Once again, our Story of the Week relates back to the debate around submissions made to the crucial Quality of Advice Review. The AFA’s strident response to calls by some groups to ban risk commissions – picking apart what it refers to variously as unfair, flawed or nonsensical arguments supporting their position – was far and away the most-read Riskinfo story this week…
The Association of Financial Advisers has issued a blistering critique of the Quality of Advice Review submissions made by consumer group Choice and Industry Super Australia.
In an update to its members, the association argues key QoA Review recommendations made by Choice and ISA – including banning risk commissions – fail to justify their philosophical position with any supporting evidence or are based around flawed logic.
…its submission …is full of criticism of financial advisers, unfair judgements and generalisations
In the case of Choice, the association says its submission to the QoA Review is full of criticism of financial advisers, unfair judgements and generalisations. It references the second sentence in the Choice submission which contains a statement that “…conflicts of interest that remain in the advice industry continue to contribute to poor outcomes for many people”. The AFA asks: “What proof do they have that this is true in the post FoFA/LIF/Professional Standards and Annual Renewal era?”
In addition to questioning the factual basis of Choice’s statement, the association’s critique also questions the quality and validity of the consumer group’s research, referring to a survey conducted by Choice in May 2022 which it says they believe demonstrated widespread distrust in the financial advice profession. The association notes “…this survey was an online survey directed at Choice supporters (and the general public, they claim), so it is hardly surprising that given the reporting they get from Choice, that they would take this perspective.”
It adds that from five examples provided within the Choice submission “…none of these people are current clients of financial advisers and they clearly lack an understanding of the current regulatory regime.”
I think that we can safely disregard the relevance of this survey
AFA chief, Phil Anderson, dismisses the validity of the Choice survey in stating “The comments refer to “best commission”, “bank affiliations” and “who benefits from where my money is invested”, all of which reflect a bygone era. On this basis, I think that we can safely disregard the relevance of this survey.”
Anderson adds that in order to understand what financial advice clients really think about their advisers, Choice should survey real advice clients.
Accessibility and affordability
In the first sentence of the foreword to the Quality of Advice Review issues paper, independent reviewer, Michelle Levy, notes the review represents an opportunity to enhance the regulatory framework for financial advice “…so that more people are able to access affordable financial advice when they need it and in the form they want.”
There is nothing in the Choice submission that will help to make advice more accessible and affordable for everyday Australians
Perhaps with the independent reviewer’s comments in mind, Anderson says of the Choice submission: “There is nothing in the Choice submission that will help to make advice more accessible and affordable for everyday Australians, other than the suggestion that a Government funded advice and guidance service should be established for low to middle income Australians. Otherwise, they are completely resistant to any form of regulatory relief that could have any consequences for consumer protections, even though it might significantly reduce the cost of providing advice.
Life insurance commissions
The AFA openly challenges the evidence put forward by Choice in its submission (ASIC’s Report 413 Review of Life Insurance Advice) which it says supports its claim that life insurance commissions “…create a perverse incentive for advisers to sell life insurance to people that are not suitable for their needs.”
The association references and then challenges this quote taken from the Choice submission:
“This research into life insurance advice found the way an adviser is paid (e.g. under an upfront commission model compared to a hybrid, level or no commission model) has a statistically significant bearing on the likelihood of their client receiving advice that is not in their best interest.”
In taking issue with this statement, the AFA points to the very high pass rate applied by ASIC to life insurance advice associated with hybrid commissions:
…there have been no ASIC reviews of advice quality over the last 10 years that have delivered a result as good as a 93% compliance result
“Seemingly, in including this quote, they are oblivious to the fact that it is actually saying that there was no correlation between poor advice and the use of either hybrid or level commission models. Of course, the hybrid model was an 80% upfront, 20% ongoing model at the time of the ASIC Report 413. The cap is now 60% for upfront commissions, which is 25% less than the hybrid model in 2014 that generated a 93% pass rate in ASIC Report 413. To the best of our understanding, there have been no ASIC reviews of advice quality over the last 10 years that have delivered a result as good as a 93% compliance result.
The AFA continues its damning critique of what it characterises as Choice’s “ideological opposition” to risk commissions: “…however have they bothered to ask life insurance clients about their views on paying advice fees or commissions? Surely a body that claims to advocate for consumers, would appreciate that very few clients are willing to pay an upfront fee to cover the full cost of life insurance financial advice. There are numerous research reports that demonstrate this.”
Choice’s position on asset-based fees also comes under fire from the AFA, which says Choice makes “extraordinary claims” in relation to asset-based fees consistently being associated with poor consumer outcomes for decades, and which have driven disastrous business models.
It adds Choice’s submission goes on to make further extreme claims that mix up the fees charged by advisers with those charged by product providers.
Industry Super Australia
While noting it agrees with some of the recommendations made in Industry Super Australia’s submission, the association takes issue with ISA’s recommendation, among others, to ban life insurance commissions.
Also referencing poor client outcomes outlined ASIC’s Report 413 as the basis for its call to ban risk commissions, the ISA argument is based on flawed logic, according to the AFA. It restates its argument countering the Choice recommendation to ban risk commissions, noting the compliance outcome for 80/20 hybrid and level commission business in Report 413 was a 93% pass rate, which it says is far higher than any other recent report on advice quality.
Quality of life insurance versus superannuation advice
The associations’ statement adds that it should also be noted that the 93% pass rate for hybrid and level advice in ASIC Report 413 was based on advice provided back in 2013, before the full impact of all the recent reforms, and that it compares more than favourably with subsequent reports into the quality of advice provided by superannuation funds::
…life insurance advisers should not be lectured to by super funds
“The December 2019 ASIC Report 639 on advice provided by super funds (including industry funds) revealed that only 49% of the advice complied with the Best Interests Duty and related obligations. Given that the current 60% cap on life insurance commissions is much lower than the hybrid products that existed prior to LIF, this further highlights the lack of evidence to argue for the banning of life insurance commissions on the grounds of consumer protection. To be blunt, on the obvious difference in compliance results between the 93% pass rate for hybrid and level commission business in Report 413 and the 49% pass rate for super funds in Report 639, life insurance advisers should not be lectured to by super funds.”
The AFA’s statement goes into detail, each time with supporting research or evidence, in its open and very public picking-apart of the reasoning and evidence presented in the Choice and ISA submissions in support of their various recommendations, including dispelling the myth that life insurance premiums in industry funds are cheaper than retail advised life insurance product options.
The association also takes aim at what it says is a nonsensical suggestion made by ISA that there exists a reduced disincentive for advisers to recommend their clients switch products because commission clawbacks don’t apply to renewal or trailing commissions.
Click here to access the AFA’s full statement in response to the QoA Review submissions made by Choice and Industry Super Australia.
And take these links to access the Choice and ISA submissions:
Industry Super Australia submission
Riskinfo will continue to report the ongoing debate around the numerous issues that are under consideration as part of the Treasury’s Quality of Advice Review, which is due to be handed to the Treasurer on 16 December.
If Michelle Levy is as smart and intelligent as I expect she is, these statements by AFA disputing Choice and ISA’s Submissions are most likely for our benefit. I would imagine, or certainly expect that Michelle would look into all the submission’s material and empirical nature and rightly determine that these submissions from such organizations are biased, to begin with and without any real stated evidence, should be dismissed without a second thought. ..but thank you Phil for making us feel a little better that you are in there going bat for us. Good Job!
Perhaps if CHOICE has a problem with life insurance and who buys it or it’s sold to, I could refer them to the families of people to whom I delivered claim cheques. The problem with life insurance is that it is generally not enough at the time.
I wonder what the real agenda is of the Choice organisation? They are a supposedly a consumer supportive organization. Why on earth would they lobby to increase costs for consumers wanting to seek the protection of life/IP cover?
Is choice so clueless they do not understand how low quality the cover is for consumers under the industry super funds? Is choice so clueless they don’t understand that commissions allow more consumers to access quality risk advice?
Is Choice so clueless they don’t realize their lobbying is driving risk advisers from the industry – risk advisers who support and help consumers navigate not only complex initiation of policies but guide consumers through challenging and perplexing the claims process?
If Choice is not clueless then what is their agenda really? Why is Choice doing everything it can to disadvantage the consumer who wants proper quality risk insurance protection?
I wonder what Choice ‘really‘ wants out of all this. If it is for the consumers to be supported and protected then everything Choice is doing is exactly the opposite of what they should be doing. Will sanity prevail? – not likely at all, based on this poor behaviour from our ‘supposedly’ premier consumer advocate organization who claims to have consumer best interest at the core of their organization!
“very few clients are willing to pay an upfront fee to cover the full cost of life insurance financial advice. There are numerous research reports that demonstrate this.”
The “research” that shows the alleged cost to deliver advice is, on average, $3,000 – why has this evidence never seen the light of day? Where are these numerous other research reports that show client preferences? Any chance for a little bit of scrutiny? Just a tiny little bit?
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