With Kelly O’Dwyer's appointment as Assistant Treasurer and Minister for Small Business, there is a lot of temptation for advisers to bombard her with reasons why the Life Insurance Framework (LIF) needs to change.
This temptation is completely understandable, but it is important to note that Ms O’Dwyer was previously the Parliamentary Secretary to the Treasurer from December 2014, and is a former executive with the National Australia Bank. Ms O'Dwyer therefore more than likely has a very good understanding of our industry and how it works.
It might be a better idea for advisers to talk to their federal and state members about the great work they do protecting the lives and livelihoods of everyday Australians, so that members have positive messages to convey about the advice profession when they meet with Ms O’Dwyer. This approach will also give Ms O’Dwyer some time to get her feet under that desk, so to speak
However, while this is happening, I do believe that as a community, we should think again about what our industry really needs in the way of reform, what we can do in order to move forward and the best way to communicate that to Ms O’Dwyer.
What’s wrong with hybrid?
That takes us back to ASIC Report 413. The report identified that 93 per cent of all advice given under a hybrid model was in fact sound advice – this means the failure rate of a hybrid model is only 7 per cent. So, instead of attempting to halve the revenues of small businesses in Australia by going from a theoretical 120 per cent upfront commission to a maximum of 60 per cent, surely we should be looking at restricting remuneration to a maximum in a hybrid model?
Let’s also consider how the 60 per cent idea came about. At Synchron, we believe it is an attempt to satisfy loud consumer groups which saw 120 per cent, took it at face value and decided it was far too much commission to be paid to an adviser. These groups apparently made an arbitrary decision that advisers should get paid half that. We have yet to see any justification, evidence, research or reasoning to support this arbitrary decision.
We have, however, seen evidence that the 120 per cent is theoretical – even mythical – because it is applied to net premiums. That is, the premium minus the policy fee, frequency loading and so forth. The actual maximum commission paid to advisers was more in the vicinity of 96 per cent, including GST – so less than 96 per cent goes in the adviser’s hand.
The commission model that we believe is sustainable is 80/20 with a two-year responsibility period. This would help allay the fears of those who – mistakenly, we think – believe that the churn debate is actually real. That is the model we think needs to be brought to Ms O’Dwyer’s attention.
What’s wrong with clawback?
Our biggest concern with the LIF is the proposed three-year clawback, because that stands as the most inequitable element. It’s very important we ensure Ms O’Dwyer understands the impact that the introduction of clawbacks will have on the sustainability and viability of financial advice practices, most of which are small businesses. It’s also important that she understands that should small financial advice practices be forced out of business, consumers will have less choice in where to obtain life insurance advice, which may in turn worsen Australia’s already serious underinsurance problem.
New thinking for a new era
All that said, while clawbacks seem very unfair on advisers and their businesses, the fact of the matter is that, at the moment, there’s no real disincentive to re-write business every second year and we have to fix that. We have to kill our love affair with yearly renewable premiums and look towards solutions such as those highlighted to us on our visit to the UK earlier this year. This visit revealed that most life insurance policies in the UK are based on a level premium set-term basis. It’s a solution which addresses sustainability, affordability and remuneration structures, and puts the nail in the coffin of perceived issues of churn.
What that inevitably means is that we need new product design from insurers. We need a product which solves the perception issues that currently tarnish our industry and when we have it, that’s the solution we need to take to Ms O’Dwyer.
Don Trapnell is a director of dealer group Synchron
Other articles written by Mr Trapnell can be found here:
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