It is (almost) universally acknowledged that the financial incentive of commission has assisted in encouraging advisers to address the risk needs of their clients. The obvious benefit of this practice is that it reduces reliance on the public purse for people suffering the financial consequences of the death or disability of a family member.
However, as soon as the practitioner representative bodies began campaigning for recognition of the discipline of financial planning/advising as a profession (and as a past president of the AFA, I contributed to this process), they sounded the death knell for commission.
There are certainly valid arguments for the status quo. Chief among them is the acknowledgement of the fact that, if we already have a chronic problem of under-insurance in an environment in which the adviser is incentivised to recommend insurance and the client doesn’t have to pay the adviser directly for his services, how much worse will the problem become once this incentive and remuneration practice is removed?
There is also a very legitimate argument for the perspective that commission is a fee payment made by indirect means. Certainly, in our practice, risk commissions are credited to a client’s fee account, giving the client full ‘credit’ for the remuneration paid to our practice by the insurance company in question.
Most advisers I know lament the image problem from which the industry suffers, aided in no small measure by a combination of the Industry SuperFund television advertising and the media’s obsession with publicising every instance of inappropriate conduct by a financial adviser (even those who aren’t advisers, but choose to masquerade as them). If we are genuine in our efforts to improve the image of the industry and gain recognition as a true profession, we cannot have our cake and eat it, too.
It’s as straightforward as this: professionals are paid in fees. They aren’t rewarded by third parties for selling product. Sure, the current system works reasonably well, at least in terms of existing clients, but the problem is that, empirically at least, eighty per cent of the population aren’t clients. If we want to improve this 20:80 ratio, any measure that has the potential to work has to be worth pursuing.
The industry is moving towards the imposition of the Life Insurance Framework. It is interesting to ponder the fact that this government-mandated reduction in the commission entitlements of risk advisers is of absolutely zero benefit to the government, the public or financial advisers. The only beneficiaries are insurance companies, which raises the question of how or why the government chose to address the issue in the first place.
Having said that, this commission reduction is the first step towards the total abolition of commission in financial services, which, whether you like it or not, is inevitable. Anyone who believes otherwise is doing a passable impression of an ostrich.
In an attempt to diminish the inevitable avalanche of comments suggesting I am championing the abolition of commission, let me make my position as clear as possible. I am not leading the charge towards pure fee-for-service. I am simply saying that once you embark on the path towards recognition as a profession, the behaviour of the industry inevitably has to align with that objective. This means that sooner or later any possibility of conflict of interest or recommendation bias must, wherever possible, be removed from the financial services landscape.
And if that’s where we are inexorably headed, the sooner we align our practices and processes with that outcome, the smoother the transition will be.
Wayne Leggett is a director of Paramount Financial Services Group
Some fair comments Wayne as would be expected. I would love to see a “professional insurance” industry where fees are paid direct by clients for insurance advice. This world currently only exists in a cross subsidised or HNW environment (unless I am mistaken). I note your comments that you receive commission but credit it to clients “fee account”. Why not just write “nil commission” or so called “wholesale” insurance policies? (Genuine query Wayne, I currently do the same as you for full service clients) Whilst I can anticipate the future you describe…what do you suggest we do in the “transition period” where it is clearly not in the clients best interest that a fee on top of their premium is charged
I dont care if external people view what I do as a function of a profession. The only thing I care about is that my clients see me as someone who acts “professionally”. Unfortunately, I believe these LIF changes will see the end of the risk specialist unless they are part of a holistic business model such as a larger firm or institution.
The Financial Planning sector hijacked the Life Insurance many years ago. As a Risk only adviser i don’t care about being called a “Profession” like the Financial planners, I am an Insurance Adviser, my clients now it and I am more than happy to say I am in the Insurance Industry and have been for 38 years. It is what i deliver for my clients that is important.The philosophy of what insurance is, does, achieves is not the same as dealing with Investment and trying to drag us into the Financial Planning mould is plainly wrong.The Financial Planners are driving the “Fee for Service” argument, Life Insurance advice has been affordable for clients for over 100 years because the Insurers funded the advice and recouped costs over the years and clients were the winners, now clients will be the losers and Life Insurers laughing all the way to the Bank, oh of course most of them are the bank already!!!
Totally agree with the conclusion. We need to be clear though that the AFA & FPA are not “practitioner representative bodies”, they are “Industry Bodies” that have to-date served with a clear bias towards the deep pockets of the FSC membership. The future professional Practitioner will be self licensed. To be a Professional Practitioner will mean the removal of the Licensee / Authorised Representative models of a Product Manufacturer and Product Distributors. Until that happens we are all kidding ourselves. The CPA have commenced what I believe is the future model of a “Professional Financial Planner” and this offer will be taken up by the public in a very short space of time, in under two years. To that end we will then see the first true ‘Practitioner Representative Bodies’. I believe the CPA Financial Planning business will be over whelmed for their service offering. This will create both opportunities for those who aspire to be professional financial planners to either work within those practices as equity partners or salaried employees. Opportunities to be in direct competition to the CPA financial planning business model will be on offer as the CPA will not have the right sufficient resources (capacity) to service their clients demands and needs. But to be ahead of the curve and be a worthy contender in direct competition to the CPA model requires immediate action! The future of the Licensee / AR model is on notice.
As much as it hurts me to say it, I agree with you Wayne. And to the naysayers wanting the status quo (or as close to as possible), you needed to have worked a whole lot harder in the past (including with the life companies) to protect yourselves, to ensure that dodgy sales people/organisations who have abused the commission system, were drummed out before they could gain a toe-hold. That did not happen. Too late now, you’ve handed the life companies the level commission structure (by 2018) that they want, on a platter …
Wayne, you are correct that many comments will not endorse the view you put forward – and I say ‘rightly so!’. While I am sympathetic to what you say I am of the firm opinion that the life insurance sector has been badly let down by those who claim to represent it. Mark these words – the result will be catastrophic. People like you should be shouting that from the rooftops loud enough for all to hear! You and those like yourself who are given room in the public debate to comment will need to look yourselves in the mirror when the lack of risk advice and poor consumer outcomes are the real inevitable outcome. Instead of telling other experienced risk advisers to ‘accept it – and move on’ – you should be standing up for your colleagues and denouncing the misguided direction the regulations have taken – these reforms have had nothing to do with a drive to ‘professionalism’ but rather reflect what amounts to collusion by powerful well organised opponents to non aligned advice and I’m sorry to say – naivety on the part of the advisory community. As a member of the AFA who has given time and energy to the association – your comments are both sad and annoying in equal measure.
Banning commissions hurts three groups of people: the customers, the insurers, and the middle-men. The commission system has proven its value to those three groups over the centuries. Now one of those groups, for reasons of prestige, wants to abandon the system for a system that does not work? The fee for service system does not allow the costs of the middle-men to be spread over the customer base. The commission system does. Its as simple as that. The whole point of insurance is to spread the costs of an unwanted possible future event over the customer base. All the customers subsidise each other.
For the sake of appearances we will destroy what is good?