Mr Loveday told ifa that non-aligned advice “will become the norm” in Australia but he can’t see it being legislated.
“Whether non-aligned advice is ever legislated is a big call because we seem to have a bit of a reluctance in the Australian political environment these days to regulate in the manner. But I certainly think it will become the norm,” he said.
However, he believes there is one critical issue that needs to be resolved by the advice industry: how it gets paid.
“Somewhere in the whole value chain the providers of advice have to receive some economic return for their time,” Mr Loveday said.
“When you had undisclosed commissions, trail commissions and upfront commission being the norm, that effectively underwrote the provision of advice. It was often quite decent advice.
“But the bottom line is somebody actually has to pay for the advice. As a consequence of FOFA and what is likely to come out of the Hayne inquiry, any commission being the primary source of remuneration for advisers won’t continue. It must be fee-for-service model.
“But the fee must be a reasonable one. The challenge for the advice community is communicating that good advice is necessary and worth paying for.”
Vertical integration to go
Mr Loveday is also chairman of Burnham Capital and was previously chairman of platform provider Praemium. His confidence in the success of non-aligned advice coincides with a belief that vertically integrated wealth management businesses will be dismantled.
“I think that, if not all, then a large amount of the old vertically integrated models will vanish without a trace,” he said.
“I am firmly of the view that it has gotten to such a state where clients, who are the most important part of the equation, cannot be satisfied whether they are getting genuinely independent, relevant advice or not.”
Mr Loveday believes that while vertical integration doesn’t necessarily mean that advice provided is sub-optimal, it is almost impossible for aligned advisers to prove that they are acting in their clients’ interest.
“It is very hard to satisfy yourself as a client when the same corporate entities control the fund manager that you’re investing in, the adviser providing the advice and quite often the administration platform that you’re using to keep everything together,” he said.
“There is obviously a P&L benefit for the corporate entity if they can service multiple demands of the client through the same corporate structure. It’s usually more profitable for them. But that’s really not the point. The point is we now have a public policy, as we have had since the ’90s, that individuals will be responsible for their retirement incomes. So they’ve got to be able to rely on independent advice and advice that is in their interests and no one else’s.”
Three of the four major banks have already made significant changes to their ownership of wealth and insurance business. CBA became the latest to distance itself from its wealth management business Colonial First State, which will be bundled up with an assortment of other non-core assets, demerged from the CBA group and listed on the ASX as a separate entity.
While some see this as a reaction to the Hayne inquiry, Mr Loveday believes it has been on the cards for some time.
“I suspect that the disintegration of the vertical integration structure was going to happen anyway. I think some of the big decisions announced have been in train for a long time,” he said.
But the royal commission has certainly had an impact on the decisions of wealth companies across Australia.
“If there are any boards sitting around not quite sure about whether getting out of a vertical structure is a good idea, I think they have probably changed their minds now,” Mr Loveday said.
There will be aligned advisers with entities that can self-insure. That will continue. Other mid small tier licencees will fold. Unprofitable. Specialist advisers will survive. Just providing basic advice on super and insurance will die off when commissions get wiped and the public move en masse to low cost basic super. That is the future. Skill up..you’ll need it.
I think what is annoying about this whole situation is that regulations like FOFA and LIF had not had the time to be properly implemented. A lot of the cases heard in the RC relate to things from years ago, but viewed with today’s lenses. Now because of the public spotlight, there is likely to be further change and regulation. And worse again, is that with the drop in the commissions to advisers, there has been or will not be any drop in premiums from the insurers. They just say they are keeping to maintain margins, so they don’t need to increase prices, which they are still doing, even on level premiums (28% increase for some).
I stand by the fact that most advisers do the right thing. As always, it’s the fly that ruins the ointment.
I wonder how counsel assisting the commission gets paid? By the client? Or does it just magically appear from thin air. And considering that she is currently being funded by the taxpayer…….
Any one who knows even the basics of how life insurance is distributed and advisers paid will tell you that commissions regardless of how high or low they are is the only (in the vast majority of cases) way to remunerate advisers effectively for the complete process.
We are currently not charging an additional fee while the rate is 88/22, however from next year we will be charging an additional advice fee which will rise as the commission rates fall. My guess is there will much less advised life insurance written unless a fee is paid in addition to the low commission rate. The only real alternative i can see is a mandated level comm, no write backs and an advice fee depending upon the size of the business written.
Does Rowena Orr not realise that there are many thousands of employed para planners, CSO’s and clerical workers in adviser offices who will loose their jokes, not to mention the job losses in the life company offices with the reduced number of life policies written?
FSC has thrown risk advisers under the bus yet again at the RC by implying the sole purpose of insurance commission relates to the selling of a product. No comment on the cost of the advice that ultimately leads to the recommendation of a particular risk insurance product, in the best interests of the client, research that suggests that clients are not willing to pay upfront for the cost of the advice (recent consumer research shows that clients do not perceive anywhere near the true cost of the advice), nor the further underinsurance problems that would arise without commissions and the consequent financial impact on the social security system. Commissions are now standardised so don’t particularly influence an adviser’s choice of insurance product when looking to the product fulfilment component of their insurance advice.
You actually ever tried though?
I write risk on an entirely commission free basis. Clients pay for it. Clients call up inbound from interstate for commission free insurance advice. Calls accelerating following the RC.
Its less lucrative but its profitable.
Is that expert and specialist risk advice or ‘holistic’ advice for which you are charging a fee/part fee from super, or perhaps for an SMSF set up. I deal with Mum’s and Dad’s and do charge a modest, ordinary money advice fee, and then make a modest profit with insurance commissions and this includes advice on their super where I often recommend they retain their ISF; perhaps only recommending a change of investment option in line with their risk profile (as I won’t move them to a similar product just so I can charge a fee from the fund). I do offer all of my clients the option of fee (higher) only or modest fee and risk commission, they all choose the modest fee and commission as they have mortgages to pay and kids to put through school. The abolition of all risk commissions, which will surely be an outcome of the RC, will mean that specialist risk advice is only available for HNW clients with the capacity to pay upfront. Also note that I do not have any clients in grandfathered conflicted rem products, to offset the costs associated with the advice for the clients I actually service, and that the modest fee/risk commission combination ensures that the clients that need my advice the most can afford to receive it.
Risk only advice.
Its possible. Robo Advice will eventually cater to those only willing to pay a minimal fee. I was also under the impression it would be hard to charge a fee for risk advice, surprisingly quite the opposite. I am not anti-commission (for risk) but see too many people saying that clients wont pay a fee as an excuse.
The most surprising is how some ‘lower premium’ clients I have offered to refer on to a commission based adviser have chosen to pay a fee higher than their annualised premiums. Yeah they eventually make that back with commission being wound down but the desire for conflict free advice cannot be ignored (I know not everyone acts on these conflicts), especially in the current climate.
Then SD you are just flogging product, not financial planning. Clients call up wanting insurance so you just scope it out along with the amount “they ” want. Chop chop, flat fee, next please. That sort of thing?
Two issues here.
Charging for the outcome of getting insurance rather than charging upfront for the amount of insurance, other considerations and long-term strategic understanding of their insurance.
Advisers getting too hands-on as part of the process – when it’s not their business. Tele-underwriting & acceptance of the insurer’s decision. If the client wishes to dispute – they pay for the assistance. Too many Advisers are sinking so much time into arguing with insurers that they’re not being paid to do. Yes, it leads to much better outcomes. But it has to be commercial, and the clients have to understand what you’re doing for them.
You charge for advice i.e. you need this much insurance strategically but don’t exercise any expertise with regard to implementation. What is the value in that sort of advice; how can you justify a fee for that? A good risk fact find, asking the right questions, expert pre-assessments, means a recommendation to fulfill your advice where the client is offered terms – that is how you make it commercial and get an outcome for a client. Not much point if they have a strategic understanding of the value of the insurance and don’t know how to get some!
Your point is well made, I don’t dispute it at all. Unfortunately for our risk writer colleagues I see the future of life insurance being a direct consumer ->provider direct model, as it is with Home and Contents etc etc.
We do a little bit of risk, only when needed, and I have to say in the last 5 years it has been a loss-leader. I’d rather the client speaks directly to the underwriter and they can explain themselves away. If comms go to 33% or nil, as is touted, I think the risk industry will fall in a heap, sadly for a lot of clients, businesses and staff.