Fortnum Removes Upfronts

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Independent licensee, Fortnum Financial Advisers, has become the latest licensee to ban upfront commissions for risk advice within its network.

Ray Miles
Ray Miles

From 1 July 2015, Fortnum advisers will no longer be able to receive high upfront commissions on life insurance products. Instead, advisers will be encouraged to charge a fee for service, or utilise hybrid or level commissions.

Fortnum said the move was made in a bid to self-regulate and ward off further legislative attack.

“Advisers are price takers not price makers. We don’t set the terms for upfront, hybrid or level commissions, nor do we set the policy terms or premiums, yet most of the blame for the industry’s sustainability issues are directed at the minority of advisers who churn,” said Fortnum Executive Chairman, Ray Miles.

“There are advisers who churn and they’re known to the insurance companies who continue to accept business from them so perhaps part of the problem is how executives are incentivised to deliver new business growth.”

Advisers are price takers not price makers

The licensee also warned other licensees and providers to follow AMP’s lead and abandon high upfronts, or risk legislation that would make it difficult for advisers to profitably provide insurance advice.

“If the industry is capped at 20% with a maximum year-one fee of $1,200 [as recommended by the Trowbridge Report], many advisers will simply treat risk insurance like health insurance and tell the client that they need it but that they need to arrange it themselves,” Mr Miles said.

“In many cases, advisers who derive the bulk of their revenue from risk will exit the industry altogether. The end result is that fewer Australians will receive insurance advice.”

The licensee does not charge insurers a self-space fee for inclusion on its Approved Product List (APL), and in late 2013 adopted an industry-leading APL selection process which focuses on an insurer’s ability to pay claims and deliver underwriting flexibility (see: Claims Service the Focus of New Risk APL Approach).



10 COMMENTS

  1. The consensus is that a minority of advisers who are known to the Insurance Companies, are churning, so it seems we are throwing out the baby with the bath water by making it harder on the vast majority of advisers who do the right thing.

    Having hybrid commissions of 80/20 will allow advisers to continue writing Life Insurance.

    The absurd statements of fee for service or a flat level 20 percent with a capped year one fee of $1200 will see a rapid decline in advisers selling Life products.

    We are dumbing down the real issues, though there is one certainty, if you make it unprofitable, no-one can write Insurance.

    • Agree Jeremy. Hybrid commissions will allow most advisers to continue to write life-risk business. However, new advisers, unless they’re single with no real financial commitments such as mortgages or other sizeable debts to service, will still find it difficult to make ends meet unless they’re super high-flyers.

      All of this onging debate has simply made what is already a challenging business even harder to be in. It’s a shame because we advisers deliver a substantial service to the insured public, but the legislators seem determined to drive us (IFAs) out of business.

  2. Fortnum can afford to adopt hybrid commissions because essentially their organization consists of mature advisers .
    My worry however is for the new advisers in our industry who do not have the asset backing to absorb the initial costs and also not able to charge a fee for various reasons.
    Going to be very difficult for them to be profitable and gain a foot hold in the industry where we need new people. Let us not forget that upfront commission was implemented to assist advisers to run their business. It now appears that the burden is being passed to the advisers to collect fees instead. Not an easy task in the life insurance world.

  3. Advisers are not price makers, their price takers. Particularly, it would seem, if their licensee is Fortnum

  4. The continued and persistent focus and feeding frenzy around commissions and remuneration by interest and non interest groups who have ulterior motives and agendas use compromised data and processes as justification for their position.
    The payment of commission either in the form of upfront, hybrid and level options is not a determining or singular factor regarding the receipt of or delivery of poor or inappropriate advice. Reducing or even removing commission will not eradicate inappropriate advice,address the underinsurance issue or convince the Australian public to take a much more serious approach to risk management.
    Poor advice can be received if paying a fee for service, just the same as it can be through a commission remunerated model.You can receive poor medical, legal, pharmacy and accounting advice every day and none of these would have been paid via a commission model.

  5. No, it hasn’t, Peter – but I hear you because we’ve experienced similar.

    When the goal posts are being continually shifted it’s pretty challenging to score a goal. It seems inevitable that upfront commissions are going to go. Who is ultimately responsible for this? The insurers themselves. But they’ve smokescreened it by making it seem that the government has made the running. The government has, but it’s been at the behest of the life offices.

    Whether the industry is viable for the product manufacturers as it has been/not been for nearly two decades is a moot-point. In any case the move to hybrid will definitely make it so. It appears in most other industries manufacturers and wholesalers etc can charge what they like, but we as the equivalent of the latter can’t.

  6. Which ever model, we adopt, has anyone heard the life companies say that if the Trowbridge model is adopted, by how much will the life companies reduce their premiums to consumers ?

    @ Peter Hawkes,
    You are correct about Fortnum.
    If you look at their adviser members, I believe their minimum dealer fees are $80,000 p.a.
    You’d have to think most of their advisers are earning in excess of $500,000 p.a.

    For those who think the “fee for service” model is the way forward, at the moment, the most an adviser can rebate 100.0% of his/her initial commission and reduce the clients premium is by 30.0% p.a.

    Curiously for those who charge a “fee for service” model for risk insurance, I’m wondering as to how you explain to a client who’s premium before the discount might have been $1500 and is reduced to $1045 is then asked to pay your fee for service,assuming it’s based upon $100 per hour (9 hours @$100) a further $900 for your time ?
    The total cost now being $1,945 to the client !!

    I want to know what you will do if the client then challenges your $900 fee for service and decides they are not going to pay it.
    Will you sue them or write it off ?….. and which ever option you decide to take,…how long can you afford to do either one ???

    Even if an adviser agrees to accept 50.0% upfront and ongoing commission, the maximum premium discount to the client is 15.0% p.a.

    Has anyone heard a word from any Life company including AMP how much they will reduce their risk premiums since they are no longer paying what is perceived excessive upfront commissions ?

    If there was a way of decimating an industry, I can’t think of a better way for this to do it.

    The option of taking Hybrid or Level commissions has been available to advisers for many years.

    We all do a lot of unpaid work in the risk insurance space. Not every client you see takes up the advice offered and is willing to commit funds for their insurance. Not every client is medically fit for insurance nor are some willing to accept loadings/ exclusions after submission.

    Not all underwriting is uniform.
    In other words, some company underwriters are less experienced than others, and the less experienced will often offer terms than are more severe than a more experienced underwriter would have.
    You don’t find out until you deal with these people.
    Most of us who charge upfront commission also generally get heavily involved in the claims process. It’s mostly unpaid in a sense.

    If anyone thinks they won’t spend 20 hours in unpaid work to assist a client at claim time… then you have no idea what’s involved.
    Will Fortnum advisers rely on their hybrid commission/level commission to compensate them when the client has a claim or will they charge extra ?

    What the industry, meaning the industry associations, the Life insurance companies and the advisers should have done is stuck together to get rid of the Churners and those who bring the majority of us into disrepute.
    It should have been a much simpler and pragmatic solution to an otherwise perceived problem.

  7. Alleycat is correct and the scenarios stated are not theory, they are real life.

    It would be nice if before all the Life Companies take the path of least resistance, they seriously listen to experianced advisers who truly have the best interests of all participants and see through the smoke screen and absolute mistruths being tossed around by all and sundry.

    Short term gain can mean long term pain if a herd mentality amongst Life Insurance Companies takes hold.

    It takes a brave person to stand up for what is right and if advisers can see that some Life Companies are serious and truly looking at the issues and making sensible changes, the payback will be a loyal adviser market that will generate long term Business that is profitable.

  8. Just another example of Life companies greed and them misinforming the public. I strongly urge planners to stick together and boycott life companies actively increasing their margins at the expense of planners. The answer is simple. If AMP wants to force through trowbride reforms just do not write AMP. If you are a planner with a dealer group trying reduce you revenue why would you stay with them. Planners unite or you will perish!

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