In 2018, the Life Insurance Framework (LIF) kicked off and reduced new business commissions for risk advice, initially capping them at 88 per cent before settling at 66 per cent, while trail commissions were capped at 22 per cent from the start of the package. On the back of the changes, the amount of advisers providing risk advice plummeted.
Highlighting the small number of advisers focusing on risk advice in its latest edition of the Adviser Musical Chairs Report, Adviser Ratings found that just 480 advisers were responsible for writing half of the new business during 2023.
However, after working in the advice industry for more than a decade, financial adviser and founder of Skye Wealth, Phil Thompson, decided to shift focus and become a risk advice specialist in mid-2021 and now believes more advisers should start doing the same.
“I personally think more advisers should specialise in it. I think it is difficult for a generalist to get into insurance advice. It is much more complex than it ever has been in the past. Underwriting is more difficult, the products are more complicated, the old insurance contracts from 2021, the old income protection products, and the new ones,” said Thompson.
“If you are ever replacing income protection, if you’re dabbling in the space, it’s very high risk from a compliance point of view if you are replacing a product without fully understanding what they’ve currently got.
“And most advisers I talk to when we’re interviewing advisers, even the ones who want to specialise, don’t know what happened in 2021 with the income protection changes, they can’t articulate what the major changes were. So, that kind of scares me from a generalist adviser.”
He explained that it’s important for advisers giving risk advice to keep up to date with relevant legislation, be that incoming or proposed changes, and the potential impacts that could have for clients, but it can be particularly hard for generalist advisers to do well.
“In general, it’s so difficult to be across all of it. I think advisers will start looking at insurance more like mortgage broking, where some people will dabble in it. But I do believe there should be so many more specialists in this space because there’s so much room to grow,” said Thompson.
Since commissions were reduced, he said risk advice has become a more “noble” specialisation as fewer are willing to do it.
“I have been an adviser for a long time, and I did set up policies before, but I always felt a little bit uncomfortable getting paid more than the first year’s premium. That’s one reason I didn’t love it,” Thompson said.
“Now that it’s harder, that people aren’t willing to do it, it feels like it’s more of a noble profession, more because it’s less profitable. Sounds a bit stupid, but it wasn’t back in the day.”
Where insurance was previously viewed, in Thompson’s opinion, as a way to increase revenue, clients are now able to see more value in the advice.
“It used to be like, ‘Oh, it’s easy money’, chuck in an insurance recommendation and you can boost your fees by 100 per cent or it subsidises your advice fees, so they’re not as hard to digest for the client,” he said.
“But now it’s like, well, no one’s doing it. No one wants to do it, and so we are here doing it. We need to subsidise our commission with receiving fees as well but I think that gives us a great value proposition for clients, where they can see the value of the advice that they’ve been provided.”
Although he believes it’s not very profitable to work in risk advice now, Thompson said “the Australian public will be better served if advisers can start getting more insurance advice”.
Whilst insurance is certainly a “noble” endeavour, the data says the insurance industry is currently in run off phase heading towards its ultimate demise, which as an old riskie myself is quite sad.
Can anyone identify a successful instance where legislative or regulatory change has yielded a beneficial outcome for the provision of financial advice regarding insurance?
I can’t. Maybe someone can help.
I thought all regulatory change was aimed at helping Industry Super eliminate any and all competition?
When you admit that underwriting is more difficult and the products more complex, and you combine this with being paid less, increasing regulations to do the job and the business risk associated with potential complaints that always fall in the favour of the complaintant, you get the reason why businesses don’t perform this “noble” role.
Have a read through AFCA determinations and you’ll see the majority of complaints are in the favour of the financial advice firms.
Hi Phil if brokerage was returned to a minimum of 100% upfront with 10% ongoing and clawback periods were reduced to 12 months then it might attract more to write risk otherwise no thanks as it would still remain commercially unviable.
Correct, Those measures would indeed help. However, once the advisers started to return to the risk arena they would quickly realize that with the likes of Steve Jones lying about promised changes AND moving the compliance goal posts every so often AND the ‘new’ stripped-down IP policy definitions AND the dead-head life company execs still there who caused a lot of the issues around commissions – well – then they may just leave the risk space forever. I know I did in 2021 and have never looked back. After 36 years in risk advice I miss my clients dearly though. Sadly, I felt I had no choice. on balance it was definitely the right decision looking at the current industry mess that is unlikely to resolve itself anytime soon.
Insurance is a dying business!