The recent reinforcement of Labor’s changing approach to the question of whether to retain risk commissions is the latest indicator of the odds shortening for those who think commissions will be retained post the 2022 Quality of Advice Review. But is this enough?
The current 60/20 commission caps were included as an integral element in the fanfare of announcements accompanying then Assistant Treasurer Josh Frydenberg’s Life Insurance Framework reform package. At the time of the original announcement in June 2015, the Assistant Treasurer was able to stand before the cameras and declare that the Government was going to halve risk commissions, at a time when upfront commissions were around 120% of first year’s premium.
There was a ‘neatness’ in the Assistant Treasurer’s ability to declare that risk commissions were to be halved – a position imposed on the financial services industry by the Government following its determination that the industry had failed to unite to adequately self-regulate post the release in October 2014 of ASIC’s Report 413 Review of Retail Life Insurance Advice.
There didn’t appear to be much science accompanying the announcement of 60/20 commission caps – as it related to the capacity for this level of remuneration to sustain a viable risk specialist advice business – other than the fact that this number represented a halving of upfront commissions in order to better align the interests of advisers with consumers.
As the sector looks ahead to the handing down of the Treasury’s Quality of Advice Review in December 2022, which includes ASIC’s review work on the quality of life insurance advice post the implementation of the Life Insurance Framework reforms, latest reports confirm the number of risk-focussed advisers in Australia has been decimated.
Without debating their merits, it’s generally accepted that the significant decline in specialist risk advisers has been due to a combination of the double-whammy of the LIF commission caps and the imposition of minimum education standards on existing advisers.
The 60/20 risk commission caps are also generally accepted by many as a key reason for the almost total lack of new risk specialist advisers entering the sector to replace those who have been and will be departing.
the question being asked …is whether the retention of risk commissions …will have any meaning whatsoever if the present 60/20 commission caps are retained
While there appears, then, to be a growing momentum that will see the retention of risk commissions as a valid form of remuneration for advisers post the 2022 Quality of Advice Review – regardless of which of the major parties forms Government – the question being asked by a large cohort of advisers and other industry stakeholders is whether the retention of risk commissions into 2023 and beyond will have any meaning whatsoever if the present 60/20 commission caps are retained.
Even before the original announcement of the LIF reforms in 2015, Riskinfo has reported both sides of the debate around whether a more nuanced approach to delivering life insurance advice – for example a combination of fees and commissions – might be the way forward for risk specialist advisers.
Some advisers and some key licensees believe the current 60/20 commission caps can and will work, to the extent that this can sustain a profitable risk specialist advice business. One of the arguments supporting this contention relates to the 20% ongoing commission, which doubles the 10% renewal commissions that were historically linked with the upfront commission model: 120/10 versus 60/20.
Others, however, have voted with their feet, as evidenced by the declining numbers of specialist risk advisers. Yes, it’s a complex issue, where there are multiple factors impacting this decline in numbers. However, one of the most critical elements is the capping by a government in a free-market economy of the commission an adviser is able to access for delivering life insurance advice.
The best interests of consumers must always be at the centre of any life insurance advice narrative. That should go without saying. But what’s the point of retaining risk commissions (and the two-year clawback) at their current levels if this results in many – but not all – specialist risk advice practices proving to be commercially unsustainable?
As noted in previous Riskinfo stories, advisers have never determined the levels at which upfront, hybrid and level commission structures were set. That determination was made by life companies in balancing a commercial premium offer to prospective lives insured. Notwithstanding current issues of overall industry sustainability, the upfront, hybrid and level commission structures set by insurers – again in a free-market economy – were sustainable for specialist risk advice businesses. That is, a hybrid commission level of 80/20 was set and accepted as commercially viable. 60/20 was never an option for advisers, unless they wanted to dial-down the first year hybrid commission payment.
For many industry stakeholders with whom Riskinfo has spoken, one solution to the challenge of retaining specialist risk advisers and specialist risk advice small businesses, rests in a combination of retaining risk commissions and allowing an 80/20 hybrid commission structure to be accessed.
Not all will agree with this position, for which many have advocated, and it doesn’t mean there aren’t other solutions. But any future declaration by the Government of the day that it has decided to retain life insurance commissions, but at their current capped level of 60/20, will be greeted by many supporters of retaining commissions as a pyrrhic victory at best.
Peter Sobels is Riskinfo’s Publisher and Managing Editor
Many of those large advisory groups and licensees who argue for the retention of 60/20 also advocate the charging of fees for advice in addition to the commissions paid by the insurers for the processing/implementation of applications to insurers. Fees of course are in the eye of the beholder. I think it’s now no longer disputed that mum and dad clients WILL NOT PAY FEES which truly represent the quality and quantity of the risk advice being provided. I for one find it difficult to raise an advice fee in excess of $1000 and have it accepted accepted.
Most mum and dad clients if pressed will pay up to $500, that’s it. That’s a token amount!
Those same advocates of retention of 60/20 are also prominent in demanding that the government allow a tax deduction for financial advice fees. Now I don’t profess to be an accountant or tax expert but most advice I receive says that I can charge a fee for advice which relates to the creation of income or the review of the plans to create income, particularly when that income will be taxed, either from an income protection product or from a lump sum TPD policy in super. . It’s rather nebulous and we haven’t seen a court case to test it.
One thing I can say as a former public servant (many years ago) is that Treasury will resist furiously the implementation of a measure which allows for the full tax deduction on a full advice fee. They’ve been doing it for years and they have a simple technique: when a politician promotes the idea on behalf of advisers that fees for financial advice of any type should be tax deductible, Treasury will point to the proponent and ask a simple question – “your proposed measure will cost us X million dollars in revenue, so which of your favorite projects are you prepared to take off your “wish” list for the electorate. It’s one of their standard techniques and has been so for decades, and they do it because they know it works.
TREASURY are conducting the general review. Anyone that who thinks the Treasury is going to allow a proposition for the tax deductibility of advice fees to get up in political terms is living in cloud cookoo land.
That then brings us back to what is the correct level of commissions which would sustain a life risk business AT ANY LEVEL OF ITS DEVELOPMENT. I accept that very large businesses, including those who have achieved scale by buying businesses of departing advisers, may be able to make us a significant profit using 60/20. But any start-up business, or one with even 15 years experience and 15 years of renewals at 20%, may find it extremely difficult, with or without technology, to conduct a sustainable advice business without any cross subsidy from investment advice fees.. I would love to know how many life risk advisers have had to sack support staff as a consequence of the halving of our life risk commissions and the inability of clients to pay fees recompense in the effort involved.
For the last few years it’s been very clear that there are a number of investment firms (including accountants) who had developed a system whereby they do charge FEES for life risk advice but it’s hidden away in a fee for investment advice. In other words a cross subsidy. I also am anecdotally informed that there are mortgage advisors who effectively do the same. Sadly, I believe that the raising device will fall by the wayside because writing life risk in today’s environment of heavy duty compliance, with the absolute danger of recommending the replacement of legacy IP contract with a post-2021 contract, has caused many of these people to forego advice on risk. It’s just too hard and too dangerous. How they get around best interest might bear closer scrutiny.
Some might have forgotten, but the FSC was in the development of LIF up to their necks. The FSC at the time were heavily controlled if not financially subsidised by the four big banks who owned life insurance companies. Around seven or eight years ago or even longer, the hardheads on the bank boards decided that owning a life insurance company and flogging its products within your bank premises might cost a fortune if the advice was ever reviewed. Because we now know that happened, and the large banks have had to cough up sometimes as much as $25 million for dud advice, and some of that was for poor life risk advice. In the banks found the return of investment was about 8% maximum – not good enough. So the banks decided to sell their life office businesses.
Bit of a problem with that though – there wasn’t enough money in existing Australian life offices to come up with the necessary dosh to pay the prices that the banks expected to get in the sale of their life offices – any buyers would have to come from overseas. What to do? Easy! Convince the government to bring in mandatory reductions in life risk commissions on the back of Report 413 so that the former banks life offices could be “tarted-up” for sale. The banks were then able to demonstrate to potential buyers that their distribution costs had just halved. Fantastic!.
The banks had two advantages: ASIC and its team of favoured investigative accountants had investigated one sacrificial life office-owneed dealer group and produced Report 413, making all sorts of subsequently unprovable allegations about churning. That created the political climate. And secondly, at least two if not three of the last ministers for financial services had worked for big banks early in their career, before jumping on the political bandwagon. Add to that, their natural mistrust of any self-employed person who are paid by commission – they just had to be crooks. And the left-wing circle of consumer groups gathered in chorus. The finance ministers were on a winner on all levels, and advisers were the victims, unable or unwilling to mount a political protest.
So that’s how we are where we are. As squeaky 21 has noted the CEOs of the non-bank life offices went along with the banks and sat back and benefited from halving their particular distribution costs, and then wondered why new business dropped off, as many experienced advisers determined that servicing older clients on a one year responsibility period and larger old-style upfront commissions for any policy increases was more profitable than writing business under LIF. I remain suspicious that the gouging of premiums on legacy products in the last 2 to 3 years is a direct result of those CEOs thinking they may be still be able to funnell all advisers into re-engaging with LIF, just by making those legacy products totally unaffordable, untouched to date by ASIC or Apra.
I’ve commented many times about what I perceived to be the lack of courage amongst our remaining life office CEOs. I have also commented that some of them are quite capable of walking both sides of the street and not even blushing. It’s obvious to me that those same CEOs think they can hold out a little bit longer on addressing the damage caused by 60/20, maybe even a couple of years, and continue to resist any entreaty to increase upfront life risk commissions to 80/20.
What has to happen, is those same CEOs NOW have to go to a new government, or a chastened minority Coalition government, gird their loins and admit to government that LIF has been a total failure.
I smell flying bacon.
Great article Peter, thank you. There is, however, a very important part of the story here not being discussed. I haven’t seen mention made of it anywhere else, either. That issue is the schism that now exists between advisers and life companies around the subject of TRUST. Through LIF, Trollbridge and the commissions coming down to 60/20, along with an increase to 2 years for remuneration chargeback potential, a rift was created which removed most any remaining trust advisers had in life companies. The life companies smirkingly stood by and paid little more than lip service to supporting advisers while rolling over to the govt and special interest groups allowing these industry destroying changes to be applied. It was extraordinary and against every business law written however the govt and life companies were happy for it to occur, for their own reasons each. Talk about shooting yourself in the foot! We told them what the outcome would be, blind Freddy could see it then and now it is here – surprise surprise. How short-sighted, arrogant and abjectly stupid of them.
Therefore, even if through some common sense miracle the commissions are returned to some higher amount (unlikely) AND the 2 yr clawback is reduced to 1 year again there is still the trust issue. Any thinking person would say this has changed forever. I’m now retired after 36 years however I for one would never trust them again enough to place the financial security of my clients in their hands.
A retention of 60/20, which I think is the best possible outcome, still conclusively signs the death warrant of our once great industry. The government – any government – could not politically justify allowing an INcrease in commissions now – not after the MILLIONS of dollars invested in convincing absolutely everybody that commissions are the devil’s spawn (Thanks Mr. Hayne). Sorry, the risk advice industry involving dedicated professional life risk advisers is over no matter which way you look at it. It has simply been stabbed far too many times in far to many places not to fully bleed out over the next 4-5 years and there is no will left, in anyone with power, to call the paramedics.
Old Risky and Squeaky 21, you have been great contributors and have spoken the truth for many years, with many insights and predictions that came to fruition of what will occur if common sense does not prevail and as the voice of wisdom and experience is a voice that for the most part was ignored, we all ended up where we predicted.
Let us hope that this decade of insanity can turn around and there will be a future for the Advised Life Insurance sector and that all our sanity remains intact.
Keep up the good fight and as a spokesman who I cannot remember once said, “let’s keep the Bast–ds honest.”
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