Who Should Pay for Life Insurance Advice?

These articles consider the debate around commission-based remuneration for providing life insurance advice, and whether a fee-based proposition is a viable alternative…

Fees Versus Commissions

Research suggests many Australians would prefer to pay an upfront fee for life insurance advice if this translated into lower premiums over the lifetime of the policy. Reflecting on this finding, CoreData’s Kristen Turnbull asks the question: are consumers really are prepared to put their money where their mouth is?…

 

The age-old debate about fees versus commissions has become a distant memory in the financial planning industry, with advisers no longer able to charge commissions relating to investments for new or existing clients.

However, in the risk advice world the debate rages on, and research by Metlife has added fuel to the fire. The research suggests most Australians (78 per cent) with life insurance purchased through an adviser would prefer to pay an upfront fee for advice – provided it meant lower premiums over the lifetime of the policy.

This caveat is important, because they’re understandably only willing to make this change in exchange for some level of personal benefit, namely a reduction in premiums.

Disclaimer: I’m not a fan of the commission structure in general. I think it lacks transparency, and essentially devalues the important role an adviser plays in the mind of the consumer.

If you’re putting your hand in your pocket, you know exactly what you’re paying and you’re making a conscious choice that the product or service is worth the fee you’re being charged. Ostensibly, you perceive value in what you’re buying. If you’re not paying a fee directly, then you’re no longer making that conscious choice.

This assumption is backed up by CoreData’s research, which suggests only half of consumers (51.6 per cent) with life insurance cover outside super know how much this costs them each year.

But while shifting to fee-only risk advice sounds like the best way forward in the interest of full transparency, we all know insurance is sold, not bought. In the life insurance sector, the simple inclusion of that trail commission removes a key barrier for consumers in taking up life insurance in the first place; they simply don’t want to pay for it.

One of the interesting things about human behaviour is that our perceptions of what we want, or need, don’t always match the reality. In behavioural science, this is known as cognitive dissonance.

Cognitive dissonance, in essence, is the gap between what you say and what you do. It’s when your words, thoughts or actions contradict your beliefs.

Saying you’d prefer to pay a fee is one thing; actually paying it is a different thing altogether.

Early indications suggest that advisers tend to agree. A poll by Riskinfo asking advisers to estimate what proportion of their clients would be prepared to pay a fee for their life insurance advice found most (68 per cent) put this figure at less than 20 per cent.

As MetlLife acknowledges in its paper Understanding the Adviser-Client Relationship Report 2019, many Australians (72 per cent) think that removing commissions will exacerbate the underinsurance gap.

While the reason for this wasn’t qualified by the research, the paper suggests it may be that consumers see such a move leading to higher up-front fees, causing people to choose lower levels of cover.

I would surmise that it could also be because they realise that there’s no such thing as a free lunch. The higher upfront fee that will need to be charged by advisers to recoup the loss of commissions would be unpalatable to many, and hence fewer people will actually take out the policy – even if the potential to have those commissions rebated back to them makes the policy cheaper over the longer term.

But charging a higher upfront fee is also problematic for advisers, who are already being squeezed under the LIF remuneration rules.

From 1 January 2020, upfront commissions are capped at 66 per cent of the premium in the first year with a 22 per cent trailing commission.

Research conducted by CoreData in mid-2019, when the upfront commission remained higher at 77 per cent, revealed four in five (79.5 per cent) advisers had experienced a reduction in practice revenue as a result of the reduction in upfront commissions, with more than one in five (21.8 per cent) experiencing revenue loss of more than 25 per cent.

Perhaps of more concern – from an affordability and underinsurance perspective – is the fact that nearly two thirds (65 per cent) of advisers say LIF has caused them to place greater focus on high net worth clients, creating a potential risk advice gap among middle Australia.

The Law of Unintended Consequences suggests there are three types of unintended consequences:

  1. Unexpected benefits
  2. Unexpected drawbacks
  3. Perverse results

While exacerbation of the underinsurance problem, lack of affordability for the mass market and a reduction in practice profitability for risk specialists can be classified as unexpected drawbacks at best, and perverse results at worst, there is one benefit – not unexpected – that would likely come from the removal of commissions on risk advice. That is, an increase in consumer trust.

Trust in the financial services industry at large took a hammering during and post Banking Royal Commission, as the true extent of the misconduct was revealed.

Towards the end of 2019, trust was yet to recover to pre-Commission levels across most areas of the industry. In the life insurance sector in Q4 2019, trust was sitting at just 28.1 per cent – below banking (29.9 per cent), financial advice (42.4 per cent), superannuation (52 per cent) and accounting (54.3 per cent).

In other words, less than one in three Australians rate their level of trust in the life insurance sector at least six out of 10, while for financial planning only two in five trust the sector, in line with the number of Australians who tend to seek financial advice.

A rebound in consumer trust would be a welcome development for both parts of the sector, but if this comes at the expense of advice access and affordability, then nobody wins.

Kristen Turnbull is Director, CoreData WA and responsible for life insurance research within the CoreData Group.

 

What Price for Insurance Advice?

Elixir Consulting’s Graham Burnard sets out his rationale to support his argument that fees for life insurance advice can be a viable option for advice businesses, particularly when used to supplement life insurance commissions.

Graham’s perspective is informed by the data collected by Elixir Consulting in the five editions of its Adviser Pricing Models Research Report.

 

It’s safe to say that the business of providing insurance advice has gone through more change in the past few years than it has in the past 50. Compliance requirements have increased significantly and, when coupled with increased underwriting requirements, we have seen the typical cost to serve rise dramatically.

The perfect storm for advisers is made worse when this increased cost to serve is coupled with significantly reduced revenue because of the legislated reduction in commissions to a maximum of 60 per cent plus GST. As a result, in only a few years, most advisers have seen their year one revenue from a given client nearly halve while incurring much higher costs.

In the 5th Edition of the Elixir Consulting Adviser Pricing Models Research Report, we looked closely at the impacts of these changes and how advisers have responded. This research uncovered the pricing models of 714 financial advisers, 59 risk specialists and 46 mortgage brokers across 273 advice businesses located around Australia. We looked closely at how advisers charge for their insurance advice, both when it’s included in a comprehensive financial plan, as well as when provided as a standalone piece of advice. For the purpose of this article, we will look only at some of the relevant findings for insurance-only advice.

While 60 per cent of the advisers surveyed said they still provide insurance-only advice to new clients, a worrying trend is that many advisers commented that they only did so reluctantly because it was not profitable, and it was often done only as a favour for an existing client. The evidence is that off the back of increased costs and reduced revenue advisers are increasingly reluctant to provide insurance-only advice.

The reason for this reluctance is that many advisers have not been able to make the shift from price takers to price makers when it comes to insurance advice. Insurance remuneration has been determined by the commission rate set by the Life Company (now the Government) and the amount of premium paid, rather than being a factor of the cost of the advice and service provided.

However, some advisers are taking control and becoming price setters. These advisers are determining the cost of providing their insurance advice and service and then ensuring they get paid appropriately via a combination of fees and commissions.

As part of our research we wanted to understand how many advisers are charging fees in some form to help ensure their insurance advice is profitable. Of the advisers surveyed by Elixir, 52 per cent said they were commission only and never charged a fee for insurance-only advice.  Many comments along the lines of “Clients will never pay a fee for insurance advice” were provided by these advisers. However, this means 48 per cent of the participating advisers do charge fees of some sort. While only 8 per cent charge fees alone, a further 10 per cent of participants give clients a choice of a fee or a commission and a significant 30 per cent of respondents said they charge fees in addition to commissions.

A limiting belief is something that holds you back because you perceive it to be true but, in reality, it may not be true. It would seem that a lot of advisers have a limiting belief that clients won’t pay fees for insurance advice when there is evidence that a significant number of advisers can and do charge fees in addition to commissions for the insurance advice they provide.

We wanted to understand whether clients not being prepared to pay a fee is a fact or whether it is a limiting belief holding many advisers back from introducing fees. To do this we asked advisers what impact the introduction of fees had on their conversion rates. As seen in the following chart, only 7 per cent of the advisers who had introduced fees had a negative experience where conversion rates had decreased, and this was of concern.

Once advisers have realised they need to charge fees to ensure risk advice is profitable the question we’re often asked is, “How much should I charge?”. The problem is that this is like asking, “How much does it cost to build a house?”. To have any hope of answering that question you need to know things like the number of bedrooms and bathrooms, the level of finish, size, location and so on. Pricing advice is very similar. You need to understand the variables that drive cost as well as understanding the value created in order to determine an appropriate fee.

Our Adviser Pricing Models Research Report reveals the range of fees quoted and there are huge variances in the fees that are charged and how they are structured. Our observation is that there is no one right way or right amount to charge.

To determine your right fee and the right structure to use, you need to understand your own cost to serve, the types of clients you work with and the typical complexity of their needs along with your desired profit margin. Once you have a view of this you can determine your minimum recoverable amount, i.e. the amount you need to earn from a client for them to be profitable. With that in mind you can determine a mix of commission and fees that works for you and delivers the business outcomes you need while still reflecting appropriate value for the client.

Of course, there is the challenge that not everybody that needs insurance can afford to pay a fee for the necessary advice. Unless advisers choose to do some of this work on a discounted pro bono basis the choice advisers need to make is to identify and work with clients that do have a capacity to pay or develop a lower cost digital engagement process to service these clients cost effectively. Once advisers have a clear understanding of their cost to serve, they can make informed choices about who to work with and what revenue they need to earn in order to have profitable and sustainable relationships.

The key is to have confidence in the value of your advice. We see all too often that advisers underestimate the value they add to clients and as a result do not feel confident about quoting an appropriate fee. Whenever someone says something is too expensive what they are really saying is there is not enough value compared to the price charged. Our Pricing Research shows that many advisers can and do charge an appropriate fee for their insurance advice and therefore, when presented clearly, clients will certainly pay for quality insurance advice.

Graham Burnard is a business coach with Elixir Consulting and co-author of the Adviser Pricing Models Research Report, Fifth Edition. The research is available from the Elixir Consulting website.

 

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