The industry should retain insurance commissions, but reward advisers who choose to charge a fee for risk advice, one adviser has proposed.
In his submission to the joint FSC-AFA Life Insurance Advice Working Group (LIAWG) Interim Report, Director and Principal Adviser at Enva, Michael Baragwanath, has argued that upfront commissions are still the most effective way to pay for insurance advice in the current environment. However, in acknowledgement of the assertion that commissions can produce a conflict of interest between the adviser and client, Mr Baragwanath has proposed that businesses which do-away with commissions should be rewarded with lower compliance requirements.
“Training does not address the fundamental conflict of insurance advice. Advisers are paid via the product. So long as this is true the adviser will always favour replacement or alteration of an existing product to get a payment,” Mr Baragwanath said.
He said advisers who choose to charge a fee for their advice should be exempted from the requirement to provide their client with a Statement of Advice (SoA).
“SoAs are ultimately there to prove that the advice is not conflicted. If the client directly pays for their recommendation via fee, the removal of the conflict subsequently removes the need to justify the advice.
…insurers effectively incentivise advisers to churn business then publicly decry that behaviour
“It’s possible that ASIC’s RG51 –‘Applications for Relief’ provides a framework for professional bodies or advisers to request an exemption from sections of corporation’s law making this suggestion possible without regulatory change.”
For advisers who need to operate on an upfront commission model, because of their size, length of time in the industry or the kinds of clients the practice services, Mr Baragwanath suggests a ‘convertible’ upfront approach.
“The removal of upfront commissions without the corresponding compliance concessions outlined above would cripple the ability of younger advisers to enter the industry and result in a dramatic reduction in insurance sales, which is ultimately bad for consumers,” he said.
“But unfortunately, insurers effectively incentivise advisers to churn business then publicly decry that behaviour. What the industry needs is a model that addresses churn concerns while still paying adviser for their time.”
Mr Baragwanath’s convertible upfront model proposes a ‘loyalty’ discount for clients in the sixth year that their policy is in place:
- Year 1: Pay upfront commission (110-121% of base premium).
- Year 2-5: Trail commission of 10%.
- Year 6: trail commission of 10%. With a 20% discount being applied to the contract.
“Insurers use 30% of the annual premium to either pay commission, in the case of level, or recoup the cost of the upfront commission. By the sixth year the upfront structure provides a windfall to the insurer. They often don’t see the benefit of this windfall because clients cancel their policies between 7 and 11 years of inception,” he explained.
“Introducing a loyalty discount at a crucial point in the insurance lifecycle will reduce the likelihood the client will cancel due to cost, and remove the incentive to switch as their current insurance solution would cost significantly below a comparable market solution.”
The LIAWG is due to provide its final report on the future of the life insurance industry at the end of March. More than 130 submissions on the interim report were received from industry stakeholders (see: Trowbridge Praises Industry Engagement).
For more submissions to the LIAWG, see:
I don’t mind preparing an SoA for Risk clients. An SoA acts as a final check on what I am recommending. In addition the more times I succinctly express my ideas on paper the better I am as presenter. Each SoA is a mini training session.
What I do think is an absolute consumer rip off is the ability of those that offer general advice to present what I consider substandard policies without any explanation of their shortcomings. Where is the protection for the consumer if they replace a superior policy by one that is inferior based on price alone? The sooner SoA’s are compulsory for all the better off will be the consumer.
Advisers are not paid by the life company ! Advisers are paid by the client paying higher premiums. I agree leave commissions as they are, but have properly priced nil commission products. The client can now choose to either pay higher premiums for the rest of the policy term or pay the adviser what he is worth. If we take this approach there can be no arguments by consumer groups. Why is this simple approach not introduced ? Perhaps it is because life companies want commissions to stay because they are the major beneficiaries.
I have long advocated for the elimination of GENERAL ADVICE
Thommo is spot on. The ISA funds have a General Advice exemption courtesy of Bill Shorten – that’s how the funds have able to get away ( so far ) with the post July 14 changes to their TPD definitions just by sending out a letter which no member could possibly understand. We know members treat these letters with the same importance as we all do when reading software terms and conditions. Tick and flick
Those rabbits on TV have General Advice exemptions. ASIC thinks there isn’t a problem but those companies will do untold damage, and could lead to market failure. I wonder how many premiums are paid for unemployment benefits in our current recession as folks lose jobs.
But folks, watch the banks. They want a two tired advice system. Personal advice from the boys in FP upstairs, general advice for crap over the counter from bank clerks.
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FOFA scares the hell out of the banks, and yesterday one bank announced they were allowing bank advisers to take a “book ” and become independent. I suspect that’s to dis-connect liability from the bank even though it will be a bank owned AFSL. More General Advice products over the counter then ? Watch this space
Hoe ASIC can think general advice is good for consumers is totally beyond me
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