According to a new report by ClearView, additional changes to adviser remuneration “will not lift advice quality or result in improved client outcomes but will only drive up costs, cripple the advice industry and compound the Government’s social security liabilities.”
How does it come to this conclusion? Describing insurance commissions as “an efficient, widely-accepted remuneration model” which “[traces] its origins as a legitimate business risk management tool,” the report says that based on a survey of more than 630 self-employed advisers, less than 2% charged a flat fee for life insurance advice.
Conversely, 74.45% charged upfront commissions, 11.67% charged level commissions and 12.15% charged a combination of fees and commission.
“Before dismissing this as self-interest,” the report argues, “let’s consider some of the issues. Advisers are biased towards commissions in the same way policy makers who are paid salaries, and their consultants, who are paid either a salary or fee, are biased toward their form of remuneration.”
The report argues that when advisers provide life insurance advice, they “can’t simply replace commission revenue with fee revenue in the same way they have been gradually doing with investment advice.” This is because unlike investment advice, where a “client can fund an explicit advice fee from the capital within an investment portfolio,” insurance advice requires clients to transfer funds or “pay out of their hip pocket,” translating to a cost of $1,750-$2,875 for a typical policy.
And according to the research provided in the report, over 80% of respondents didn’t believe clients would be willing to pay that kind of fee. Because of this, should insurance commissions be banned or subject to further changes, 54% of respondents indicated they would cease to provide standalone life insurance advice.
Which, of course, would likely further exacerbate Australia’s over $1.8 trillion cover shortfall.
Positing commissions as a business cost management model, the report says current commission debates “[forget] that variable remuneration structures including executive bonuses link ‘costs’ to ‘income’ or ‘success’ and allow businesses to better manage their revenue and profitability.”
“However,” the report says, “businesses that pay only fixed remuneration carry all the risks of sales and profit variability. This makes them less stable and often more highly geared. It tends to bring forward costs and increase the risk of failure.”
Ultimately, the report says that reducing commissions further would require the industry to shift to a salaried adviser model, which would lead to “increased business risk and costs for life insurers which will ultimately be borne by consumers” and “less innovation and competition as only the largest institutions will be able to survive. Smaller players and new entrants will be casualties.”
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