In a study of the effects the Life Insurance Framework (LIF) will have on new risk specialist practices from 2018 onwards, Dover found that a new practice opening its doors on 1 July 2018 will face a drop in real value of commission income by as much as 40 per cent.
“This dramatic drop in the real value of gross income is an existential threat for most risk insurance practices. Few will survive such a big hit to their top line,” the dealer group warned.
“The new practice will recover somewhat in subsequent years as the increased trailer commissions are paid, but not completely, leaving the typical new risk insurance practice about 20 per cent worse off after seven to eight years.
“This is a much worse result than most other observers are predicting,” Dover said.
According to the dealer group, many observers of the effects of the LIF are merely comparing the halving of the first-year commission with the doubling of the subsequent year commissions and concluding “all will be well”.
Dover cautioned that these observers are ignoring the effects of the two-year clawback period, increases to lapse rates and the time value of money.
“The drop in the real value of the adviser’s gross commission income will be matched by an equal increase in the real value of the insurer’s gross commission income,” Dover said.
“It’s a zero sum game that will be won by the insurers. It’s a profit shift from advisers to insurers worth hundreds of millions of dollars,” the dealer group said.
Dover said risk advisers should start making business changes now, since waiting until 2018 to act will mean it is too late to prepare for the effects the reform will have.
“Risk advisers should [work] now to adapt to their changing environment. This includes practical advice on improving their systems, reducing the length, time and scope of their statements of advice, emphasising strategies over product placement, and widening the range of services provided to clients,” the group said.
Dover has released an e-book, Fifty ideas to take your risk insurance practice from good to great, which explores the research and the current state of play.
[quote name=”Dylan Martin”]You’ve really got to stuff up bad for a client to be suing, surely?[/quote]
That depends. When people lose money it gets nasty, even if not your fault. The best protection is spell out the risks in simple terms and make sure you file note any discussion about it. This is why the industry needs its own compensation scheme rather than relying on PI cover. Product and fund manager failure. There needs to be decent compensation scheme for that.
The key disclosures and other usless clutter would be in a seperate reference document, stuffed into the FSG or available somewhere on our website. You’ve really got to stuff up bad for a client to be suing, surely? If you give sound, quality and suitable advice there shouldn’t be any issues. 10 pages was an example but we need to move away from the redundant SOAS of 40+ pages, dealer groups need to set us free and let us focus on what we do best so we can keep clients happy (engaged, educated and less confused) and enable us to continue to be profitable in a world of LIF, revenue crushing, ill-informed government, and etc.
Like Joe says, could you imagine going before FOS with a 10 page SOA? And imagining you could win?
Was recently chastised in an audit because we hadn’t advised that the client might ‘potentially’ lose access to a lower rate home loan if they shifted from an industry fund. When I called the related loan provider the call centre wouldn’t provide me with the info because different deals had been done with the different union funds. I had to talk to one of their mobile lenders.
This was the level of nitpicking detail they wanted us to go to because a case had been though FOS and this was one of the things that FOS picked up on!!
[quote name=”Dylan Martin”]The most appropriate solution of all. Scrap for 30+ page SOAS. Let us do what we do best and produce more compact “Summary of Advice” documents outlining from start to finish what the client wants to know, needs to do and will know in 10 page or less. ALL generic dribble or disclosures are referenced to a PDS, advice memorandum on our website, or something of that fashion.[/quote]
Agreed. The whole process needs a restructure. We spend way too much time on SOAs and ROAs that don’t even hold up at complaint time. Big SOAs get kicked out of court. Your own dealer groups are putting you at risk. Industry standard templates should be used with advice and costs. This is held on file or lodged in a portal. Clients gets a summary letter, and the template if requested. We are professionals aren’t we? It’s time we got treated as such.
Dylan to do that it means also scrapping the entire FOS system as our adjudicator (negatives and positives in that statement). The reality is a 10 page summary would never be inclusive enough for them to rule for the adviser, and therefore the PI insurers in the current system would bail.
In other occupations like accounting, (not picking on accountants before anyone burrs up!), the client has to go to the effort and cost to bring a complaint for monetary restitution to court. This means that profession has better PI rates and an extra layer of ‘protection’ whereby they can forgo lengthy documents when providing advice specific to their profession – at this stage anyway.
Can you really see FOS being dismantled in this environment? We either have to adapt and overcome or else get out of the game.
Couldn’t agree more Paul, Yes, it is more or less the dealer groups trying to protect themselves from clients sueing and to a degree ASIC also but I will be pushing our dealer group to consider reducing more and more the “need to know” from the other stuff.
Good point Dylan. I’m not a Dover adviser but I believe they do take exactly this approach to SoAs. ASIC have said that they don’t actually require the huge SoAs that so many dealer groups mandate. So the problem lies with the compliance departments of most dealer groups and the law firms that advise them. Simplifying SoAs is a huge untapped opportunity for the whole financial planning industry to reduce overheads, and provide advice which clients can more easily understand. It just needs dealer group execs to have the courage to push back against entrenched compliance bureaucracy.
The most appropriate solution of all. Scrap for 30+ page SOAS. Let us do what we do best and produce more compact “Summary of Advice” documents outlining from start to finish what the client wants to know, needs to do and will know in 10 page or less. ALL generic dribble or disclosures are referenced to a PDS, advice memorandum on our website, or something of that fashion.
The industry has bought all this on itself and there is a saying about chickens coming home to roost. Truth can hurt but the manufacturers attached excessive commissions to their products that allowed salespeople to reap massive incomes not only up-front but on-going for little work and normally holding minimal formal qualifications. Over many years I’ve seen advisers nearing retirement reviewing most of their books and taking full up-front for the service as their farewell present – it wasn’t dishonest but it was milking the system “because they could”. During the GFC I dealt with holistic practices who compensated for the drop in their advice revenue by churning their risk book – a pretty good business decision but should it have been morally allowed? No wonder LIF is about.
This the dark side of the risk business because I have also dealt with some outstandingly professional risk only advisers who have protected their clients, contributed to their industry colleagues, and charged a fair price for a fair service.
Charging clients a fair amount is difficult. No adviser can turn out a piece of risk advice, even for a $200 annual premium, for under $2,000 after taking into account compliance, administration, processing and meeting costs. But is it fair that larger clients are used to subsidise the bottom end? E.g. can any adviser really justify receiving $30k up-front for a piece of risk advice? Is a 20% or 25% on-going commission really justifiable for the actual work put in? Should only flat fee for on-going that fairly represents the work the adviser puts in be allowed?
I agree with Les that the future is risk advisers utilising the emerging technologies and Reality that we need appropriate (yet to be developed ) hybrid models and a much greater move to fee for service.
Les Mace, its as if you think that compliance costs now are less than in the past or something?
It will be far mostly costly to establish a new business now than previously… I operate on a hybrid commission basis (if not fee for service if the client can pay) and the LIF is all negative for me because this perceived benefit of ‘a higher trail on hybrid’ is not the case when you were already using 80/20 or 70/25 etc
Dealer group fees will have to drop significantly for the Advisers to maintain the cost of operating with every thing else expected of us, so it could be a sad future for the IFAs who have spent their lives dedicated to this industry. I still think that no government should be allowed to legislate what any person or business can earn and then legislate a penalty for how long the product is inforce, this has to be unconstitutional.
Based on the article please see http://www.licg.com.au Sign up make a stand .
Can’t say that I agree. A new practice would not have the overheads of a well established business nor will they have operated on the old basis so they will build their business model to suit. The new practice will have to take full advantage of the emerging technologies and be as efficient as possible. I can see a bright future for new entrants but the business models will be different to what we have seen before. The need for specialist life insurance advice has never been greater.