The vast majority of advisers say the payment of commissions for risk advice represents no conflict of interest to the consumer.
As our story goes to press, 85% of the many hundreds of advisers who have taken part in our poll believe there is no conflict of interest, real or perceived, in paying commissions on risk products. Only 6% believe a conflict does exist, while 9% believe a conflict can exist sometimes (see: Adviser Backlash on Banning Risk Commissions).
While the large majority of advisers believe conflict of interest does not exist on risk commissions, there have still been many suggestions made as to how the current system can be advanced.
For example, many advisers have commented that if commissions were standardised, this would remove any temptation to place business with a particular insurer for additional financial gain.
Some advisers have taken this argument a step further, calling not just for standardising commissions, but also for the removal of upfront commissions. In addition to removing product preferences based on remuneration, it is argued this would also have the effect of substantially reducing the practice of churning policies.
On another level, the risk store’s Sue Laing points out that at claim time, when the policy counts most, it is the level of cover and the product mix that will have an impact on the claim outcome and that any conflict of interest, real or perceived, would play virtually no role in any case:
… in 99.9% of claim situations there is no retrospective proof that the client was sold the ‘wrong’ product. There is no such thing as a bad product. … even if an adviser sells Company X’s product rather than Company Y’s, it will NOT be to any recognisable detriment of the client.”
Ms Laing adds, “But not selling the right sums insured and product mix WILL be to their detriment. Commissions or no commissions will have ZERO effect on that outcome.”
Other advisers have called for a level playing field, arguing that related sectors such as general insurance, mortgage broking, share broking and real estate services are no different in terms of potential conflict of interest.
However, Financial Services Minster, Chris Bowen has indicated that while the Future of Financial Advice reform measures are focussed on the authorised providers of financial advice, he will in future be turning his attention to other areas.
A number of advisers have suggested that when it comes to risk insurance commissions, any conflicts of interest exist at the dealer group level, and not with individual advisers. This point of view argues for:
- Removal of all dealer group approved product list restrictions, thereby allowing a ‘level playing field’ of access by advisers to all risk products
- Removal of volume bonus payments made by product providers to dealer groups
Many adviser comments addressed the potential adverse impact on middle Australia if risk commissions are banned, their arguments centering on the large proportion of their clients who would not be able to afford the payment of a fee for the advice, in addition to the premium cost.
But the Government’s agenda, expressed by Mr Bowen, relates to the real or perceived conflict in the eyes of the consumer and how the Government should address this issue in order to restore public confidence in the financial advice industry following the collapse of Storm, Opes Prime and others. As one adviser pointed out:
“Most of the above have stated the obvious BUT they are only obvious to us in the industry…”
What appears obvious to the large majority of advisers (although a number strongly believe all commissions should be banned), may not seem as obvious to consumers. Therefore, the challenge facing the life insurance industry on risk commissions is to communicate its arguments to the Government and consumers so that clients will be confident the risk advice they receive will always be in their best interests.
The consultation process between Government and the financial services industry on the Future of Financial Advice reforms continues, which is why it is important to voice your opinions now. At the completion of this poll, we will be collating and sending all adviser comments to Mr Bowen’s office…
People see an accountant and do not pay a commission…people see a doctor and do not pay a commission…people see a lawyer and do not pay a commission…all of these services are used without the need to fund the service from a 3rd party provided sales commission…are these services experiencing difficulty?
If a good adviser (which the majority of advisers are) can articulate the need for insurance (to protect ones life-style and wealth etc) and the value they add…then regardless of how remunerated the client will take the cover and pay the cost of the cover and the advice.
If the adviser cannot articulate the value (of the cover and the advice) then the client is only thinking of the cost…and will not arrange cover regardless…or at least not sufficient cover.
The issue is – commissions are going…may as well be prepared and move how one does business to an ADVICE BASED business and not a SALES BASED business…and charge a fee for the advice that you provide, which is off-set (possibly not 100%) by the lower cost of premium as the commission is removed from the equation.
Maybe the issue is NOT with the client not being prepared to pay for the advice….but with adviser’s confidence that they are indeed adding value to the client and hence having difficulty liaising with the client with regard to their fee…just a thought.
Good luck to us all.
Well described, Peter.
As a further comment to those of mine you have quoted above, let me expand on the ‘quality of advice’ point I made, re the right sums insured and generic product mix.
Firstly I should add to that comment that the right ownership is the third element that must be done well if the consumer is to be properly looked after at claim time – again that will in no way be influenced by which product an adviser may be tempted to use due to commission size.
Secondly it could reasonably be argued that fee-based advice will drive LESS attention to getting all this right. Take this scenario: there is a lot of information that an adviser has gathered on a client and he/she is then under pressure to get the advice (and the advice document) structured correctly, clearly and concisely while also running up hours in work. So how many advisers will be likely to try to keep the fee cost down for the client otherwise they will potentially lose the client AND the product sales! This means that it’s also likely that less time will be devoted to all these key strategic issues and the advice might come down to a rushed and less than perfect outcome, to ‘save the client money’ (dare I suggest it could become close to commoditised!). Even the client themselves may drive this restriction on time spent, by demanding that the adviser take ‘the shortest time possible’ to construct the advice. Clearly this is less of a concern if the initial advice is flat-fee based – but if commissions are removed, then how does this cater for covering the adviser’s costs of all the time managing the underwriting??
The flaws for the consumer in this model in this industry, are simply not understood let alone being addressed in the debate.
Fergus fair comments re advice not sales and that supports my contentions about the importance of hte quality of the advice. However: re “which is off-set (possibly not 100%) by the lower cost of premium as the commission is removed from the equation.” please read my comments last week on the myth of lower premiums in return for removal of commissions – you are one of the thousands of people who believe this is a given, and it is far from probable and certainly if it is, it will be VASTLY less than 100%. Ask any life actuary how likely this reduction will be…if this remains part of the argument then there will be a lot of confused and disappointed commentators.
What if the client can’t afford an upfront hourly rate or the up front cost of the advice but can afford the monthly premium?Some of us are missing the point.I must admit to being concerned when this ffs debate started because all the ffs practioners to a man/woman, told me they had never had it so good,and that their incomes had increased since they transitioned to ffs??????????
Perfectly put Fergus.
Look forward, don’t rely on the crutch of commission to help grow and protect your business. The institutions built commission, not you, and they control distribution for this very reason.
The government should legislate against products being sold with out advice.
Products are a commodity, but the Advice on how to use them requires expertise and is valuable.
I must say that I find it comforting that advisers (who advise on risk mainly) care so much for their clients – and wish to keep the price down so all Australians can get cover – it is commendable, especially when those advisers who advise on investments charge such high fees (eg. 2% upfront on a $1m investment to fill in some forms)…
Excuse the slight tone of sarcasm. Even if the cost of cover does not fall because for some reason the life companies remove the commission and then add back in to improve their profits or what ever…there is a NEED for cover – and those clients who see the benefit in getting ADVICE will arrange cover – for those that do not – then they will experience the painful consequences…advisers in the main want and do the right thing and are nice caring people…but we are also running businesses.
If we are to be concerned about clients not being able to afford the advice etc – then why not institute a type of pro-bono service like some legal firms do – as part of becoming a profession…ie service to society and the community.
Again a robust discussion is good for our industry one day to become a profession – I hope!
I have run a ‘straw poll’ amongst people I know, all of whom are insured. There have also been claims within this group, so there is no question as to whether they understand the value of insurance.
I offered them the theoretical option of paying for my service, in which case I would advise them on how to best protect their financial position and lifestyle against premature death and disability. There would be a small upfront fee of $500 for my advice, and an ongoing service fee accounting for 30% of the premium. All commissions would be refunded. The ongoing service would be no more expensive than paying the insurer directly, and would mean they are supported if changes need to be made or if they need to make a claim.
I explained that the benefits would be I am not being paid by the Insurer (so as to remove this potential conflict of looking after their interests).
I then provided the 2nd option. As above, but just pay the Insurer directly. The Insurer pays me.
In every case, the response was the same.
– “I dont know if I could afford the $500 advice fee.”
– Re ongoing service, “does this mean I have to pay two direct debits?” Everyone found this inconvenient.
– “If you know your stuff, I don’t care if the Insurer pays you directly. Just look after me”.
I venture that in investemnt and super advice, the Fee For Service issue will mean more and more of middle Australia will move to the lower-cost intra fund advice. It will be HNW clients who want Fee For Service.
However in insurance, it is middle Australia who need this service the most, more so than HNW individuals. Intra-fund advice doesn’t cut it, the products are not there. FFS would definitely price this service out of middle Australia’s range, and while I am confident in my skills as an adviser to service an ‘upmarket’ client-base, those who need it most will miss out.
By all means, consider removing upfront commissions, and standardising commission rates across Hybrid and Level.
But moving to Fee For Service for insurance doesn’t add up!
I’m beginning to think that whose who religiously advocate FFS lack the experience of seeing lower/middle income workers struggle with the Workers Comp and/or Disability Pension!
As for becoming a profession, my suggestions are:
– Raise entry level education requirements significantly
– Increase exposure to real life claims handling as part of the minimum training requirements. Include analysis of medical reports, impact on client, etc.
– Better training on medical terminology, health conditions and epidemiology for all insurance advisers
When the claim cheque is paid to the surviving family, who is going to argue the merits of commission or fee?
Doesn’t it make sense to get the client cover through whatever means!
My previous experience was that clients who wanted the cover would suffer through the paperwork, but not so ready to pay fee for service. So I had done my job in selling the need, just not the cost!
Advisers are a dying breed – thank goodness I saw the light and left before I died!
The other side ofcourse is that it is unlikely the current government will be in place to implement any further stuff ups to this country!
Long live the client!
So if an adviser could charge say a flat fee lets say as an example they charge $2000 for the provision of risk advice and implementation whilst at the same time the client gets max discount on ins premium and no commission is paid. OR the adviser doesn’t discount the ins premium (and doesnt advise the client that they could even get a discount if a flat fee was charged) and as a result the adviser collects say $10,000 in commission or perhaps places the business with another insurer who pays even higher commission, how on earth could there be conflict of interest.
RE: Martin Hunter, Posted June 2, 2010 at 4:32 pm
Martin, I take it you have a lot of $10,000 commission clients?
I believe the industry average premium per client across most advisers is about $1750 p.a., which would make a 1st yr hybrid commssion $1194 in Year 1 and ongoing commission of $318(excl. GST).
Can you see your average mum and dad client paying for that (x 2)?
And what happens if they cancel the ongoing service fee. Do you charge them an hourly fee or a percentage at claim time? Would you like to negotiate that while their spouse is in hospital or facing delays with the Insurer?
Like they dont have enough emotional baggage to deal with at claim time?
This debate totally misses the greater picture. It is insular and bureaucratic.
The priorities should be (1) increasing educational standards, (2) increasing entry requirements, and (3) increasing awareness of the need for cover and reliability of insurers and advisers amongst the public.
Mr Bowen, I’ll offer you again the opportunity of coming to my practice in Rosedale, Gippsland, Victoria and meeting some of my rural clients. Only then will you understand the plight that myself and these clients will have if I’m forced to charge a fee for service rather than commission. I could give you many reasons here why this action is of major concern but rather than reading about it, get in the car, and meet real people to find out the true feeling of ordinary mums and dads, farmers and small business owners- not just wealthy people who “fees” mean nothing to.
The obvious way for the Government to see if there is any conflict of interest and determine appropriate advise and fee/commission arrangements, is for Mr Bowen to spend a day in a specialist risk advisers office. Then he will be able to see the huge work load and behind the scenes work that must be done, (which clients, Insurance Companies and non risk Financial Planners have little understanding of) in order to provide advise upfront and on a ongoing basis.
I am a specialist risk insurance adviser and have 23 years experiance with Six people working in my office, so I am in a ideal situation to give expert advise to Mr Bowen.
The mistake many organisations and Government make is to listen to self interest groups and lobbyists with little experiance in the field they are so vocal on.
You must talk to the very people who are at the coal face, who can cut through the inane, irrelevent rubbish and go straight to the important and relevent issues.
I welcome Mr Bowen to visit my office and can guarantee that he will learn more about the Life Insurance Industry and how it really works in one day, than in months of meetings with people who may talk the talk, though have never actually advised, or ran their own Life Insurance Business.
– Most people do not want to pay the premiums for insurance EVERY YEAR. Especially if they need multiple cover ie. Life, Trauma and Income Protection. At each anniversary of the policies, people ring me to say is there a cheaper product, do I decrease the benefit amount to reduce the premium.
– If we have to ALSO charge a fee for our services: meeting/s, advice, research, processing paperwork, review meetings, processing claims, ordinary people will not be able to afford this.
– The other problem is advisers would not influence people to take appropriate levels of cover, comprehensive products, cover for the wife and the kids, as this will increase the overall premium cost. How would they then afford our fees ??
– Why don’t the commission (revenue/payment) % be the same across ALL companies so THERE IS NO CONFLICT OF INTEREST AND NO BIAS TOWARDS COMPANY X TO COMPANY Y ?
– Then as advisers we could focus on our role which is to educate people to understand the importance of paying for insurance to protect their assets, lifestlye and family !
Currently there is choice for clients:
1). Pay the premium to the insurer, with built-in commission going to the adviser IF the business is accepted.
If the application is not accepted due to pre-existing medical conditions, the client does not get any cover and the adviser earns $0.
2). Rebate the commission, this decreases the premium by 30%, and then charge a fee to the client for all services, which can add up to alot of hours over weeks or even months.
What is the problem with the current model?
We give all clients the ability to choose the model and it works very well.
99% of people choose option 1, as option 2 is more expensive (discounted premium + our fees).
I think we should be focusing on the bigger issues facing the Australian public, under-insurance and processing claims and providing cheques to people or families who suffer illness, injury or death.
Financial planners who give advice for superannuation and investments are able to charge a fee debited from the portfolio either monthly or annually.
The client is indirectly paying the adviser a fee eg. for super: the employer puts super contributions into the portfolio, and hopefully the portfolio increases in asset value with the market.
Those in the risk/insurance only area do not have this option. People have to pay for the premium out of their credit card or bank account, and they feel it every month.
Make all the insurers have the same commission % rates and the conflict of interest will be removed.
Rather than argue that a conflict of interest doesn’t exist, risk advisers would be on a stronger footing in this debate by admitting that conflict is there and then arguing why it is appropriately managed, if you believe it is. The adviser’s conflict is obvious. If the best advice for a particular client is to take out insurance through their industry super fund because the families cash flow is too tight to fund it any other way, the adviser is not going to get paid unless they charge a fee for providing this advice. If the business model depends on being paid for making a product sale on behalf of an insurance company, the adviser’s need for remuneration conflicts with what may be the best advice for the client. Arguing that no conflict exists only increases the distrust that the wider community of consumer advocates feel.
As an industry, we would be better off being upfront about the fact that a conflict of interest exists and then providing a robust argument about why it doesn’t matter, if indeed that is what you believe.
Arguing a case that underinsurance will be greater if commissions are removed also doesn’t make sense. Removing upfront commissions reduces premiums by around 30%. Using the 30% premium reduction as an advice fee, as a simple example, means that an adviser will be in a similar earnings position over a 5 year period. With upfront commission on a $1,000 premium, the adviser might currently earn $1,100 Yr 1, $110 in yr 2, $110 in yr 3, $110 in yr 4, and $110 in yr 5. Total earnings over the 5 years are $1,540. Obviously this doesn’t account for indexation and stepped premium increases etc.
If commissions are removed, the client’s premium in year 1 would be $700 and the adviser’s fee would be $300. In yrs 2 to 5 the fee would also be $300 p.a. Over 5 years the adviser earns $1,500. Not much different to what they would earn on a commission basis. The client’s total cost is still $1,000 p.a. including the $700 premium and $300 advice fee – the same cost as they would have paid for a premium on an upfront commission basis.
I agree with the comments that this doesn’t have to be a big deal if advisers can confidently communicate their value and sell the package of risk products plus advice, rather than risk products only.
Firstly I refute Matt Pack’s comment that it may be best to place the client’s life cover through superannuation because they can’t afford monthly premiums. What is overlooked here is how the cost of taking premiums out of member’s accounts will impact on the accumulation of funds required at retirement. As we are aware, not many Australians will have sufficient funds to retire on as it is. Why deplete them further? Furthermore, super fund trustees often add complications to claim payments, and who in the industry funds (or any funds for that matter), are going to hold the claimant’s hand (or their survivors’ hands) through the claim process? Let’s start being real about this. We, as risk advisers, should be mighty proud of what we do for our clients at the most important time…claim time. Under Bowen’s proposals, imagine how the client or survivors will feel when we invoice them for the time spent on a claim!!
Secondly, show me the members of the public who have complained about conflict of interest with regards to risk protection. This issue has NEVER been raised with me in 20 years in this industry. Client’s rarely even look at the “Commissions Paid” section of the SoA, and even more rarely comment on the amount paid. In addition to this, if the adviser has the trust of the client (and we don’t gain clients if we don’t win their trust), they very rarely contest the particular life company recommended.
Bowen’s idea is bureaucracy at its best. It’s time to get some politicians in power who have actually had business experience, rather than unionists and public servants!! (and I don’t regret the political comment)
Matt Peck you are joking? Conflict….Try this…..Industry funds provide square hole square hole answers not tailored solutions. Have you ever tried to complete not just recommend a high sum insured offer with an industry fund without causing your client or yourself distress? Good luck with that. Why ask an industry fund to provide a service for the client that they are not equiped to deliver? Do they have underwriters? No. Do they have the ability to communicate with advisers? No. Do they have a claims offering? Not in my experience. You must be a journo or are an industry fund mole as you clearly not an adviser.
Re: Matt Pack.
Wow Matt, it only takes 5 years to recoup your costs?
Now there’s a sustainable business proposition if I ever heard one. Do you have any idea of the work that goes upfront into researching policies and needs? Or servicing clients with pre-existing medical conditions?
Why don’t we just offer interest free loans while we’re at it?
If there is any distrust, it is not in the fees vs commissions debate.
Any distrust by clients mostly exsists in the following segements: “1.What am I covered for?” and “2. Will the Insurer pay when I claim?”. As simple as these questions sound, they actually take a fair bit of specialist training, experience and service reliability to deliver.
No point paying a fee if you don’t get what you expect at claim time.
The fees vs commissions is a moot point in that respect.
If your not a Bank, you have no say. That is the message here.
The big 4 control the majority of the Financial Services Industry, and now they control the FPA, the ministers view, and the Government(Why even have an FPA or a minister just for 4 banks).
This whole issue here is not about the consumer at all. It is about market dominance, and the Rudd Government have given the Banks a free ride all the way to the finish line. Congratulations Rudd.
Why don’t you give them another big handout before you get smashed in the election you imbecile.
The Rudd Govt has pushed Financial Services back more than 20years in less than one. Well I suppose you may as well make it a pair after you have done your magic with the mining industry.
Compare the pair. He has his insurance with an industry fund so his premiums are lower. She has her insurance with a retail advice offer so her premiums are higher. He has a no advice auto accept solution so gets less at claim time with no help. She has a tailored advice solution with an adviser to help her at claim time so she gets what she paid for. Now that would be a TV ad worth spending members money on Matt?
I think a lot of people are missing the point as to why commissions are paid in the first place. They are set by the product providers not the advisers. The providers are paying for the sales & service that an adviser can provide to a client in placing a client within a particular product.
Any good adviser will have the choice of at least 6-8 major companies with which they can compare premiums for a client, and therefore get the best ‘value for money’ outcome for the client. When the big 4 banks dominate this industry you won’t get that choice, you will be sold their product (i.e. CBA = Colonial/ NAB = MLC/ Westpac = BT/ ANZ = ING), get my the drift. We all know what this means.
They will collude and rip us all off because they will have no competition (as we see with Woolies & Coles/ Caltex & Woolies/ Coles & Shell in the oil industry), and the ACCC won’t do anything about it as we have already seen. The ACCC is basically a lazy organisation that prefers to spend time lunching with corporations, they don’t work for you & me.
Rudd and Bowen are the enemy of the free market, and the consumer.
Back to the point. With competition in the market we all know this reduces prices for consumer(Simple economics). If you allow Rudd & Bowen to kill of competition we all suffer, like the cattle farmer, and the corner shop suffers at the hands of Woolies/Coles(Colluding Duopolies).
Take out this competition and the product won’t be sold, it will be rammed down your throat via your bank, or industry super fund, with little advice on wether or not you actually need this cover.
The Rudd Government is taking this industry back 30yrs to when the Unions ran super/insurance and siphoned off a portion of profits to fund Labors political campaigns. Is this what we all want?
What the government must do is offset any ban on risk commissions with a decision to allow a tax deduction for advice fees. The costs to policy holders will increase for those insurance premiums that are tax deductible if commissions are stripped out of the tax deductible premium costs, and the clients are forced to pay an advice fee which they are not allowed to claim.
If this is not done, even if the clients before tax premium cost does remain the same, their after tax position could be significantly worse off for income protection or some superannuation owned policies.
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