February 12, 2019
Our latest poll has been driven by the Government’s statement that it will mandate level commissions for life insurance advice if ASIC’s 2021 review finds that the Life Insurance Framework remuneration reforms have not had the desired impact on ‘aligning the interests of advisers and consumers’.
For many advice businesses, the answer to this poll question may depend on a number of variables, not least of which is the degree of level commission that would be mandated from 2021.
Advisers should note that the present Federal Government initiated David Murray’s Financial System Inquiry, which recommended that upfront commissions should be banned (see: Ban Upfront Commissions – FSI). Using exactly the same language in December 2014 as invoked by the Treasurer last week, Recommendation 24 in the FSI final report recommended, in part, that a ban on upfront commissions “…would provide a balanced and cost effective approach to better align the interests of advisers and consumers.”
The Financial System Inquiry did not stipulate what that level of commission should be. It simply recommended amending the law to require that an upfront commission for life insurance advice is not greater than ongoing commissions. A few months after its release, however, John Trowbridge recommended in March 2015 that future life insurance commissions should be capped at 20%, but include an initial advice payment of up to $1,200 to accommodate and support adviser upfront costs (see: 20% Flat Commissions – Trowbridge).
Level commission offers among the retail life insurers mostly sit between 27.5% incl GST and 30.25% incl GST. If level commission was the only option available to you after 2021, could it sustain you and your business?
One strong upside to a flat commission structure is the increase in ongoing business revenue and the potential rise in the value of risk advice practices that may develop, given annual renewals would flow at 30%, increasing each year, as opposed to 10% or 20% for those advice businesses which have historically elected to operate on an upfront or hybrid commission model.
The critical downside, though, is the ability for current and future advice business propositions to transition to this model, given the immediate, upfront cost of placing any advised life insurance solution on the books.
There’s more we could say, but we’ve already said too much. As always, it’s over to you to continue the conversation, and we welcome your measured comments…