Financial advisers have rejected suggestions that commissions are responsible for under-insurance and have instead stated they are the best way to ensure consumers can purchase adequate insurance coverage.
At the same time, they have also claimed under-insurance is due to the rising cost of premiums and consumers were unlikely to pay fees for insurance advice alongside the costs of premiums.
The reaction of advisers follows comments made in a whitepaper released recently by three industry commentators – Fortnum Financial Group, executive chair, Ray Miles; Innova Asset Management, managing director, Dan Miles; and Certainty Advice Group, managing director, Jim Stackpool, and reported by riskinfo last week.
Riskinfo readers rejected the proposition that commissions were the cause of under-insurance as well as the mistrust of advisers claiming that all professions receive payment for their services and commissions were often the only way of guaranteeing a consumer would be able to afford life insurance.
“Making insurance fee for service will just increase the under-insurance problem as it will make insurance even more expensive at the implementation stage.
“Commenting on the statements in the whitepaper Paul Underwood said “the real reason there is an under-insurance problem has more to do with premium costs and the ‘she’ll be right’ mentality of the average Australian. Making insurance fee for service will just increase the under-insurance problem as it will make insurance even more expensive at the implementation stage.”
A number of readers said a move to fee for service was acceptable in some parts of the advice sector but was not suitable in all cases with Christoph Schnelle stating “it is an excellent way but not the only way.”
“I find commissions perfectly acceptable provided I am not conflicted as otherwise most clients simply wouldn’t buy high quality insurance. It is alien to all but the wealthy to pay for insurance advice as much as it costs.”
Others believed the low levels of under-insurance and mistrust cited in the whitepaper were a result of licensing and regulation with Tony Cafarella stating the licensing system was flawed and “how was it possible to have confidence in a system when we use the same licence to allow product provision and advice?”.
Robert Coyte pointed out that financial advisers were subject to one of the toughest disclosure regimes in Australia and “the real issue is that licensees and regulators need to take appropriate action against financial advisers that don’t follow the existing law and act in the clients best interest”.
However Wayne Leggett, a board member of Fortnum, stated advisers needed to move past commissions to be seen as professionals in the eyes of consumers.
“Because we have been calling for recognition as professionals, we have to accept that a ‘professional’ should not be remunerated by third parties. It will take a long time before this is the accepted practice, largely because it will take some time for people to understand and come to terms with a “user pays” framework.”
“Because we have been calling for recognition as professionals, we have to accept that a ‘professional’ should not be remunerated by third parties…”
Riskinfo readers also responded strongly to particular statements made by Stackpool in the first section of the paper.
Under the section titled “Quality financial advice: Is it a myth?” Stackpool stated “a recent review of life insurance files by the Australian Securities and Investments Commission found many consumers of life insurance from a financial adviser would’ve been better off without it”.
A number of readers challenged the statement claiming that ASIC’s Report 413 did not make such a claim, with some questioning the reliance on a limited, targeted survey of advisers conducted by ASIC.
When contacted by riskinfo, Stackpool said his comment was based on ASIC’s own statement in Report 413 that “…we found that 63% of consumers received advice that met the standard for compliance with the law, while 37% of consumers received advice that failed to meet the relevant legal standard that applied when the advice was given”.
He further commented stating “Report 413 found that one in three advisers fail to comply with the law when it came to giving advice on life insurance. I conclude that most people would be better off without illegal advice which is the basis of my statement.”
Just how will an unemployed person afford to be fully advised in the potential purchase of say, Trauma Insurance, in order to defend their near relatives from further financial support costs in the event of severe, but all too common, illness?
I doubt the adviser community can afford to perform all these tasks on a pro bono basis, when so many needy people will be unable to afford the initial cost of advice in a low/no-commission environment.
So Jim Stackpool actually lied when he stated “a recent review of life insurance files by the Australian Securities and Investments Commission found many consumers of life insurance from a financial adviser would’ve been better off without it”?
When ASIC TARGETED a small number of advisers that they already concerns over in regards to churning they found 63% of advice compliant and 37% non-compliant. ASIC did NOT in fact state that the 37% of non-compliant advice customers would have been better off without the advice or products they had been sold. Jim had no evidence to support this statement.
Imagine if the same exercise was performed by ASIC on the vast majority of advisers who do not churn or looked into advisers that charge excessive fees when a commission route for risk advice would have been financially better for the customer?
Jim Stackpool may have a vested interest in reducing competition risk advisers who’s customers prefer (and are financially better off from) commissions over fees but this is not within the best interest of all customers (mum and dad vs high net worth)
In my opinion making statements that distort the facts for personal gain is the same as giving bad advice for personal gain.
What Stackpool has failed to mention in the ASIC report also said that over 90% of advice given using a hybrid commission model passed the test. Everyone in the industry know ASIC targeted certain Advisers with very high new business inflows. These Adviser were in effect “dobbed in” and the result was always going to be what it was.
Ahhh Jim….Lies, Damn Lies and Statistics. Pretty poor conclusion by a pretty poor “survey”. Another way to look at it (ie from the coal face) would likely be..”which part of the corps act did it not comply with?” if it was Best Interest Duty…fair enough conclusion (but surely needs to be framed in the context of the targeted “survey”) If it was illegal because did not “tick a box” and was technically illegal but still left the client in a better position what would be your conclusion? I’ve read 413 a few times and have no doubt that there was plenty of crap “advice” (read product flog/churn), but that’s exactly what I would expect to find if I targeted it. For all those clients that will not seek advice due to the bad publicity and then get turned away by fee for service advisers due to affordability (or even just common sense for premiums under $2k), where do you think they will end up? I’m no scholar but see plenty of direct rubbish where they cancelled their own policy for one with no underwriting. I also see alot via their industry super fund which used to be generally cheaper…unfortunately I see plenty that have just the default levels(or worse they opted out of cover because they saw on telly what a rip off it was). I usually find Jims comments/thoughts progressive/thought provoking but in the case of insurance advice I can only conclude elitist, conflicted or ignorant at best.
“Better off without” is quite a leap from “illegal advice”. The illegality may have been as simple as not providing a particular document in the stipulated time frame, something which doesn’t make the advice bad, just not complying fully with draconian rules which in many cases add no value to the process. Robin Hood would be proud of the long bow you have drawn here Jim Stackpool.
Who says that ASIC actually knows what the right insurance is for a client? Or state they would be ‘better off without it’ Remember to much intelligence can be a dangerous weapon…. Get ASIC in a room for 30 minutes on this discussion and i think we would be all shaking our head in disbelieve.
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