Risk Commissions to Subsidise Investment Advice?

Our latest poll asks you to consider whether the cost of investment advice will increasingly be subsidised by risk commissions in a post FoFA world.

This question addresses one of the possible unintended consequences that the Future of Financial Advice reforms may herald (see: FoFA Could Impact Insurance Sustainability).

Momentum has been building in recent years for the nature of financial advice to transition from product-based to values-based outcomes for consumers.  This momentum has been due, in part, to the banning of investment and superannuation commissions, due to take effect from 1 July 2013.  In the proposed new world of advice, the client will be served by advisers who deliver values-based solutions that represent the client’s best interests.  While many have made this transition in recent years, thousands of financial advisers are either still in the process of transition, or have not commenced.  In any case, it will take some time for many to adapt to a remuneration structure under which investment and superannuation commissions will be banned.

The argument is that, post the implementation of the FoFA reforms, there will be a proportion of the financial adviser community who may consider ramping up their life insurance advice proposition in order to continue to access commission-based remuneration, rather than re-structure their business on a fee for advice/fee for service basis.  The remuneration they receive via risk commissions would then subsidise other elements of their advice proposition.

This model would naturally create a huge potential conflict of interest, where the adviser embracing this model would only be appropriately remunerated for their investment and other advice if they successfully place insurance business.  But, as long as the best interests of the client are served, and as long as the adviser receives appropriate remuneration for their genuine endeavours, would this model be deemed acceptable by the industry?  Could it satisfy the ‘best interests’ test under FoFA?  Could it lead to a spike in the number of Australians who may be delivered levels of cover appropriate to their needs?

This issue, or potential issue, raises these and other questions.  We’d like to know what you think…