In the first of two features in this CPD article Chris Unwin outlines how he overcomes the issue of clients who make decisions based on cost rather than value, and in the second item the team at Business Health reflect on 10 mistakes to avoid when deciding your advice future.
Both these articles appeared in Riskinfo’s Adviser Focus article series in 2020…
The Cost of Personal Protection – It’s All About Perception
Chris Unwin shares the wisdom he has absorbed during his time as a highly successful risk-focussed adviser to outline his proven recipe for success when it comes to engaging with the prospective client around the critical issue of premium affordability.
Chris’s approach can open doors that some advisers may never have considered walking through until now, when it comes to positioning the cost of life insurance in a way that offers the client a totally different lens through which to consider this critically important decision…
How much resistance would we encounter if it cost our clients absolutely nothing to have appropriate types and levels of cover? None whatsoever, I fancy. So, cost is the only real barrier to people having appropriate personal protection. Therefore, anything we can do to lower the bar when overcoming the price barrier has got to be a move in the right direction.
When somebody tells you they’re ‘broke’, what do they actually mean? Technically speaking, the definition of being ‘broke’ is when your fixed outgoings i.e. non-negotiable expenses exceed your income net of tax, thereby leaving no disposable/discretionary income. The reality in most situations is that being ‘broke’ simply means that someone is overspending their disposable/discretionary income!
The first challenge is to enable our clients to prioritise the allocation of funds to their personal protection package over a lot of the other claims being made on their disposable/discretionary income. The second challenge is to get our clients to move the cost of their personal protection package out of the disposable/discretionary income category and into the fixed outgoings category. After all, if mortgage payments sit in the fixed outgoings category, then surely the cost of securing 100% Income Replacement in the event of illness, accident or premature death to enable the mortgage to continue being paid should also sit in the fixed outgoings category?!
The way in which we achieve this outcome is to kick this thing called a “needs analysis” firmly into touch and replace it with a “wants analysis”. This move from a needs-based analysis to a wants-based analysis revolutionised my life risk business and turned what had historically been a “grudge purchase” for my clients into a “fantastic opportunity” for them.
Assuming you agree that people will get more enjoyment out of talking about what they want than out of talking about what they need, I believe it is crucial that you pre-position the wants analysis as early in the engagement piece as possible.
Therefore, hot on the heels of the Financial Services Guide at the introduction stage of the first client meeting and in order to enable the client to relax, it is essential that you establish and get agreement on the purpose of the meeting you are about to have. For me, doing this led seamlessly into a simple outline of the rest of my initial advice process and the basis for my recommendations. Here is how I sought to achieve this:
“My mission today is not to get you to tell me what it is that you would need to survive financially in certain ‘what if’ situations – I’m really not interested in that. What I am on a mission to do is to help you tell me what it is that you would want in terms of financial outcomes in those same ‘what if’ situations, because once you have told me what financial outcomes you would want, I will be in a position to use my expertise to put together my recommendations for appropriate types and levels of cover that are specifically designed to achieve those financial outcomes you have told me you want and hopefully within an affordable budget – does that all sound reasonable?”
One of the concepts I used in the last 20 years or so of my advice practice was expressing the cost of my clients’ Personal Protection Packages, not as a dollar figure, but as a percentage of the income they are protecting. I can assure you that the client’s perception is that the percentage figure will always sound like less than the dollar figure and remember: perception is reality in the mind of the person doing the perceiving! I found the best time to introduce the percentage concept was when you get to the superannuation/retirement planning section of your fact find. When arriving at this point, I suggest you ask your client the following three questions:
Question 1: “What percentage of your income is currently being allocated to securing your income for after your working life?” I believe this is also an excellent way of describing superannuation to your clients as it provides an accurate description of what superannuation does for people rather than what it is. For most employed people, the answer to this question will be 9.5%.
Question 2: “Out of interest, what percentage of your income is currently being allocated to securing your income for during your working life?” This is an accurate description of what your client’s Personal Protection Package is designed to do, namely to secure your income for yourself in the case of illness or accident and for your family in the event of your death. The answer to this question for most people is zero percent and for the others it’s nowhere near 9.5%.
Question 3: “Tell me, which of these income streams – after your working life or during your working life – is more important to you right now?”
What I was able to do at this point was to say: “You may be interested to know that over the last 12 months my new protection clients have deemed it appropriate to allocate somewhere between 4% and 5% towards securing their income for during their working life. Do you think that might be an appropriate allocation of funds on your part?” What a powerful question, as it means that most people are allocating around half the amount of money towards the more important income stream as they are towards the less important income stream – sounds pretty reasonable to me!
This really has the effect of putting into perspective what the cost of your clients’ Personal Protection Packages really represents, and it enables you to sow the seeds for the percentage concept right up front. This means that whenever the spectre of cost rears its ugly head, you can revert to the percentage figure and not the dollar figure. For example, after you have asked the questions on the Fact Find around what financial outcomes your clients would want in specific ‘what if’ scenarios, a lot of clients would say to me: “ Chris, this all sounds great, but what is it all going to cost?”
To this I could reply:- “Well, I can’t give you a precise dollar figure off the top of my head, but given that most of the outcomes you want are not very different to the outcomes that most of my clients want, I have no reason to believe that the figure is going to fall outside the 4% to 5% I mentioned earlier. Does that still sound like a reasonable allocation of funds on your part?”
Having conducted the Wants Analysis (for details of the questions to ask see Session 4 of my online Risk Workshop), it is important to note that the ‘recommended strategy’ in the SOA needs to be for the types and levels of cover that would achieve the financial outcomes identified on the Wants Analysis and this is what I referred to as the “Platinum Package”. More often than not, the Platinum Package would need to be trimmed to accommodate the client’s budget, thereby becoming a gold, silver or bronze package from day one.
The Platinum Package therefore becomes the aspiration of the client and we would need to identify which of the financial outcomes are non-negotiable and which are relatively speaking luxury outcomes that may become achievable when cash flow permits. An additional section of the SoA (which I used to call “Client’s Actions”) would then be required to detail what types and levels of cover the client is actually proceeding with which would include an explanation of the reductions/changes.
When discussing ways of trimming the Platinum Package to accommodate the client’s budget, we should always attempt to reduce the cost with minimum impact on the sums assured, given that in the event of claim it will be the sums assured that create the financial choices. Therefore, apart from the sums assured themselves, there are a multitude of ways in which the cost of the cover can be reduced such as:
- Modes of premium payment (stepped vs level)
- Longer or split waiting periods
- Own or any occupation TPD
- Evaluating the relative merits of optional extras on the policies
Finally, when conducting client reviews (annually as a bare minimum), if the client’s income has increased, then an increase in cover may not actually represent an increase in ‘cost’, but just a maintenance of the same percentage of income going towards securing their income for during their working life as per the 9.5% to super for securing their income for after their working life.
Chris Unwin is a former financial adviser of 37 years standing and was a specialist risk adviser for 22 years. His training and consulting business has operated for 16 years and it specialises in helping advisers across the full spectrum of experience with their client engagement skills, both in the risk advice specific space as well as in the more generic soft skills space.
Ten Mistakes to Avoid When Deciding Your Advice Future
Well-known industry services firm, Business Health, has recently released its list of the ten mistakes to avoid when it comes to deciding about the future of your advice business, and we thank the firm’s Terry Bell and Rod Bertino for the opportunity to share their collective wisdom with Riskinfo readers…
It’s fair to say that there will be a good deal of soul searching, mirror looking and earth moving in the world of financial advice over the next few+ months in Australia. And advisers, practices and licensees alike will be thinking very carefully about their options going forward – this is certainly their ‘where to from here’ time. The recently announced purchase of MLC by the IOOF Group is the latest in the long list of disruptions causing many to ask (and hopefully answer) the really hard, sometimes uncomfortable but absolutely necessary questions. Do I:
- Stay with my current licensee
- Move to another licensee
- Apply for my own AFSL
- Exit financial planning
The principals of Business Health have been down the disruption road on numerous occasions over the past 20 years and we’ve been able to observe first hand what’s worked and what hasn’t. Here are some of the biggest mistakes we’ve seen over these years – to be avoided at all costs.
1. Being rushed into making a decision
Sounds obvious I know, but the fact is that we’ve seen too many decisions made because of an externally imposed timetable. While it’s not always easy/possible to influence someone else’s timing, the sooner you start the process (and allow yourself more time) the better. And if you’re still struggling to decide, don’t hesitate to ask for an extension.
2. As the proverb goes – more haste, less speed
Not deciding your end game first.
The biggie. It’s difficult (impossible really) to make a decision about your future direction, without having a crystal-clear picture of where you want to be in say 3- 5 years’ time. And that should address your personal/family life as well as your professional/business one.
Sensible, logical and what everyone should be doing, right? Unfortunately, this doesn’t appear to be the case. Business Health’s research over the years has continually highlighted ‘planning for the business’ as a major weakness in Australian advice firms. Consider, only 34% of firms have documented their plans for the ensuing 12 months, while just 29% have formulated a 36 month view.
3. Not paying sufficient attention to the potential impact on your most valuable assets – your clients and staff
Any of the options outlined above will invariably impact your clients and staff. It’s a simple reality which has been borne out time and time again through our various surveys (clients and staff). Change can very quickly convert into concern for clients and staff.
As such, we believe that a carefully thought-out communication strategy and program is called for. Frequent, meaningful and positive communications will go a long way to allaying these concerns.
4. Thinking that there will be no unforeseen cost
Changes such as these are often accompanied by additional costs. These could impact your financials, other resources and time management for example. And often overlooked – there will undoubtedly be a personal cost in one form or another.
Recognise and budget accordingly.
5. Not focussing on the nouns, instead being seduced by the verbs
Simply put – is the licensee able and willing to support your future plans? For example, if you view aged care as an important element of your service offer going forward, how can your licensee assist you? If your concern is market reputation – what’s been the track record of the licensee?
It’s our experience that, it’s not what is said (or promised) that’s important, but it’s what’s actually being done. How does the licensee deliver on the words that appear on its website, in its promotional material or are mouthed by its own managers? Returning to our aged care example – what’s the proof that the licensee can deliver this capability. Perhaps there’s an arrangement in place with a recognised third party aged care expert or maybe a qualified aged care expert has been appointed to the licensee’s management team.
6. Being distracted by the cost, not appreciating the value
Licensee fee levels/structures are relatively easy to compare and contrast and it’s a natural thing to do. But we urge you to consider, not the quantum of the fee, but the value your licensee will be able to deliver to your practice.
This has been a consistent finding from our client survey work – the fee their adviser charges them seems to only ever become an issue in the absence of the value they perceive to be receiving.
If the licensee could prove that through their various practice development initiatives its practices had lifted profitability by say 20%, would it really matter that its fees were slightly higher than its competitors?
7. Not fully acknowledging that operating a financial advice practice is not the same as running a license
When faced with the need to change licensee, one of the alternatives invariably thrown into the discussion is obtaining your own AFSL. I won’t ever again be subject to an external owner; I’ll have complete control over how I run my practice and so on.
This line of rationale can be very appealing and for some, it can indeed be the most appropriate course of action. But the mistake often made is to treat the licensee operation as simply an adjunct, supplemental to the planning side. Nothing can be further from the reality. What will be your compliance framework for example? Will it be administered – manually or through technology? How many file reviews do you anticipate in the first year? And so it goes.
Operating an AFSL is a serious business in its own right and will require significant commitment, resources and capability. The question for any adviser contemplating this action – assuming I have the skill required – is how will it impact my advisory practice?
8. Delaying your exit planning
This is a very personal decision for most and to call time isn’t easy. But retirement will come to everyone and just as the adviser has during the course of their career advised and counselled clients to plan for retirement, they obviously will need to do the same for themselves.
Use the recently announced extension to qualifications wisely – to prepare your practice for sale or transition. Just as the house owner puts a fresh coat of paint on their home, tidies up the garden and completes all those odd jobs that have been put off over the years, the practice owner should do likewise – before they start talking to the market. Determine just what it is exactly that you’re looking to sell – is it a client book or stand alone business for example?
Have any compliance glitches been addressed? Is every client now being serviced through a fixed term agreement? Does the CRM contain up to date and comprehensive data for every client? When was the last satisfaction survey conducted? And so on.
Our latest data clearly indicates that there’s plenty of work ahead for many – just 10% of firms currently have an effective exit plan in place.
9. Underestimating the time involved
Irrespective of the road chosen, it seems to us that Murphy’s Law is ever present and lurking and even the simplest of tasks seems to take forever. Plan accordingly and always build in a time buffer.
10. Acting alone, without external input
As the 17th century English poet John Donne observed – ‘No man is an island’. For each mistake canvassed here, we strongly believe that an external voice (or voices) is needed – to ask the hard questions, point out the cold facts and to offer support, guidance and advice, thereby helping you to avoid making the mistake.
Let the soul searching begin!
Business Health is an independent organisation specialising in customised advice and solutions to the financial services industry…
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