Level Commissions – Really?

Could your advice business remain viable after 2021 if you were required to operate on a level commission basis for life insurance advice?

  • No (47%)
  • Yes (41%)
  • Not sure (12%)

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…

  • Roger Smith

    I assume by this Survey that it is Risk Info’s belief (as it is mine) that there will NOT be any change to “ongoing commissions” other than possible upfront commission changes post 2021. Is that correct? and if so what is your assertion based on?

  • Christoph Schnelle

    I find Level commissions to be equal to 80/20, marginally better than 70/20, definitely better than 60/20 in most cases already. It would make us more like general insurance brokers who are on level commissions already as far as I know.

    • Daryl La’ Brooy

      Accept General Insurance Brokers do a lot less work up front than Risk Advisers. So our compliance workload is going up and revenue going down, unless you can charge a fee.

      • Christoph Schnelle

        That makes a lot of sense. Personally I am ready to wear this but others may feel quite differently.

  • Jeremy Wright

    The life Insurance Industry requires New Business to offset claims and lapses brought on by rising premiums and changing circumstances in peoples lives.

    The ability or even willingness for advisers to continue writing new business, will come down to risk versus reward.

    The current model, including the FASEA fiasco, pushes the Risk above acceptable levels and there will be a decline in New Business, followed by an exodus of advisers.

    The talk of level commission, is a mute argument.

    The Industry will already be in decline by 2021 and the goal posts will change again.

    Unless we start getting some proper representation, (forget the FPA, they have never understood how the Life Insurance Industry works and have rolled over regarding FASEA)
    and heavy hitters, the Retail Life Industry will go into sharp decline and then will need to be rebuilt.

    Just look at the last 20 years of the management at NAB as one example and you realise that the people at the top, have little understanding of the real issues and the consumers are the ones who pay the price for their incompetence.

    • Daryl La’ Brooy

      Already some of the Life Company BDMs are telling me that retail inflows are down by about 30% since LIF came in.

  • C.

    These surveys and the subsequent results are being targeted and manipulated by a dedicated team of trolls industry fund representatives and ideologists who are focused on skewing the appearance of results so they appear to be significantly more balanced than would be the case if the responses were only limited to actual practicing risk advisers.
    If anyone believes these types of surveys and results represent the reality, then they are kidding themselves.
    Aggressive organisations with specific political bent will be undermining every possible issue to influence perception, even though the analysis of the actual respondents cannot be assessed. Groups like GetUp are experts in manipulation and just one example of the types of aggressive and under the radar tactics they would employ to influence.
    Unless these surveys can prove that respondents are involved in operating a financial services business the results are dubious at best.
    You only have to read some of the more recent respondents fanatical commentary on these sites following the RC recommendations to understand there is a very sinister and unhinged element who derives immense please at provocation and uneducated defamatory responses.

    • Daryl La’ Brooy

      So far we haven’t heard from the Financial Services Council on the position of the Life insurers in relation to the RC recommendations. Wonder what their stance is going to be. It’s best not to engage with uninformed comments. I’m more concerned about the silent majority amongst our peers who haven’t commented and are suffering in silence. Please join the UFFA and the FSU so our voices can be heard as the RC recommendations are implemented.

  • C.

    The machine of survey manipulation has responded immediately and is hard at work.
    Point proven.

  • Just About Done Now

    This poll and level commission suggestion is absolute BS!

    Whenever changes are made with the promise of a better future, it gets changed and advisers cop it in the neck and get dudded!

    Here we are already, ONLY 2 years into LIF, where advisers were promised 22% ongoing after having our upfronts slashed and burned from 110% (GST INCLUDED) down to 88%, down to 77% this year down to 66% next year (GST INCLUDED AGAIN) for a rightful initial payment for work done (that probably required 8-12 hours work minimum to just place a clients insurance application, without there being any guarantee that it goes through successfully and we actually paid for that work) – and we’re already seeing that 22% ongoing revenue payment under threat!

    What this industry is doing to the advisers that built it, is an utter disgrace.

    • Concerned

      Couldn’t have said it better!

    • emkay

      you forgot to mention business values decimated due to lack of buyers….

      • Just About Done Now

        Thanks for the reminder…so yes, and there’s that too!

      • Squeaky_1

        emkay, no lack of buyers at all for good quality pure risk books. They are the jewel in the crown or the risk industry. What better to get a risk specialist through a period of dwindling upfronts? Highly sort after now even moreso.

        • emkay

          then why are values currently at around 1 to 1.5 times, unless your renewals are $1.0M plus. You seem to have forgotten half risk advisers will leave in the next few years, then you will see supply and demand decimate values further

          • Squeaky_1

            emkay, no idea where you’re getting current multiples from but they fly in the face of recent sales and any logic regarding the future. Quality risk client bases are selling for 3.5x renewals unless there is a mitigating influence. Regarding the future, suggest to me why they would sell at a lower multiple when upfront commissions are lower and there will indeed be generally a much higher reliance on established quality reliable renewal income. The remaining advisers will place a high value on a continuous source of reliable renewal income. This is not any type of wishful thinking – this is happening now and the value of established client bases carrying a reliable income source will indeed be highly sought after.

    • BKY

      Hey Just about Done…sorry to remind you but you left out the 2-year responsibility period…sorry

      • Just About Done Now

        AND THAT! Yeah, great industry we’re in now hah BKY?

        Well sadly….not for much longer! Its just not workable now.

  • Ken

    How can you ask such a limited question and expect the right result ?? Firstly what is the level of commission you are referring to ? If it’s 70/20 the answer is yes 60/20 maybe ? 30/30 no
    So the outside sources who make these decisions see these answers ( which are no where near correct) as the answer and think we are happy about it so let’s proceed that way !!!
    The “trolls” as someone put it are already st work assisting ASIC whether they know it or not

  • Swaami

    Reducing commissions to ‘level’ would not be such a financial drain, if our existing business was also paid at the level 20% rate.

    I believe the existing advisers will get through all the legislative changes (if they choose), although, a career in insurance won’t offer a livelihood that would attract new entrants, particularly with degree requirements. Insurance will end up being supplied from NRMA or Bank type operations, with shopfronts.

  • Phil Smith

    Think carefully before objecting to [fighting against] level commissions applying sometime after 2021. Mr Hayne’s desire to totally remove all commission will lurk in the background the longer we protest against removing upfront commissions. Admittedly, I am coming from a selfish angle as I switched to hybrid & some level commissions 25 years ago. Therefore, my recurring ‘servicing’ commission is mostly 20% and a few up to 33% [+GST]. Agreeing to a reasonable level commission [be it 20%, 25% or 30% +GST] by default secures our ONGOING income – for me that’s 32 year’s of accumulated ongoing income. Hayne winning the war would [I envisage] see me losing ALL my past plus future commission income earnings. Grandfathered provision under FoFA are already to go. Let’s not give Mr Hayne or anyone else ammunition to ban ‘all’ commission.

    • C.

      Understand you are wanting to protect existing remuneration, but how do you see new business remuneration being viable if at 30% or even 20% Level ?.
      If there is no reduction in premium cost to the client and the adviser has to issue an invoice to the client for the advice, the cost of receiving advice and product will escalate significantly.
      Secondly, if the worst case scenario were to eventuate regarding zero commissions, it would be a deliberate acquisition of property if they attempted to also ban all existing renewal risk commissions and decimating businesses and business values.
      If that were to be the case, they would also have to ban all renewal commissions for General Brokers and Mortgage Brokers thereby further destroying existing businesses…the impact would be deemed discriminatory and I suggest a class action against the Govt may well ensue.
      Alternatively, the Govt that would implement such a legislative change could be subject to compensation on just terms for deprivation of property.
      This proposal by Hayne is short sighted, influenced not by logic but ideology and an objection to any form of commission payment for any service.

  • ken

    Just for a bit of interest is anyone out there listening ? When are we going to start protesting this outrageous attack on our services and income I note that the Mortgage Brokers and their association are all over this with petitions and television advertising and proposed lobbying of the Government { whoever that may end up being } They are certainly not taking this “lying down” If we do not react and react soon as a whole group led with AND BY our associations that we pay fees to for their services particularly now then the inevitable will happen { as has always been their plan } no commissions full stop. and we can all look for a Sub way franchise bankruptcy or in some lucky case early retirement.

  • John Curtin

    Does anybody realise that having level commission and changing an existing client to a better policy with a reduced premium (who was already on level commission), would mean it would actually cost you money to change them. You would get no payment for the review or the advice paperwork and a reduced payment for the new policy, as they would both be on the same level commission.

    • PS

      At least Trowbridge recognised their was an upfront cost. Fixed at $1200 didn’t cover the cost, but better than what Hayne has said. For any adviser with a small book of recurring income and definitely any newbie starting out – nothing but 20% flat commission leaves no option other than to charge a fairly hefty upfront fee. But will the client pay? We all know the answer to that.

      I fear the pure risk insurance adviser will inevitably fall by the wayside unless they already have a large book of recurring income.

      With a larger recurring income base my potential business model can support 20% level commission on future new business clients. Akin to a collective, I have an amount coming in each month that covers my total costs of doing business, including paying myself a realistic salary. I call it robbing Peter/Mary to pay Paul/Margaret each time I advise on & set up a new client policy – my pool of clients covers my costs – be they new business, servicing, reviews and claims.

      But not everyone did like I did 25 years ago taking only hybrid & level commissions. Begs the question. Was taking 120-130% upfront & then being paid 5%-10% ongoing ever going to deliver a long term successful business model?

  • disqus_J1cxQ4hGad

    Most of these polls are irrelevant as they.

    1. don”t ask the right questions.
    2. They don’t differentiate between Holistic advice and Risk Specialist advice.
    3. there is no way to know who is voting in the positive or negative. advisers or non advisers.
    4. the integrity of the poll outcome is seriously questionable due to the above.

    How about this fact. most advisers who are planning to leave the industry in the next year or two are not reading these articles as they don’t give a s#@*. Therefore they are also not voting on these polls and the poll result therefore is distorted and meaningless.