentioned commissions to me, not a single 1, and I tell then this is how I get paid, and as you know, I, as we all do, disclose commissions. So your opinion, I believe is not indicative of all advisers.

      • Even though now a licensee, Don is still a practising adviser and knows what he’s talking about. It seems from your comments that you agree with him anyway. Don’s saying that doing away with commissions would have a detrimental effect on our industry, on advisers anyway.

        Like you, I’ve rarely been challenged about commissions to be paid on business written, but that isn’t the point here. What is the point then? That if the powers-that-be ban life-risk insurance commission many advisers simply won’t survive, unless they can diversify. Big ask, Rob.

    • Ian I wonder if you have ever done any risk only insurbacebfor complex clients where the commission are above $10 k and significant travel, meetings, research and other costs are incurred, without the ability to subsidise the cost through super advice or other investment, so if the premium is $10k how would you charge the client? And appropriate fee for your Services, True cost recovery that reflects your real costs and a reasonable profit margin of 30% and stay sustainable, and do you then charge a fee every time a clients wants an alteration, what about at claim time ? How many clients do you have ? i I suspect that you have achieved your business over a long period of massive commission on super and fees Iover many years and Are reaping the benefit of many years of commissions which allows you to subsidise new clients, your view may suit your business model but it is selfish short sighted and I suspect if you have been in the industry longer Than 10 years amnesia has set in, get your head out of the clouds.

  4. Ian Bailey makes a good point about advisers offering the choice of commissions or fees which the client can pay. How many clients will understand the implications of the decision they’ve been asked to make is my question.

    However, what about those new in the business or those who don’t have a significant client base from which to work? Don Trapnell is correct about this. Ian may be a well-established adviser and more power to him if he is. But in this his view is shortsighted and what Don and Michael say is far from garbage.

    As for the comparison between general insurance brokers and life risk advisers there is a world of difference. Clients look for general insurance – they don’t necessarily do that for life-risk. Besides, very few start from the ground up a general insurance brokerage. They often have to in life-risk though.

    What will happen with a fair degree of certainty is that if commissions are banned or reduced to below-subsistence levels at the outset, the under-insurance problem in this country will go off the scale. Not to mention advisers who can no longer make a living in our industry and who will be looking for work. How then will the regulators address these issues?

  5. Paul Herring is absolutely correct. I don’t know what your business model is Ian Bailey but as a risk specialist who has been involved in this industry for 20 years, I will state that it is a known FACT – the average Australian will NOT pay a premium AND an adviser fee for risk insurance.

    Banning commissions or even reducing the commission to a Level basis will have a devastating effect on the risk insurance industry in this country. This has been stated again and again!

    Look at the riskinfo poll – almost half advisers will leave the industry if commissions are banned. The stats speak for themselves!

  6. Where does the “at least 50%” figure come from?

    Pitching that as an argument for not making changes implies that commissions are a significant (at least 50%) of the reason that advisers recommend insurance. Of course we know this isn’t true, but the average punter on the street presented with this kind of argument would not be unreasonable to draw this conclusion, and may even suggest that commission structures SHOULD be changed to weed out this 50% of salespeople. Imagine if the same threat was posed by second hand used care salesmen or multi-level marketeers….

    Remember, we might know that what we do adds value and is appreciated by our clients, but when 80% (or whatever the number is these days) of Australians don’t have an adviser, it’s not our clients that we need to prove our worth to.

    So don’t shoot the messenger, but I think we need to be careful about how this issue is communicated.

    • Jam, I don’t usually re-comment when people criticise an article I have authored, because I do believe it is healthy for us to have an open and vigorous debate. I do on this occasion feel it is appropriate to grant you the courtesy of clarifying where my “at least 50%” figure came from. Synchron surveyed a substantial sample of our 350 authorised representatives. Interestingly a very recent RiskInfo survey came to a similar conclusion where 45% of respondents stated that they would be forced to leave the industry if 30% flat commission is mandated. The simple reality is that any business model where the cost of acquisition is greater than the revenue received is a seriously flawed business model. As for as your comment about commission being a significant reason why advisers recommend insurance, all I can say is that I do appreciate being paid for my time as does any other provider of a service or commodity.

      • Thanks Don, I appreciate the reply.

        And I agree with you – we need to be paid for our time. I suppose my point is exactly that.

        We provide an end-to-end service including but not limited to identifying and measuring any financial deficiencies, determining how best to address these – insurance may play a part, finding the most cost-effective solution for the client, reviewing the client’s situation and products to ensure they continue to be suitable, providing assistance at claim time to both the client and (where appropriate) their family…etc etc…

        That service has a value, and it also has a cost. For a pretty standard risk assessment, policy selection and recommendation and application it costs us somewhere in the order of $1,800 – $2,200 per client. If we were to invoice clients for this fee instead of taking commission their gross insurance premium might drop by somewhere in the order of 25%, so (assuming they have plenty of cash in the bank earning 0%) they would need to pay around $6,700 of premiums before pure fee-for-service becomes financially advantageous. Of course if they have any debts, or if their cash is earning more than 0%, or if any of their insurance premiums are tax-deductible, then the level of premium needed to be paid to break-even under a pure fee-for-service model becomes even larger (i.e., on an IP policy the in-built commission is tax deductible to the client, whereas the upfront fee we would have invoiced them for the advice is not; by way of example, if the client was earning $90k p.a. the break-even works out at around $11,000).

        The point of this is that for smaller policies (premiums less than around $2,500 p.a.) it’s actually a better outcome for the client to have a commission structure like those currently in place.

        Maybe imposing a level (or hybrid) commission structure on policies above a certain size (say, >$5,000 p.a.) would still be workable however applying something like this to every policy is just going penalise those who need it most.

        Interesting result from the survey – I would be interested how many of those surveyed are already looking to exit (due to retirement etc). After years of being beaten up by the likes of Industry Funds (and mainstream media chasing sensationalist headlines) I can’t help wondering whether a change to payment methods might just be the straw that breaks the camel’s back…

  7. Ian – there are a few flaws in your argument. One of which is that you say that general insurance brokers survive on way less. General insurance brokers work in an industry where many of their products are mandatory such as workers compensation – They receive a commission equivalent to a level model and usually charge a broker fee in addition. The only day I would ever consider moving to a level commission model only is the day where Income Protection and Life insurance became mandatory. If we are going to draw comparisons, let’s make sure we are making doing so on a level playing field.

    • GI is a very different kind of business. I have a number of GI firms as clients (tax, business strategy etc) and compared to personal risk it’s a much tougher game.

      Granted the application process is much more straightforward, but the ongoing admin and messing around to retain a policy is far worse than personal risk. Most do not charge fees in addition to the commission they receive. Also most mandatory covers (of any meaningful size) go to tender on a semi-regular basis and are not very sticky. This is one of the reasons why a mature and well-run GI business sells on a substantially lighter EBIT ratio than personal risk businesses.

  8. We need these commission free/fee only risk providers to put comparative numbers on the table.

    If we are all worried, I see no better way to either a) confirm our worries or b) put them to rest, than to see what our business would like in 3 months, 12 months and 5 years down the track if we went one way or the other.

    I confess that I have never given the client an option to have a reduced premium and paying us by a fee. I might try it and see…..

  9. This discussion on commissions being the ” evil” of the industry has gone slowly but surely from the sublime to the ridiculous As an independant employed people who understand what it takes to run a business with support staff what gives these people the right to say we earn to much?? And don’t kid yourself that is exactly what they think If this was another industry the unions had an interest in (apart from their influence over industry funds) they would be lobbying the government that this move is a restraint of trade and heathy competition and against The Trade Practises act I have been in the industry for 36 years and although my renewal base is reasonable I could not afford to keep my 4 staff members if level commissions were imposed
    Someone please pull the heads of these beaurocratic A £%#’ holes out of you know where and get into the real world before under-insurance problem completely spirs out of control and the unemployment level ( due to u retains me support staff) rises .5 percent
    What a mess this is creating

  10. There are other big differences between life advisers and general insurance brokers. General insurance brokers control the cash flow so can pay themselves immediately the client pays the premium. They control the renewals each year and can be proactive to increased premiums before the renewal goes out, switching insurers with minimum fuss. Risk advisers have no control over the cash flow and can often wait weeks for their commission to be paid via the dealer group system. Because of this control over the cash flow each way, GI brokers can often keep their commission even if a policy cancells mid year of their one year responsibility period. Which brings us to another looming problem of the life companies considering extending the responsibility period to as much as 5 years in addition to reducing the commission.

    No matter what is decided, risk writers “aint seen nothing yet”. They have had it tough for the last few years and it is going to get tougher.

  11. @ Ian Bailey… how impressive are your comments !!!

    If the average life premium paid by the client is no more than $1500 and under the present commission system I’m paid initially $1500.
    The fact that it takes from the initial interview, preparation of an SOA, presentation of the SOA, completion of the application and submission of the application approximately 9 hours.
    Because if you are doing what is expected of all of us and producing “in the client interest” an advice document, this is what it takes.

    I’ve assumed under your model you might charge $100 per hour and in this instance you would charge the client $900. Now by accepting a Nil commission reduces that client’s premium by 30.0% to $1050 initially.
    I’m interested to know why it’s in the client’s best interest to pay you and the life company a total of $1,950 for something that might have cost them $1500 in the first place.

    Next, under the current commission model that exists, assuming the premium remains constant, I would receive $150 on renewal irrespective of how long the review process took. Now under you model, if you have drive to see the client after normal business hours at his home which many advisers do even though they operate from an office, do you charge out your time from the start of your journey and add the review time to your charge out rate ?

    I suspect that if you do it will cost the client a lot more than $150 and in which case, the client is unlikely to pay for any review ?

    Next of course under the current commission arrangement, my renewal commission is supposed to cover my costs in assisting clients and their families with claims.

    I’ll be be generous in my estimates of time but seldom have we been able to liase with client’s, their medical attendants and the relevant life company to settle claims under 15 hours.

    At your rate, at what point do you bill the client $1500 for this or does your service end if you’re not paid ?

    @ Rob, you are correct with disclosure of commissions.

    I, like you and many other’s who present SOA’s with full disclosure of commission including referee payments (to Accountants) have never been challenged by one client on the quantum of initial or ongoing commission,,,,,,, a legal requirement

  12. Can I comment on Mr Baileys comment re GI brokers

    Having been an owner , I know the problems in GI. A broker employed by a large GI business has a book of business in which the commission on insurance ( but not workers comp ) is around 20%. Most charge a handling fee/admin fee of 5% or even 10% of base premium

    Experienced GI brokers review clients every three years, not one year, except for the clients they see as “high maintenance “. Its all about maintaining relationships and COIs – you get to play a lot of golf. Their employers expect them to increase the book by 10% a year, but often premium increases take care of that

    At the end of the day the name of the game in GI is to PRESERVE the value of the book. The BDMs of the General insurers are keen to have brokers with 90% retention, and of course, a low claims rate.( loss ratio )

    Accordingly, GI brokers tend to plateau- just keep the book bubbling along

    Plateauing would be a TOTAL DISASTER for a life office because there would be no FRESH MEAT being placed into a Number 1 Fund next year. As the life book ages, claims increase, premiums must GO UP. This is the exact opposite of GI. And apparently life insurers only care about advisers Loss Ratio sometimes, judging by the way they still fall all over a big writer looking to move insurers..

    This is why the reduction of life risk commissions, and the consequential rapid departure of over 50 years advisers, would be such an unmitigated disaster for life offices

    The same would occur for “fees only” for risk. Adviser care factor after policy in place – NIL !!!!I

    If fees are our only source ( or a major source ) of life risk remuneration, we will not act to get a policy back on the books when a credit card bounces, nor will my client pay me to do the paperwork. WE KNOW many clients, faced with repaying two months premium all at one go will abandon the policy, not preserve it. That costs the life insurers dearly, because they have born the set-up costs !

    The life insurers have been transferring admin costs to advisers for decades, but it all stops NOW !!!

    Surely the God the idiot bank CEOs, and their Actuaries, who comprise the FSC can see this !

    GI is not a preferred remuneration model

    As to the rest of your comments Ian, I heartedly agree

  13. I am of the opinion that the industry should look at a premium structure of 55% initial & 45% trail or something similar.
    If the higher upfronts are causing so many problems “apparently” . Then the cost to the companies are expected to reduce significantly by lowering the initial to approx. half. So this will allow for the ongoing to be increased .
    This would reduce the incentive to switch companies and advisers won’t go looking for the smallest reason to change. Obviously if the change is in the best interest, then the adviser receives a higher commission. Depending on the premium will determine if the extra 10% comm is sufficient to cover costs BUT retention of clients will be paramount and clients may receive better service from their current adviser so they will not consider changing to other advisers.
    The reduced commission pain will only be for a couple of years until the increased trails take effect.Short term pain for long term gain.

    • It shows a total lack of understanding by ASIC, The Working Group and FSI(Financial Systems Inquiry)to recommend up front commissions be banned.
      It would be catastrophic for them to be banned as our incomes would drop by around 80% to accommodate a 30% level commission model. The great majority of Life Insurance advisers would find 30%level commissions inadequate, unsustainable and unworkable and it would be impossible for any newcomer.
      Upfront commissions have been paid for around 150 years and any Actuary or Life Company Executive will tell you that they are not only affordable but necessary for them to attract or provide incentive to advisers and make sure they can succeed in business and make a profit.
      The consequences of banning up front commissions is alarming as their will be a large decline in the number of advisers resulting in a drop in production including across the board job losses at Life Companies, Licensed dealers ,Adviser practices and businesses.
      It is also inconceivable and alarming that the Life Companies are remaining quiet on this important and vital compensation issue and only a few Licensees such as Synchron are speaking out against level commissions or standardization of commissions.
      I will be opting out of the Life business after 40 plus years if they introduce level commissions as I consider this to be the last straw, but I haven’t given up just yet.
      My intention is to be face to face with politicians and that includes an appointment with a Liberal Senator within the next two weeks.
      My hope also is that all you supporters of our great Life Industry will do the same and see your local MP or Senator before April/May this year.

  14. I have been watching this situation develop for some time and have made numerous comments.
    The one thing that I find most concerning is that throughout this whole ridiculous focus on the proposed re-structure of risk insurance commission, is the total and utter silence from the insurers themselves.I have been told by several insurance companies that quality, Upfront commission business is the most profitable model for them.
    For the volume of commentary that has been put forward by many, the volume of commentary from the Life Insurance companies is deafening. The volume of adviser-supportive commentary from the insurers even less so.
    I am not naïve enough to understand that independent or employed advisers providing risk insurance advice is the insurers only source of premium income as the direct market has gained a not insignificant percentage of the business, however, the vast majority of risk insurance business remains to be provided by advisers and yet we hear very little, if nothing at all from the insurers who reap the financial rewards from the advisers that place risk insurance business.
    Wouldn’t you think the insurers would be openly and regularly supporting the hand that feeds them……..or is there another agenda at play ?

    • Craig, me thinks you’ve answered your own question. I haven’t researched the figures but if you take into account the number of people insured via industry super and direct insurers I think the number would far outweigh those insured by independent risk writers (as opposed to bank aligned writers).

      So I don’t think that bank owned Life Companies who also provide Group Life service to most industry Super funds care much about the fact whether independent risk writers exist or not.

      Financially, we are a greater cost to them than the other forms of distribution channels they support.

  15. Whilst having read the article and the many views expressed I am saddened to express the view that the “commission debate” is dead and buried! Why? When the Deputy Chair of the PJC publicly states that all adviser’s are “cowboys and shysters” no manner of concise, intelligent and rational debate is going to change a decision which I believe has already been pre-determined. Having now looked at the make-up of the sitting joint-committee and taking into account the views expressed publicly by Senator’s O’Neill and Williams – if a vote were to be taken – it would be 6 – 4 in favour of introducing a 30% Level Commission regime. My only hope is that I’m wrong in my assessment.

  16. @ Gav,
    There’s a simple way for you to calculate what it means to you and the client.

    Cost out the time it takes for you to see a client, factor in travel if there is any, cost in the time for research and completion of your SOA, cost in your time for presentation of the SOA, completing the application and include travel to see the client if that’s the case, cost in your time for administration and cost to discuss with the life company (medicals/financials/underwriting decisions), then
    finally cost in the time it takes for the life company to pay you.

    Then discount the initial premium by 30.0% and then figure out your cost and what the client ultimately pays by either method.
    If you think the one person in this post who thinks the present system should change, then one or both of you may not be around for long.

  17. Ok I sat down and did the numbers for our relatively new Risk focused practice of 5 years or so. We started without buying a book. I now employ 2 other staff. The reality is one of those staff will be looking for a new job if we go to level premiums, as we do not have a Massive trail business. Naturally will we innovate and work around this. I am one of those advisers that looks at my team as people who deserve to earn a living and I have been proud to employ 2 people in a small regional town in QLD. If this goes ahead I will be forced to outsource what we can to one of our neighbouring countries, what a shame.

    Don and Michael have done the numbers. Only the insurers with plans to sell more direct product to the public or banks that can cross subsidise will benefit from killing upfront commissions. Say goodbye to many new independent entrants to this industry. This type of interference will benefit those at the top end. If Troybridge was a real report the FSC and AFA would have not asked for Submissions while everyone was away on Christmas break, and they would have at least one Risk adviser on the Panel, Shame Shame!

  18. With all the opinions noted above, and they are all valid and noteworthy, I think to myself, how may actually went to the trouble of putting their opinions and arguments into a submission to the Towbridge report.

    And Michael Ord, I found time during my “holidays” to put my point of view across in a submission, as I felt it was important to do so. I didn’t cover off all the aspects the report was considering, but I sure put forward my experience on those that affected me and my future in the industry as an adviser.

    The way I see it Michael, is that you took a real risk in allowing others to decide your fate without due opinion from all quarters of the industry if you didn’t.

    • Praise be to “The Real Risk”,

      At pains to discuss my Holiday, but in reply to “The Real Risk” attack, I was on a remote Island, booked a year ahead, with no internet, outside communications, or even a Phone reception (Bliss). I was heading out on Holidays when Submissions were requested and didn’t have access to the Trowbridge Report by this time. The One Holiday of the year I spend with my Family. Unlike YOU I dont hide behind an”Alias” on Social Media however. I can tell you this, I have stepped up and had 3 direct discussions with a Liberal Federal MP about this issue. So to “The Real Risk”,, Phone me, I am in the phone book 🙂 under Michael Ord, not “The Real Risk”. I would love to read your Submission and maybe discuss working with you, if you can forgive my tardiness on not getting in a submission back in time via Pigeon Carrier. Really I would welcome your input. Unless you are actually one of the Cronies? Don’t be scared now, do you even have a real name? I would respect your comments more if you had, had the whole story, but it is all too easy to hide behind an “Alias”. So are you a Faceless Man or a Boy (no Disrespect intended ladies)” The Real Risk”?

  19. At the risk of sounding terribly disrespectful, I wonder if ASIC really cares if 50% of advisers leave the industry. Life offices could them employ salaried salaried advisers under their institutional AFSL. ASIC would than only have a handful of licensees to have to monitor, rather than the hundreds of “independent licensees”. It would be a win for the institutions/life offices (distribution for their products) and industry funds, a win for the regulator (fewer AFSLs to monitor, and those they do have deep pockets), a win for salaried advisers (job, salary,bonus), and a big loss for IFAs and the general public.

  20. Folks your all missing the point about the supposed changes. Firstly even the ALP will want a revenue impact statement and secondly so will the State Governments and the Liberals.

    Lets assume that ASIC and the rest of the lemmings charge over the hill of upfront commissions and try and direct the market. This process has an inbuilt failure guarantee. This means that the volumes of life insurance written will drop like a stone along with the company tax and stamp duty on life contracts. Your talking about $2bn in revenue. Really good idea.
    Next it will simply mean that some insurers will relocate to NZ or Singapore and operate from there as those countries would love the tax revenue, and as the advisers would still be paid upfronts then nothing changes except the tax losses in Australia.

    This idea is idealistic and dopey and when the cash flows of the life insurer crash then and only then will everyone understand. This mooted change will finish off MLC for good.

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