The Association of Financial Advisers has highlighted one of the less prominent elements of the new Life Insurance Framework proposals, in advocating that existing level commission arrangements should be retained.
In a statement it released last week, and further reinforced during its current National Practitioner Roadshow series, the AFA is reminding its members and all advisers that the LIF proposals include ‘… a very clear statement protecting the existing level commission regime.’
The Association specifically directs advisers to wording in the statement released by Assistant Treasurer, Josh Frydenberg, when announcing the details of the LIF proposals, to the effect that the reform package is not intended to limit the industry’s current ability to operate on a level commission or fee-for-service basis.
The AFA will strongly resist any concerted actions by the life insurers to collectively set a cap on the rate of level commissions
AFA CEO, Brad Fox, said the Financial System Inquiry recommendation on level commissions did not seek to set the rate, which presently hovers around the 30% level, suggesting that it should be left to the marketplace. “Any move to reduce the rate of level commission payments has nothing to do with the quality of financial advice,” he said, adding, “The AFA will strongly resist any concerted actions by the life insurers to collectively set a cap on the rate of level commissions.”
This message has been reiterated by AFA Chief Operating Officer, Phil Anderson, during his presentations at the AFA’s National Practitioner Roadshows over the last two weeks. Mr Anderson has been giving perspective to the current debate by taking advisers through a timeline of critical events, starting with the Future of Financial Advice reform debate, followed by the original churning proposals put forward by the FSC in 2012, to ASIC’s Review of Retail Life Insurance Advice, the Financial System Inquiry recommendations and the Trowbridge reform proposals, all of which have contributed to the current debate surrounding the new Life Insurance Framework proposals. In exploring all of the potential outcomes of the debate, Mr Anderson reinforced the AFA’s position on retaining existing level commission structures in noting, “… we intend to hold the life insurers to that.”
The discussion on maintaining level commissions is a mute point, if the cost to provide the initial work is substantially higher.
The studies suggesting it costs $3000 to provide best interest comprehensive advice means to just break even will require a $10,000 premium which is far above the average.
The fact is, that the cost can be far higher than $3,000 and the only way the Industry can become sustainable, is for the retail life Companies to radically simplify their administrative processes, from underwriting right through to alterations, renewals, increases, claims.
It is common knowledge that direct product floggers for Life policies have lapse rates in their first year of upwards of 50% so clearly that particular loss leader is not working.
No Business can sustain 50% lapses and be profitable, yet these rogue Companies are destroying the fabric of what took decades to build and was the foundations of the Life Insurance Industry, ( Retail Life Advice) by being able to run amok with no regulation or Industry controls to stop the cannibalizing and chaos they are causing.
Is all very well to boast about the increase in life Insurance sales, though somewhat defeats the purpose, if the funnel at the bottom is widening and the premiums do not stay on the books.
Which gets me back to the level commission argument again.
Level commission is only viable if the cost to put the Insurance on the books is lower and if the policy survives for more than 5 years.
As usual, the solution is simple, though it appears we are banging our heads against a brick wall, though I live in hope that some Life Companies will listen and start telling the regulator the real truth of what has happened in the last 5 or so years and only then can we move forward in a constructive manner.
Let’s avoid the real issues again shall we ?? 3 year clawbacks are the real concern for advisers not level commissions This is nothing but ” smoke and mirrors” in a hope the deep concern and disguised real purpose of this legislation ” the banks bottom line ” will magically disappear !! I for one don’t believe any of them anymore Even the government is a pawn in this mercanary attack on the retail life insurance structure The real looser in the end will be the Australian health system which will collapse under the strain of claims brought on by bad or no advice systems ! The direct insurers the only ones left in the system
What would IFA’s do if the AFA were not attacking with all guns blazing this major problem of keeping existing Level Premium structures! About time they stood up to the banks on these major issues!
All you will hold of the Insurers are their hands in pushing Small Commission based Risk only advisers out of the market……… Good for you all.
Paul. The main game of the institutions (CBA, NAB, WBC, AMP, etc) is purely and simply to make the world difficult for non aligned AKA independent advisers. Squeezing from a number of aspects under the guise of client best interest etc. is totally and completely misleading. They are really about their respective bottom lines and how to increase these. Together with the industry funds they are wanting to take out 20+% market share of independent advisers. The intention is to make it unprofitable for such businesses to consider lower value clients for risk insurance. They then can mop them up and cross sell into other products which ultimately make them a profitable client. Industry funds retain both super and inferior insurance for the same clients. (try and get a successful claim through an industry fund).
For those risk only advisers, the ability to absorb the costs is extremely difficult. Even more difficult if you are starting out….. god help those in that boat. Hence this will be a process of killing off the independent risk only adviser. They will need to broaden their offering and incorporate wider “advice” to make the client a $5000+ p.a. client or they will have to bypass the client. A really sad situation which has been hidden also by the likes of the insurers too. It has been a sad state of affairs that most insurers other than Macquarie Life have not put forward a strong case against much of the change that will impact non aligned advisers. TAL have been speaking with a forked tonge. AIA & Zurich have “private submissions”. Why should that be the case? I suggest you read the submissions and what was not said as much as said to get the picture. (http://fsi.gov.au/).
As for level comm’s, how many advisers books are going to shift their clients from 10% ongoing to circa 30% ongoing? What does this mean to current insurers books?
What about holding the insurers to the existing Hybrid commissions as well, because the ASIC Review of Retail Life Insurance Advice illustrated a 93% pass rate for advice provided on EXISTING Hybrid and Level commission options, so there is no documented or assessed data that indicates that reducing Hybrid or Level commissions rates to a lower rate than currently exists will result in a higher standard of advice or a better advice outcome for the consumer.
If there is no assessed data to support any change, then there is no evidence available on which to justify a reduction.
The proposed reduction in Hybrid commission to the 60/20 model cannot be justified.
Ask ASIC to provide evidence that a further reduction from the existing 80/20 model will result in a better advice outcome.
ASIC cannot state that by reducing the Hybrid commission model from the existing that the advice pass rate will increase from the previous result of 93%.
Ask Josh Frydenberg to produce evidence as to why he told AMP that an 80/20 Hybrid model was not good enough and that it had to go further.
On what basis did Frydenberg base his directive……answer….none…….it is all political.
He needs to justify why he became involved, when he stated he did not want to be involved.
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