Alternate models for financial advisers seeking to implement a fee for service option can take many forms, such as charging a fee for service depending on client complexity, working off a statement of advice (SOA) fee-set price, incorporating a claims fee at initial point of sale, or charging a hybrid commission but incorporating a cancellation fee that covers any clawback before year two. And of course, the option for hourly billing, providing the client with an itemised account at time of billing much like a solicitor.
The issue of fee-for-service models has risen as Australia’s hardworking risk advisers continue to persevere and shape their service offerings in the aftermath of heightened regulation and the ongoing complexity of risk insurance product design and ongoing client needs.
This all comes at the end of a tough few years for those in the risk industry. Legislative change has sparked new education requirements and a raft of product offerings. The reputation for the advice profession also took a hammering with the Hayne Royal Commission proceedings and ensuing regulatory actions including the Financial Adviser Standards and Ethics Authority (FASEA) regime.
However, in 2023, there is the sense of a new era emerging with fresh opportunity for advisers to rewrite their future business success.
The good news is that advisers have emerged as technical experts, backed by enormous sector knowledge and experience. Higher education standards have been achieved (thanks to FASEA) and it is high time the industry gained deserved recognition, backed by appropriate fee-based remuneration models.
Clients expect and will seek out technical competence, education, and experience. No one consults their solicitor or accountant and expects not to pay a fee. Charging a fee sets your stance as a professional. It validates the quality of your advice and will also enhance your future standing.
So, the question is: why should financial advisers be any different to other professional groups? Why is advice one of the only remaining service sectors working for free? The main hurdle is the optics of commissions.
In the past, this industry experienced commission rates payable almost double of that paid today. Commission structures in 2023 are based on a hybrid model of 66 per cent upfront and 22 per cent ongoing, or a level commission of 27.5 per cent upfront and ongoing. An upfront commission of 66 per cent, for young, healthy, clean-skin clients, may incur an acceptable profit. But the reality is that few young people wake up in the morning and contemplate their desire to buy a life insurance policy.
Thoughts of wealth protection happen when clients create a family and accumulate their own debt. The average first home owner is now in their mid to early 30s in Australia. With age, with life — comes health issues, financial complexity, and other consequences of adult life.
As an adviser, you need to understand your client’s personal circumstances, navigate potential health/financial issues to a successful outcome, liaise and negotiate with underwriters, business development managers (BDMs), and call centres. You then have to recommend benefit amounts based on strategic formulas and find the right product (out of 10 strong risk offers in the market) to protect your client. How many hours of work goes into this? And does your upfront (and potentially ongoing) commission cover this?
The fee for service concept is linked strongly to your personal client value proposition (CVP). As an industry, advice has undersold its duties/capabilities by not educating clients about the complexities of a risk insurance application. Even if that application does not go into force, the adviser has still invested many hours to complete the SOA and recommendations. Time requires compensation. Compensation that is not reimbursed if the insurance application does not go into force.
The success of an adviser managing their client’s claim at claim time far exceeds that of a litigation lawyer. The adviser:
- Is familiar with the risk products and how they are to function at time of claim.
- Is familiar with the risk processes of the insurer.
- Has the technical knowledge to navigate the claim (or has the contacts at the insurer to find the correct technical response).
- Has the industry relationships/connections to help that claim through.
Solicitors do not have a relationship with the head of claims or sales. You as an advisor may do. These factors should be mitigated to create a strong, individualised CVP for your clientele.
Charging a fee gives you control over your revenue. You can work towards profit margins set for your business, year on year. You can choose to charge on complexity, size, or type of client. You could charge for complex claims handling, an intricate review process, even your SOA.
In my view, nothing surpasses personalised advice. Robo Advice is great for a “one size fits all” approach, but that is the exact antithesis to what personalised advice is about. Just like the adage, “you get what you pay for”. Charging a fee can also eliminate clientele who do not see the value in your advice; you save yourself a lot of time finding this out upfront.
Removing commissions and charging an upfront and ongoing fee gives your client a 25 per cent discount on their premium for the life of the cover. A discount that should be incorporated into a fee structure, but more importantly could be sold as a “buffer” advantage against future repricing. It also validates your stance as a professional providing professional services.
Charging a fee consolidates that you are experienced, knowledgeable, and maintains a strong relationship with the insurance providers you do business with. It gives you control over your upfront and ongoing revenue. It will change the social perception of the value add of consulting a financial advisor; it confirms that no one does this better than you do.
It is time as an industry that we start charging for our worth. So go on — get out there! Trade the cow for those beans … and watch them grow!
Sophie Gacomi, business development manager NSW & ACT, PPS Mutual
Try the same logic with Mortgages. Explain how about 70% of the mortgage population are written on a commission basis by a broker. Risk advice is similar. Clients don’t mind commissions – see mortgage industry. They value someone looking after them, who has expertise rather than how you are paid. Obviously, if comms don’t cover your time, you charge a fee. If you have a big policy holder it may be viable to write fee for service, because it stacks up financially. The clients should have a choice, rather than having a back or white approach to how you are remunerated. Let the market decide!
Thanks, Sophie, an excellent and thoughtful article. Agree that Financial Advisors should be regarded on the same playing field and thus appropriately remunerated as other trusted advisers such as accountants and solicitors given especially in recent years we must uphold rigorous professional and ethical standards. I find the hybrid fee model one that appeals to most Clients as they do appreciate the effort and extensive research required to provide bespoke and evolving advice over their lifetime.
Great article, Soph. You raise excellent points, starting with having a strong CVP – knowing who you serve, why they choose to work with you and what value you provide. This in turn informs how the adviser structures their remuneration. I agree with Katherine’s points below – having choice and being able to utilise the option or combination that works best for the adviser, is essential. This is an important ongoing conversation, so thank you for weighing in!
Great article Sophie. You bring up some very valid points. Good to see a BDM challenging conventional thinking and the status quo.
“Clients expect and will seek out technical competence, education, and experience. No one consults their solicitor or accountant and expects not to pay a fee.”
Every client who has not gone through a claim thinks that insurance is easy and all insurers are the same. They therefore will not pay a fee that is sufficient enough to cover the cover of providing advice. This is particularly the case if the insurance premium is below a set figure, which I estimate to be $6k pa. This therefore rules out the people who need the insurance.
I also don’t see a solicitor that often and it is usually reactive (ie) something has happened. Part of the reason Australia is under insured is because people think nothing will happen to them so the analogy is further flawed.
I have no doubt that someone who has life and TPD cover but not trauma who has recovered from cancer will pay a fee to get insurance advice because they will have realised the importance of that cover. It’s a shame they are uninsurable.
Great article Sophie, Well written!
Very thought provoking. I think your argument is strong for charging a fee from both a business owner and client perspective.
Thank you Sophie. The premium discount to the client under the fee for service model is indeed very attractive. I had clients who paid the fee to secure these discounts.
Yes, but the dollar value of the discount varies according to size of the premium. That’s why fee for service insurance advice is generally both viable for advisers and attractive to clients, if premiums are over about $10K. Below that level however, it rarely works.
Good article Soph. I recall a time when you would have been shouted off the screen for even suggesting it. We’ve seeing more clients coming to us with no comm’s already advised and our experience is that the conversation is they are more engaged in what their actual risk plan is.
The article raises some good points. I am fiercely protective of the right for advisers to have a range of options as to the combination of fees and/or commission arrangements that they can choose from for their service offering. The current discussions the days are more around when does it create the most value to both client and adviser to include a fee, at what point, which services, how much etc rather than the old arguments of fees vs commission. It’s good to see more conversations happening across this front with broader thinking.
Part of the value proposition for personal insurance advice used to be helping clients differentiate between good and bad quality products, and faciltating access to good quality products that weren’t widely advertised.
However with the big declines in personal insurance product quality across the board, particularly the legislated dumbing down of IP, there is less scope for advice to add value. Personal insurance is becoming more like commoditised home and motor insurance, and will increasingly be purchased without advice as those products are.
Relevant & timely article Soph
Charging a fee for pure risk advice? Simple . . . doesn’t work. Near 2 decades of clear and detailed explanations and offering a choice to clients netted a 4% take up rate of fees over commissions and those were subsidized by wealth advice. No, pure stand alone risk advice was never meant to marry a fee-for-advice model. Telling a young family that full protection is $5,500+ premium AND $3,000 for your fee, well, it doesn’t work and I’d say never will. Our company tried it for that extended period and we know of other top-flight risk advisers who tried it over a span of time. Nobody got it to work and it certainly wasn’t for lack of trying. wealth advice can do it but definitely not risk advice.
We need to fix current pressing issues like QAR and adviser education before tinkering with something that is not broken.
I’ve been in the industry 37 years and never had a client complain about fees built into the product.
If you are going to go down this road then make it a level playing field with products or service are reliant on ‘in built’ commissions i.e. travel products, mortgage products, car finance, real estate sales.
Do it for all or leave it alone. Consumer groups come and go but risk specialists evolve with experience and they just can’t be replaced.
And for what its worth, I have no problem charging fee for service.
Time the insurance companies stood with the advisers and the industry associations because when you lose the specialist adviser, you are cutting off your voice and your distributor of products not to mention leaving Australian severely underinsured other than the basic no frills ‘one fits all’ cover offered by industry super funds’… then again that’s another conspiracy.
One great thing from all this is it gives the bureaucrats the opportunity for a major talkfest that achieves nothing.
It’s less-difficult to charge a fee when one has professional qualifications. I acknowledge that my Masters degree is insignificant in comparison to my 37 years’ experience in insurance. My next client does not know that.
Risk or investment Nischa?? Quite important and the answer makes all the difference. More people on these pages, including authors, should be specific when speaking “advice” and “advisers”. Risk or wealth – be specific always please. VERY big difference in the advisers, the service, the knowledge AND the selling. Yes, risk STILL needs to be sold. Pure risk advisers specialize in these aspects including, yes, the SELLING of the need.
Volatility risk, inflation risk, interest rate risk, regulatory change risk, longevity risk, counterparty risk, estate challenge risk, bad decision making risk, or death/illness/accident risk Peter? All financial advisers are risk advisers of some sort. If you mean personal insurance advisers, then be specific.
Thanks ‘Anon’. Yes, indeed, personal risk insurance advisers. But then again, you already knew I meant that that didn’t you. What other type of risk advisers are often discussed on this page. Methinks someone is precious, much. 😉