The Financial Planning Association has rejected the Financial System Inquiry recommendation to ban upfront commissions.
Contained within its 31 March submission to Treasury in response to the FSI Final Report (see: Ban Upfront Commissions – FSI), the FPA has delivered a set of arguments in arriving at a five-point set of principles it says should be adopted when developing reform in the life insurance industry.
While supporting the majority of the policy recommendations outlined in the FSI Final Report, including the principles underpinning Recommendation 24, the FPA’s support does not extend to that part of Recommendation 24 which calls for ‘…a level commission structure implemented through legislation requiring that an upfront commission is not greater than the ongoing commission.’
And while not directly making reference to the Trowbridge Final Report, which was released prior to the publication of its FSI submission, there are some parallels in the nature of some of the FPA’s recommendations. It’s five-point set of principles are:
- Ban other forms of Conflicted Remuneration: Volume-based payments, rebates, profit sharing and shelf space fees should be banned. This was not addressed in FoFA and should be rectified.
- Open Approved Product Lists (APL): Remove heavily restricted approved products list. Life risk products should be competitive on the basis of their suitability to the client and financial planners should be supported in meeting their best interest duty.
- Consumer benefit: Life insurance companies should be required to pass on savings in the form of premium reductions and sustainable premium pricing structures across all channels including retail, group and direct.
- Funding models: Notwithstanding the form that remuneration may take, professional life risk advice should be provided using remuneration models that are affordable, transparent, and sustainable. Financial planners should be supported through better product design that caters for different funding models that can be offered to clients.
- Stronger and smarter enforcement: The regulator should work better with industry to monitor and enforce poor life insurance advice practices and do not meet the best interest duty. A system should be established where life insurance companies are required to provide a list of financial advisers that have replaced insurance policies to the regulator for review.
Without directly advocating retention of upfront commissions, the FPA’s statement in support of appropriate remuneration for life insurance advice specifically rejects a flat commission model. Its submission states:
… remuneration for insurance work should be compensated commensurate to when the work is undertaken
The FPA believes that remuneration for insurance work should be compensated commensurate to when the work is undertaken in an open and transparent manner. Given that most of the work involved in putting insurance policies in place through a SoA and underwriting is in the establishment phase this would preclude support for a flat or level commission structure.
Its not a shock that the FPA and AFA etc reject the Trowbridge Report. They have a conflict of interest. They receive membership fees from advisers and dealer groups and 95% of advisers reject the Trowbridge report. What if they came out and said that this review was a necessary evil? They would go broke before the year was out.
I was speaking with someone who works high up in APRA the other day and the issue that ASIC has with regards to the life insurance review is the sales based vertical integration of the big banks and AMP etc.
Commission needs to go and Advisers have to change their model. If accountants and other professions can build a business with fee only models than advisers can as well unless accountants are secretly receiving comm from somewhere?
If you are a traditional risk writer, like many occupations your time may be up but this is not new. As the business world changes, you need to innovate or die. It is rare that an old risk writer from the AMP WOL days can live out his or her career not changing and not innovating. No industry is that slow to change or have government change the rules.
Mr Z you’ve commented on this issue a few times. Your remarks don’t let us know whether you’re a life-risk adviser, a financial planner or whatever your industry status is.
It seems from reading what you’ve written that you may come from an advantaged position – ie from a family financial services business, perhaps from working with an adviser who has a large book of business, or even a bank employed planner. In any case, life-risk insurance is nearly always sold, not bought. So your view on accountants being fee-based and running successful businesses doesn’t resonate with advisers. Prospective clients don’t call us up and want to review their insurances – we have to take the initiative and contact them. There’s a world of difference in that.
As a self employed Adviser with a Large Licensee i agree on the removal of, or significant reduction of commission. Im at a loss as to why so many commissioned advisers are so scared of fees for their work. Yes there are the stories of those that cant afford the fee, so in those cases do the advisers then rebate future commissions after they have received sufficient in lieu of the initial fee, i think not. At the very least let client decide ( rather than the adviser ) on paying a fee vs the adviser receiving commission. In my 30 yrs as an adviser very rarely have i ever come across a client that was even offered an alternative to commission. At the very least show clients the huge savings they will make over many years, by not having the commission built into the annual premiums. (wouldnt be too hard for licensees to make that part of their standards ) How many commissioned based advisers do that i wonder. You might surprise yourself, all of a sudden the clients might just find the dollars to pay the fee rather than the extra 20% to 40% every year on the premium. My practice has been fee based for Risk for about 15 years. Product manufacturer have an interest in getting their product sold, the quicker a manufacturer makes a stand re high commissions, no doubt others will follow, as they did when Steve Tucker made a Stand ( and rightly so and i applaud him) on investment commissions. Churning will not stop until this happens, and of course the churner will always have the “reasons ” documented for the change.and yes i agree the professional associations dont want to lose members, why else would they not agree with a huge reduction in commissions.
Although I agree that the FPA and AFA are clearly far from impartial commentators on the matter, I feel a few of your comparisons are not like for like.
You mention that accountants are able to work on a fee for service model which is of course true, they are also benefitted from Government mandated taxation compliance that makes their service a requirement for all Australians, most Australians dont choose to see an accountant they have the need thrust upon them.
Furthermore the service that a financial planner is required to provide is substantially influenced by the compliance requirements, regardless of the clients wants, this is good intentioned and designed to protect the client. But I ask, in the event that a client would like IP cover, are they better off receiving the 30 odd page document they receive to go with the cover, in some cases maybe, others not, Either way the client will be asked to pay for that documentation (in one form or another). In an open market the adviser could arrange the cover either way, and charge for that service, if the client wanted the report he could charge a separate additional fee. This is not an option for a financial planner.
My particular fee model is a set cost (dependant on the strategies relevant to the individual client) and any insurance commissions will directly reduce the cost. The suggested model may actually increase my overall fees as the ongoing commission will likely increase.
However it will make it more difficult for many clients to afford financial advice, arguably those who need it most, this is not the intent of the legislation.
Interestingly I agree wholeheartedly with your comments regarding the vertical integration with Banks and large institutions using advisers as a sale force to sell their insurance, however I think this legislation benefits these guys and hurts the adviser trying to select appropriate providers based on individual clients needs.
Mr Z , I can understand why your the last letter in the alphabet because your so far behind in having a understanding on risk insurance and how much work is involved acquiring it…….
Comparing accountants to financial planners is completely ridiculous. The two professions are very different. Accountants are generally fee only yes but they operate in a system where every individual , business, corporate or trust entity is required by law to prepare and file a tax return each year. It is not discretionary as is the case with most if not all of what a financial adviser does.
The bottom line to me is that there is a proven chronic under insurance problem within Australia today. There are also instances of unscrupulous risk writing advisers who churn clients needlessly. The first is the bigger problem in my opinion, and it would be foolish to further exacerbate the first problem in a blindly focussed attempt to rectify the second.
Imagine if accountants were all of a sudden rsponsible for reporting and uncovering tax evasion and fraud, how quickly would large numbers of accountants close their doors?
the fcat is, people go to accountants because of the complexity of the tax laws, the low and low-middle income earners are now left with sitting in a shopping mall cubical to do their tax returns. are they getting the best advice $50.00 can buy?
this is the potential future for Joe and Mary Public should Trowbridge get his way.
@ Mr Z,
Your comments as others on this post have said are not only ill-informed but have no rational pragmatic basis.
Should advisers move to a fee for service on risk here’s a comparison with accountants.
There are many small suburban accountants carrying debtors in excess of $180,000. No Risk only or Financial Planning practice can survive with that much owing.
Of course they have the following options like accountants do which is to,
1. Recover outstanding amounts through debt collection agencies.
Someone owing you a $1000, if you are lucky to get it and is willing to pay you $20 per month will keep you in business won’t it.
I’d like to be able to tell the companies that provide electricity/gas and light that since I’m only getting $20 per month from my client, that’s how I’d like to pay you. for your service.
How do you think they will receive that ?
2. Suing your ex-client for the money will guarantee at least one thing, it will cost you more than the $1000 owing to recover the debt,…. but that will keep you in business won’t it ?
3. Writing off the debt because tit will cost more than it’s worth, will keep you in business won’t it.
Try going into David Jones or any store for that matter and buy a product and then try not wanting to pay for it !!
The writing of Risk business is nothing like running an Accounting business and for you to draw that comparison clearly shows a lack of understanding that’s only usurped by that provided Mr Trowbridge
Mr Z, fees only risk advice will not stop the perceived problem of “churning “, which has never been accurately defined by the nil commission advocates. The churning problem is 99% furphy, its really about insurers recovering Group Super losses.
Over on the dark side I constantly see fee based investment advisers increasing their annual review fee by recommending changes in investment products and adding an advice and implementation fee to the base review fee. But you can pull it off if the money has to put somewhere and the client is chasing returns. Insurance of course must be sold, but it can be sort of bundled to confuse the client,. Transparency in my experience is rare in these situations
Noice !! And funnily enough, the fees from these pretenders for changing a risk policy somehow always ends up around 90% of the commission that would be received for an upfront model.
Bah humbug Mr Z. Under your model, the insurers will have no control over these fee-based churners, and lose even more, and cop a loss on the policy set up costs because they cant claw back commission.. Conflicted remuneration is an ideological argument from a regulator who should be more concerned about vertical integration and limited bank licencee APLs
Under your proposal, we could see the re-insurers objecting to seeing the same big case switched every year between insurers for the best premium on a large term life case, with the re-insurer paying commissions to the insurer ( no longer passed on ), if the risk is over treaty limits, And if Take Over Terms is involved, the re-insurer does not even get to underwrite the case.
Mr Z,
Next time use your real name when telling old planners to die.
Cheers,
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