Day 1
Day one and we have already been told three times that life insurance is sold, not bought. It has long been our mantra.
Everyone talks about the UK experience, how the UK tried to ban adviser commissions, it didn’t work, so they didn’t do it – or they stopped doing it.
This is not true – at least, not in relation to risk (which they call protection). In 2007, the UK government released a consultation paper – CP121 – which looked at the industry overall and determined that there was so much bad selling that commissions should be banned. However, after analysing the impact that banning commissions would have on life protection sales and the huge underinsurance gap (similar to Australia), the government decided against banning commissions on life protection products. A new regime was introduced which saw increased education standards but because of the underinsurance gap, life insurance commissions were untouched. Today, commissions paid on life insurance products are higher than those paid in Australia, on products we regard as generally inferior to those in Australia.
Much of the life insurance products sold in the UK are ‘unadvised’ products sold alongside mortgages. Products are generally inferior because there is no guaranteed renewability and an expiry date of age 65 or 70. Most products have level premiums and are cheaper than in Australia, because of the set term, which means the cover is not usually in force when the policyholder dies.
Today we visited a business, which we regard as similar to a small dealer group in Australia – it employs 30 advisers on a combination of salary and bonus. The business sells about 120 mortgages per month and the insurance in relation to those mortgages is about 40 per cent of their overall business (including investments). Because the insurance is sold in line with the mortgages, advice is not required. So the UK is nowhere near Australia in terms of acting in the best interests of consumers. In Australia, we are required to give a full analysis of the client’s situation before providing advice on anything – in the UK they don’t; the insurance is simply attached to mortgages. We believe some UK companies are trying to change this situation but we are not meeting with them until next week.
We have also visited leaders of an industry association which we would regard as the equivalent of Australia’s Association of Financial Advisers (AFA). The AFA used to be the Life Underwriters Association (LUA) and Michael was involved as an early board member. In the UK, the association used to be the LIA. The LIA has morphed into a financial services organisation in a similar way to the way in which the LUA morphed into the AFA. In the UK, we understand a breakaway group called the Professional Protection Association has formed to represent risk advisers. We will be researching this group over the next couple of days to discover more about what they do.
We will also be looking at a new smart underwriting system that is said to be doing very well in the UK. It apparently works with no human intervention whatsoever. We will be looking at it to see whether it has application in Australia.
This is the end of our first day, and it is very early in the piece, but we have a lot of appointments and already there are strong indicators that we have much to learn about what we could and perhaps should adopt and what we should avoid. It is research we simply couldn’t conduct from our desks via the internet because it’s all about the conversations we are having with people operating at the coalface in the industry in the UK.
Day 2
We had three appointments yesterday with independent financial advice businesses of varying sizes. One of these was a small IFA that focused on a very specific market, another was much larger in terms of focus and number of advisers and had a much broader base in terms of clientele.
We are finding that advice is being polarised in the mortgage market. By law, anyone who takes out a mortgage has to do so through a licensed mortgage adviser. Many of these mortgage advisers also have a life insurance licence.
One of the other things brought to our attention in these meetings was the situation in South Africa. South Africa addressed the so-called churn issue with self-regulation, not government intervention. The life companies got together and said for any policy re-written within a five-year period, the new business commission or the balance on the new business commission would not be paid to the new adviser, but to the previous life company. The life companies established a central registry where they were able to identify when a policy is re-written with another company.
For example, if a policy was re-written three years into a five-year responsibility period, the old adviser will not get a write back and the new adviser will only get a small amount – the expired amount within the responsibility period. The new life company has to pay the balance of the commission back to the old life company. The write back is therefore actually worn by the new adviser. It is very clever. If churn does indeed exist, and our doubts about this are well known, this approach addresses it very effectively, and addresses it in such a way that the life companies are the gate-keepers.
Day 3
We had the opportunity to visit a number of advice practices and while the majority of risk insurance is written off the back of mortgages (up to 60 per cent of all term life) there are other advice models operating.
The UK market has some life protection specialists who sell income protection, critical illness and business insurance cover but these are less common. We met with some of these specialist protection advisers who sell large business cases and they explained how they both ‘shape’ policies and offer clients a fee option equal to 75 per cent of the commission and a net (no commission) premium as an option.
In the UK the commission-free premium reduces the normal premiums by a staggering 40 per cent, so much so that the client is in front in a couple of years. Interestingly that same practice has both business insurance and domestic insurance specialists. While the business insurance customers almost always accept the 40 per cent discount off premium and pay a fee of 75 per cent of the upfront commission (equal to around 135 per cent of the first year premium as a fee) in the domestic market virtually NO clients opt for the 40 per cent discount and pay a fee, but opt to pay a higher premium and no fee.
The UK’s biggest mortgage and financial services distributor told us that his business totally relies on the upfront commissions and the trail commission is not of great relevance. While upfront commissions are huge by Australian standards (185 per cent to 220 per cent with a four-year responsibility), renewal commissions are very small, typically 0.5 per cent up to a maximum of 2.5 per cent.
We asked what effect the removal of upfront commissions in favour of a flat 20 per cent commission would be and he responded that his business would probably concentrate on mortgages and stop marketing term life.
Alternatively, one of the UK’s largest IFA practices has a full advice model – albeit phone-based. All advisers in this practice (270 of which only 20 are non-salaried) have a strict process, which follows a firm phone script. Internet leads (typically from comparison websites) are fed to the phone-based advisers. These advisers go through the fact find discovery process and then recommend a full insurance programme based on that fact find. Because this is a low-touch business there is a potential for a high lapse rate. To counter this, each client is telephoned in the eleventh month and reminded of the reasons they made the purchasing decision. Lapse rate is therefore kept down to around 5 per cent to 7 per cent, although we did not discover the lapse rate calculation method.
We discovered that licensee fees are much higher in the UK compared with Australia. One practice with $800,000 turnover said their fee to their licensee is 15 per cent of all revenue plus a monthly fee of $1,200 per authorised rep. Smaller adviser practice fees are typically 25 per cent to 30 per cent plus a flat rate. These costs include PI insurance, software and training costs.
Don Trapnell is a director of Synchron. This article was co-written with independent chair Michael Harrison.
Great work Trappers! Proud to be an adviser under your leadership.
The biggest question that will come from the great work Don and Michael Harrison do in the UK will be….will the bodies behind the hidden agenda to force adviser remuneration levels down actually listen to the evidence and leave the majority of the industry alone or will they continue with their own self interest instead???
I like your comments Paul, the legal advice comparison makes it simple ! Iwould be nice to see a Life Company share on clawbacks due to circumstances outside the advisor’s control. eg. Bankruptcy, divorce, loss of job etc. during the early period of the policy. The advisor wears too much cost once again.
Firstly, thanks to Don and Michael for doing some further research.
The issue with paying the commission on a replacement policy back to the old life company is that it assumes that all replacement business is being churned and the replacement advice is not in the best interests of the client.
Where is the incentive for a professional adviser to provide quality advice to correct an incorrectly structured / inferior or overpriced product regardless of who implemented it be that an adviser, a bank owned channel or direct business, if that adviser is then not paid for their time?
These sorts of rules are good for advisers that like to write business and not service the client because if that client is referred to another adviser in 3 or 4 years the new adviser will not get paid appropriately for their time and advice and may not want to get involved.
As an example. If I was to get legal advice from a law firm and then a year later got a second opinion which was far better from another law firm and proceeded with the new advice the legal fees payable to the second firm would not be reduced because the first lot of advice received was not as good.
We are running businesses not the Salvation Army and we need to generate a profit from provide quality advice, not to maybe break even after 3 or 5 years.
Industry funds it seems have a built in commission on a level basis with no advice whatsoever. How can that ever compare to extensive research and written advice model. I came from South Africa and used this method of churning..worked well although I think with our product range it sometimes is more difficult to retain for 5 years
Great initiative Don and Michael. Fantastic to see a licencee with such a focus on improvement that it would invest in such a study tour. With the government awaiting an institution/ industry association response to Trowbridge, and expecting it in “weeks, not months” it is good to see you leading the charge. It is to be hoped your learnings can be integrated in our professions response; so change can happen before it is forced upon us.
Interesting read. A huge thank you for investing your time, money and effort in the interest of advisers of all licensees and, more importantly, the best interests of our clients and the Australian public.
Finally, someone who actually takes steps to research other jurisdictions rather than point to a google search and claim it as evidence. Someone who questions the rubbery life office “churn” figures. Someone collecting empirical evidence rather than anecdotal evidence. We should all get behind this bloke. I’m looking forward to the next installment.
Great work Don and Michael. The responsibility period write back with the new adviser is a very interesting concept and food for thought. This could work as long as it does not penalise the new adviser correcting bad advice or inappropriate cover recommended in the first place.