The Life Insurance Advice Working Group (LIAWG) should look for ways to improve the quality of life insurance advice before making changes to remuneration models, according to Australian Financial Risk Management (AFRM).
Nicholas Hatherly, Managing Director of AFRM, has told the Trowbridge-led LIAWG that the issues raised by the Australian Securities and Investments Commission (ASIC) review into life insurance advice were not really about remuneration, but about the need for better standards of advice.
In his submission to the LIAWG Interim Report, Mr Hatherly said while he agreed with ASIC’s finding that there is a lopsided incentive for advisers to move risk business regularly and that the quality of advice delivered by these advisers is poor, the industry needs to address the quality issues by moving to a more professional footing.
“These poor practices need to be removed, however there needs to be an acknowledgment of the cost of giving well researched and analysed advice,” Mr Hatherly said.
…there needs to be an acknowledgment of the cost of giving well researched and analysed advice
He recommended the introduction of a ‘professional year’ for new advisers entering the risk sector, similar to that employed by the accounting profession. Under this model, advisers would not be able to be licensed or authorised to give advice until they have achieved a certain number of years’ experience in the industry, and successfully passed a professional skills examination. (Note: this model has also been proposed by the Parliamentary Joint Committee for Corporations and Financial Services’ inquiry into advice standards, see: PJC Proposes Significant Restructure of Advice Industry).
He also called for a greater focus on specialist skills training, highlighting that advisers could no longer rely on insurers to provide this.
“Quality advice is not linked to the insurers. They are only interested in product sales, hence much of the training has been withdrawn from the industry as margins tighten and costs need to be controlled. There is a disconnect between the obligations of advisers and the insurers’ incentives.”
Mr Hatherly similarly noted that advisers should not receive all the blame for high switching rates:
“For the purpose of the client’s best interest, there are many reasons that a policy still needs to be changed. Many of these reasons are caused by the insurer themselves.
“The insurers as product manufacturers have a right to put out whatever they like to the market. They must however be cognisant of the need for advisers to act in the best interest of their clients and that may mean they lose that policy. This is not an adviser problem; this is an insurer problem.”
Our profitability comes from retaining clients for the long-term
In addressing the issue of remuneration, Mr Hatherly said he understood the need to review the level of upfront commissions currently paid in the industry, to address sustainability issues, but cautioned the LIAWG to ensure adviser remuneration aligned with the real cost of giving risk advice. He advocated for a hybrid commission model, which is currently the mandated remuneration structure for AFRM representatives.
“AFRM have calculated many times the real cost of giving clients advice and know that the cost of resources required to provide advice and implementation are greater than the new business income – much the same as insurance companies. Our figures show that we lose money on new business under the hybrid model.
“Our profitability comes from retaining clients for the long-term. The importance of this statement is that there is no incentive to replace client policies as that would have our client go through the new business process again creating the same loss described above.”
Thanks Nicholas for your very wise observations and I couldn’t agree with you more.
The findings of the ASIC review DO NOT support the comments and findings of the LIAWG report – the statistics show clearly that those insurers paying the highest commissions were actually used the LEAST by advisers and the insurers paying the lowest commissions were used more. This flies in the face of the concept that high commissions somehow skew advisers recommendations.
If we are to get anything out of the ASIC review it is that there are a small number of advisers (within statistically acceptable boundaries) that have provided poor advise, but (more importantly) there is still a higher than acceptable number of advisers that do not dot their “i’s” and cross their “t’s” sufficiently.
I am fully with Nicholas – it is nothing to do with the commissions, it is all about the quality of the advice!
This has been mentioned numerous times and needs to be brought to all the Life Insurers attention, that the time and cost to do a small increase on a existing policy is prohibitive.
Existing policies that have been on the books for 6 years or more are profitable, so the emphasis needs to be on making increases or alterations as simple and time efficient as possible.
A $20 a month increase to attain extra cover on a $200 a month existing policy, should be a one hour job for the adviser.
In reality, it is a 6 hour job having to do the plethora of compliance and underwriting tasks.
One example is the adviser having to fill in a full application of 30 odd pages for an existing client. This is ridiculous and I am yet to hear one valid reason from any Insurer, that this is justified.
$240 commission for 6 hours work = $40 per hour though the real cost to provide that advise, means that the income is negative.
However, if the Insurer and regulators made it simple to add extra cover, the retention rates of existing policies will rise and increase the long term profits for the Insurer and our Businesses.
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