Remuneration changes will cripple the industry

Alex Burke,  Senior Writer,  No More Practice Education

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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JOHN GILLIES

06/06/19

This article is about life insurance commissions a business model that is very old and no broken and does not need repair. So much damage has been done all ready i believe the industry is light by at least 10000 advisers compared to two years ago. I gleened this from statements from the TPD. I HAVE ANOTHER ASPECT: Asuper fund i use has been in existance since 1988. known as the free enterprise super fund before being taken over and run by Associated Planners. It's best years. At the time It was one of very few funds that suited OCCUPATIONAL SUPER ie no loadings no up front no claw back to use a disreputable phrase It ha a 6% inward fee the two notables of the day were 8 and 10%. The 6 was 1 to the fund manager 1 toan organiser in each region (a BDM ) AND 4 TO THE AGENT AS WE WERE THEN. Ultimately this fund was taken over by a fund manager who at some time added a 1.85% admin fee quite cleverly diguised no doubt. Continued to carge the contribution fee 6% and has been getting away with it for years.

Greg Sierocinski

06/06/19

Conflicted remuneration? You mean like when Parliamentarians approve pay rises to Judges and then Judges approve pay rises to Parliamentarians. But this is not conflicted?!

07/06/19

Don't know what business the wrier targets, but it is simply not worth going through the full advice process for less than $3,000. If you expect to sell a client on paying insurance premiums (at 60% up front that means $5,000) that will fund a commission to that level and then ask him to pay $5,000 out of his own pocket, you are a better sales person than I am for 95%+ of cases where clients simply aren't in a position to realistically afford that sort of cost = most of the population now excluded from getting financial advice re: Insurance and very few non-aligned financial advisers will survive= clients worse off, under insurance problem gets worse.. Why not find solutions that actually address the problems ? Most of the problems ASIC identify seem to be with replacement product cases. You want to solve that problem, make the insurance providers allow you to transfer cover at same level on same terms with no waiting periods on anything provided waiting periods have already served on policy being replaced. This will mean insurance companies have to keep premiums competitive or risk policies moving to better rates elsewhere = better out come for clients. That took me about 10 mins to write, no Royal Commission required.

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