Can risk advice bounce back without regulatory intervention?

Unrelenting regulatory changes over the last decade have led to a massive decline in the number of financial advisers in the industry, with just 15,701 left according to the most recent figures from Wealth Data.

This is even more true for risk advice, with the Life Insurance Framework (LIF) and the reduction of commissions to the current levels of 60 per cent for upfront commissions and 20 per cent for trailing commissions, with a two-year clawback.

According to Phil Anderson, general manager for transformation and policy and advocacy at the Financial Advice Association Australia (FAAA), the flow on effects of fewer Australians in the risk pool are wide ranging.

“There’s data we’re hearing about new business sales volumes, which have more than halved in the last five years,” Mr Anderson said.

“So, there’s a lot less policies being written, there’s a lot less new clients coming into the risk pools. And that’s, that’s concerning because new lives and typically younger lives, and getting younger lives into the risk pools is important for the sustainability of the risk pools going forward.

“That’s something that we should all be quite concerned about.”

He said the reduction in new business then leads to underinsurance getting noticeably worse, while adding that the decline in the number of people who are actively agreeing to provide life insurance advice is concerning.

Mr Anderson explained that all the regulatory changes have acted as a “trigger” for advisers to walk away from an area that is too complex to stay up to date without commensurate reward.

“A lot of advisers started to change their business model and they started to outsource risk insurance to a risk specialist. Or at least some of them put those outsourcing arrangements in place,” he said.

“Our concern might be that a lot of advisers are not addressing risk in their discussions with clients. Or they are making a referral that doesn’t necessarily eventuate and people are not getting that risk advice.”

Turning things around is going to be challenging, Mr Anderson said, as it takes a “real commitment” to build expertise that comes with being a risk specialist.

“How do you incentivise people to do that, given that there’s all the challenges that the LIF reforms have created?” he said.

“We are concerned about this. I think we’ve got to look at how we bring more people into the risk channel, how we adequately support them to do study that’s relevant to that area, rather than doing study that is more broadly relevant to holistic financial advice.

“We’ve got to make it easier for people to come in, and we’ve got to make it easier for risk specialists to work alongside holistic advisers. There’s a lot of challenges to make that work. I think we’re fairly early in the stage of realising the scale of the problem.”

Mr Anderson said that while the solutions will take time to work, things like the establishment of the Council of Australian Life Insurers (CALI) have to be viewed as a positive to help encourage the broader financial services industry to respond to the challenges.

“But the work is in front of us to achieve that,” he said.