The Life Insurance and Advice Working Group (LIAWG), which was formed by the FSC and the AFA following ASIC’s critical review of the life insurance advice industry, has released an interim report responding to the issue raised by the regulator.
Independent chairman of the LIAWG John Trowbridge – a former member of APRA – said the interim report has put forward four areas of discussion including adviser remuneration.
“There are four keys areas of the report – [there is] the quality of advice, remuneration, [and the] other two areas are insurer practices and product offerings,” Mr Trowbridge said.
Mr Trowbridge, on the point of remuneration, said the LIAWG would not consider alternative fee models to commissions, but does not believe high upfront commissions are “appropriate”.
“I am offering a view [that] nil commissions won’t work and the other is that the high upfront commissions of more than 100 per cent on the first year’s premium – we are ruling that one out too,” Mr Trowbridge said.
“But we haven’t ruled anything out between those two extremes.”
Mr Trowbridge pointed out that life insurance advice will “not work” unless there are commissions.
“We have actually dismissed the nil-commission model because there are too many issues with making insurance available than if you don’t have commissions – bearing in mind fee-for-service is not a realistic option,” Mr Trowbridge said.
“The report cites a few different parties that have said they don’t think [alternative models are] realistic. The Ripoll inquiry is happy to see commissions and certainly the industry, both the insurers and advisers believe it’s needed,” he said.
Mr Trowbridge said the process the LIAWG is now undertaking is similar to that of a government review and it will now be accepting submissions from the industry to respond to the discussion points it has put forward.
Submissions will be accepted until the end of January 2015 and the final report will be released by March 2015.
[quote name=”Dave”]I take no commission on any risk policies and charge an upfront fee for my advice. Client gets a 30% discount for life of policy (due to no comm) and I get paid for my professional advice, not product selection and I still get paid if they proceed or not or get cover or not. It’s a winner for my business. “What about those who cant afford an advice fee in addition to the premium” I hear you say, you’re kidding yourself. That just means you haven’t been able to get through to them the importance of cover.[/quote]
Dave, out of interest is this a set fee or hourly rate?
I take no commission on any risk policies and charge an upfront fee for my advice. Client gets a 30% discount for life of policy (due to no comm) and I get paid for my professional advice, not product selection and I still get paid if they proceed or not or get cover or not. It’s a winner for my business. “What about those who cant afford an advice fee in addition to the premium” I hear you say, you’re kidding yourself. That just means you haven’t been able to get through to them the importance of cover.
The solution to the “problem” is this:
If an adviser were to replace insurance that was previously placed within a 5 year period (including their own business),then level commission only would apply to the replaced business.
From 5-7 years, then a Hybrid commission model could apply. After 8 years in place, the adviser could receive full upfront commission as an alternative to either other option.
In addition, the advisers who are well known to every insurer or re-insurer in the country who have a repetitive history of churning insurance every 2 years are simply banned from any insurer accepting their business or placed on level commission only basis with every insurer based on a signed memorandum of understanding.
The problem lies in the fact that there are insurers who are prepared to accept this business in order to achieve new business figures and then are prepared to blame the majority of quality advisers who support them.
The insurers need to step up.
The very essence of appropriate and valued advice has nothing to with adviser remuneration on a commission basis,fee for service or combination of both. It has everything to do with
with the empathy and understanding an adviser has of their client and their needs and an understanding from the client they can rely on the advice to be in their best interest. The issue of commission payments to advisers of quality matters little, as it does to those clients who receive quality advice from advisers around Australia who sit beside dying and sick clients in hospital rooms or their homes and talk to them and their family members about the claims process and assist them to the end when they need it most.
If someone suffering from terminal cancer has ever said to their adviser that you have been paid too much for the service,advice and benefit you have provided to me and my family or business, let them speak right now because I can say after 25 years, this has never been an issue.
Upfront commissions are often blamed by commentators for agribusiness failures . In fact, this is supposedly the reason for Lambe and Muir doing their backflips on FOFA reform.
Anyone who knows the history of these schemes knows that when the ATO expressed doubts about the tax deductibility, sales of these products were almost nil. Before and after that 3 year period, sales went through the roof.
The same commission was paid on these throughout the whole time. The sales were based on the tax deductibility not the commissions.
Anyone who believes that reducing/eliminating upfront commissions will stop bad advice occurrences is basically saying that the BID requirement is either unworkable and/or unenforceable. If you have BID, why do you need to ban commissions on risk?
Knowing ASIC, they most likely won’t enforce BID. But this is an argument for boosting ASIC’s resources – not for increasing life company profits by eliminating commissions.
[quote]After 160 years, we are now being advised this system does not work![/quote]
Work for who?
I’d say the current high level of underinsurance is pretty indicative that something isn’t working.
Let’s accept that more than 100% commission is not a good look and it encourages the “relatively few in number” churners to rewrite business. That said clearly there is a lot of work placed into writing what is intended to be at least a 3 to 5 year arrangement. So looking at the first year’a premium versus first year’s commission is simply an incorrect sample.
We need to adopt a model that matches the effort undertaken with the resulting likely income stream. Set a benchmark like commission over the first 4 years cannot be more than 40% of the anticipated total premiums paid over the period?
Leave the rest to the market place.
After 160 years, we are now being advised this system does not work! Years ago, members of LIFA would talk with each other and report Agents who were guilty of “Twisting” or replacing, and BAN them. Why not introduce again? Develop some New and exciting products , such as new Cash Value Life, with Level or Decreasing Riders and premiums. Offer Loan Values, with sensible interest rates attaching as well! ! Business and Estate Planning problems, are usually regarded as permanent problems, and should be met and solved with, Permanent Insurance Policies or a combination of Permanent and Temporary. In 1869, Australia had a new Life Company, The National Mutual Life Association, formed on the basis of the “Non Forfeiture Principle” a world first ! Another example of an important benefit lost to the Australian market.
This a message to Scott Hodder:
To quote your article on Investor Daily 18th Dec, titled “Insurance Sector Responds to ASIC Report”.
You clearly referred to “the damning review of the industry’s sales practices by ASIC”
Firstly, where do you get off in referring to the ASIC report as “DAMNING” of an industry?
The ASIC report was entirely flawed in it’s methodology and the sample group was a minor percentage of the entire industry with a specific and targeted criteria in order to satisfy an intended and pre-determined outcome.This outcome has now led to this ridiculous situation and commentary by David Murray regarding level commissions and now has yet another working group spending endless resources on a so called problem that could be easily addressed.
Journalists who continually use terminology to deliberately sensationalise and exaggerate beyond the facts are very much to blame for the consumer perception of financial services. Work with us,not against us.
[quote name=”LB”]In a lot of cases the commission recieved does not cover the time taken to get the insurance in an hourly rate for the actual time taken…… How will this work for a small policy that is difficult and time consuming to get across the line. Imagine the headlines when a planner sends out an account for $5k to place $250k of insurance!!![/quote]
Spot on I agree with Gerald and Matthew as well.
I would like to remind you of what Peter Smedley said after he sold Colonial to CBA and personally made a fortune for himself and mates from shell (28) – he took a line from Kerry Packer when he said he will only ever find one David Murray in his life time.
How can anyone take this person seriously ?
I just wonder who is it inappropriate for??? The Life Companies?
How is the reduction of Upfront Commissions going to improve the quality of financial advice? Furthermore, we have already a Best Interest Duty that needs to be abided by, along with all the other compliance related tasks that ensure that the quality of advise is up to standard…These people have got an agenda and we all know what it is and it has to STOP!
In a lot of cases the commission recieved does not cover the time taken to get the insurance in place. The planning process and compliance alone can take many hours and add to that the underwriting followup. So it is acceptable to make a loss, but in the instance that the commission is more than the time taken we have a problem. So the only way to get around this is to charge an hourly rate for the actual time taken…… How will this work for a small policy that is difficult and time consuming to get across the line. Imagine the headlines when a planner sends out an account for $5k to place $250k of insurance!!!
How much money has the Government spent on FOFA? let me tell you enough, David Murray is commanding $5000.00 a day plus costs, and they are paying him that.
The FOFA enquiry has cost a staggering 75 Million Dollars of TAX payers money and from what?
This funding could have gone to the defence force, why the defence force is now charging cadets to train as a cadet.
The defence force can afford to pay for its cadets to go on a training camp, why no more camps cant afford it. Oh the Governor General can spend $70,000.000 a year on flowers yet we cant spend $50,000.0 a year to train our defence force cadets. Oh I know perhaps David Murray will defend the country? or Bill Shorten.
Is Mr Trowbridge suggesting the industry price fix? perhaps we can price fix all his income to lets say $25.00 an hour because that’s what they are doing to us.