Advisers were given an opportunity at the risk store’s annual 2010 Life Risk Forum to consider the consequences to their business if commissions on risk products were banned.
In a packed breakout session featuring key advisers, Mark Westcott and Rob Winch, there was a general concensus that it was probably unlikely a full commission ban would ever be applied to risk products, but some advisers contemplated the possibility of a future where trailing commissions, at least in their current form, could be banned.
Such a scenario would see the adviser paid an upfront commission for establishing the policy in the first year, but being required to confirm an agreed fee each year thereafter to continue to service the insurance needs of their clients.
This ongoing service fee model is to be applied for investment and superannuation advice, as outlined in last week’s announcement by Minister for Financial Services, Superannuation and Corporate Law, Chris Bowen (see: Government Bans Commissions…).
While the debate on imposing fee-based risk advice is only hypothetical at this point, there were a number of key issues raised during the discussions:
- Under fee for service on risk products, the adviser is still paid for the genuine value provided during the underwriting process, even if the client is rejected or does not proceed for any other reason
- Fee for service on risk products may work in some circumstances for high net worth clients, and some advisers already take this approach
- However, it would not be viable for ‘mums and dads’. Even if lower-value clients were prepared to pay a fee for service, the adviser could not afford the time it would take to properly service those clients’ needs, given the lower level of maximum fee that would be available
- Charging an upfront fee can generate greater levels of trust, for example, in business insurance cases where accountants and lawyers may also have input. Rather than taking remuneration via commission, the client and his/her other advisers will more directly associate the value of the role played by the financial adviser with the upfront fees they charge.
… people have got used to ‘free’ insurance advice
- Also in favour of charging a fee for service on risk products is the notion that people have got used to ‘free’ insurance advice. This is because commission payments to advisers are invisible to clients and take place at a date some time after the provision of the advice, subject to acceptance of the proposal, as opposed to fees that would relate specifically to the advice provided, irrespective of the outcome of the insurance application.
- A move to fee for service on risk products may see the ‘commoditisation’ of insurance advice services, where each element of the advice process could be individually costed
- This in turn could lead to a future where product providers become wholesalers, distributing their products through advisers who would be the retailers of the product and the services that underpin their delivery
- Would more advisers consider charging fees for time involved in protracted claims cases? Opinion remains divided berween those who offer the client the choice of dealing direct with the insurer or effectively contracting the adviser to act on their behalf, for a fee, and those for whom it will continue to be part of their existing commitment to be available for thieir clients when needed most.
- If advisers charge a fee in future for servicing claims, and are paid from claims revenue, how would they charge in the event a claim was denied?
- The value of an advice practice under a fee for service regime for risk advice would reduce, but the value of existing risk advice businesses would increase in value as trail commissions already in place could be retained
- Under a risk fee for service model, would independent financial advisers survive, or would the industry revert to salaried ‘agents’ employed by larger instritutions, because this would be the most robust model under which risk fee for advice could operate?
W have been adjusting to FFSfor 18 months at thee high end while starting this year in super and investments on a three tear fixed dollar cost. This was based arround research by some practises on time spent and costing for various wage/consulting charges taking into account overhead costs and productivity.
The problem was doing a cost benefit offering in the business and detailing it. We are busy with thisat the moment and will detail in our suplementary FSG and also website. Insurance, I dont believe will be implemented for some time as the is not viable to looking after those in the community it is suposed to protect.
We offer claims (now) to either go it alone or for us to charge and process at 1%. This works well and explains cost/benefit fees more clearly to clients.
The fact that any practice would consider charging a client for a claim is abhorrent & taking advantage of a clients loss.
I have been in the financial services industry since 1984.
I have worked for such companies as ANZ and Citibank and as a self employed mtg broker and financial planner since 1991.
I have seen, over this period, Term Life and TPD insurance proposals (and to a slightly lesser extent Income Protection cover) morph from a 3 panel A4 application to the current behemoth 50 page Insurance-Advice-only SoA’s plus insurance applications of some 40 pages inclusive of all medical questionanires, etc.
All thanks to the ever diligent and selfless efforts of our fine legal fraternity.
It is preposterous for anyone to think that the very people who need this type of insurance the most, will actually pay for insurance advice.
Anyone who says they will is dreaming and living in an ivory tower of high nett worth clients.
The unskilled workers who are employed in high casualty rate industries are the very ones who need good advice but are also the ones that will not pay/ cannot afford to pay to get it.
If commissions are banned for personal insurances you will see only the majors with their embedded distribution channels dominate – i.e. the banks/ industry funds.
That will lead to less competition and poorer products.
As a case in point I recently saw an industry fund aggressively promoting their funds ability to offer insurances with litle or no underwriting and cheaper premiums – upon reading the small print though, the insurer had the right to “look back” 7 years, from the time of application, to check for any “pre-existing conditions”.
The above effectively means for many applicants, they think they are insured when they are not.
I can say with absolute conviction that should fee for service be imposed upon the insurance industry the level of underinsurance will skyrocket, government assistance to households who have lost the main bread winner due to sickness or accident will skyrocket and industry participants will diminish resulting in less competition and poorer quality, higher loophole products.
For the record I offer a fee for service practice and have done from inception in 1999 BUT it is on the basis that commission received is utilised to reduce professional fees to $0.
In conclusion I also find it poor form to charge a fee to process/ assist a Claim, based on percentage of benefits at claim time.
In fact it has never even occured to me to charge a fee for services rendered at claim time – perhaps its my Banking background/ training – as I have always considered the payment of trailing commission to be for that very purpose: to assist clients when they need it the most.
Product groups have supported the reforms regarding no commissions, because this will reduce competition, and ensure product groups continue to consolidate control of the advice industry.
For risk insurance this will lead to the return of tied agents, rather than multi-agents. Imagine that, tied agents who only provide fee-for-service advice, whilst advisers able to provide multi-product advice disappear!
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