Advisers should start preparing now for incoming regulatory changes and future-proof their business in the process.
Many advisers will experience a drop in revenue from 1 July 2016 when the government’s new life insurance reforms come into effect.
The 80 per cent cap on upfront commissions will see new business revenue initially fall by up to 30 per cent, with further reductions slated for 2017 and 2018.
The upshot is that many advice practices need to become more efficient, better manage their cashflow and focus on growth.
Five practical ways to get ready
There are several practical ways in which advisers can prepare for life after July 1.
It may be as straightforward as completing as much new business as possible ahead of July 1, or it may be more complex and involve advisers expanding their value proposition, restructuring fees or adopting new technology-based systems and processes to streamline back-office operations.
Below are five possibilities to explore:
To improve their revenue this financial year, advisers should have a sense of urgency when it comes to winning new business and helping clients organise cover.
A number of insurers are also currently offering special deals, such as higher rates on hybrid commissions, to help advisers transition to the new regime.
For example, a hybrid commission rate of 90 per cent initial and 20 per cent on renewal until July 1, which is a bonus relative to the standard 80/20 rate.
By taking advantage of special offers, advisers may be able to use this extra revenue to help improve their recurrent cash flow before entering the new regime.
Over the last two decades, many traditional risk advisers have broadened their value proposition to include advice on budgeting, cash-flow management, superannuation, investments and estate planning.
This strategy has allowed them to protect and diversify their revenue while better meeting their customers’ total needs.
By doing so, many have effectively future-proofed their businesses against further individual regulatory ‘events’ as well as economic and cyclical factors that can negatively impact the take-up and renewal of insurance.
These advisers continue to generate commission for insurance advice and charge a fee for ongoing strategic advice.
A growing trend among risk specialists is to charge a separate fee for claims management.
Some argue that the trail commission is there to cover the cost of managing a claim. Another school of thought is that the trail covers ongoing advice and client service but in some cases, helping clients with their claims can involve considerable effort and cost. As such, it should command an additional fee
Introducing a claims management fee can ensure advisers are adequately remunerated for their work.
It’s critical for advisers to review their referral arrangements with centres of influence including mortgage brokers, accountants and financial planners, given risk advisers commonly agree to hand over a percentage of first-year commission revenue to referral partners.
It’s likely that the terms of existing referral agreements won’t make commercial sense for advisers under the new regulatory regime. In the future, it may make more sense to share a larger slice of the increased trail commission, and cut back the upfront payment.
On top of existing arrangements, now may be an ideal time to forge relationships with new referral partners.
Either way, advisers who are negotiating or renegotiating terms will need to make them attractive enough to encourage centres of influence to refer their clients while ensuring they’re able to continue providing profitable advice.
Another critical task for advisers is to streamline their back-office operations because of the enormous potential to boost practice efficiency, productivity and ultimately, profitability.
There are many technology-based solutions designed to automate repetitive tasks such as manually populating forms, collecting client data, sending advice documents and maintaining existing business.
This may also be the time for advisers to rethink their service offering for C & D clients. Automated solutions offering limited advice or the ability to purchase simpler products direct from the insurer may be a scalable way for advisers to effectively and less expensively service their lower value clients.
With July 1 less than five months away, advisers have a lot of work to do to ensure they’re well prepared for the changes to their business. Those who start the process as soon as possible will be better off in the longer term. Licensees and insurers also have an important role to play in helping advisers adapt to the new regulatory changes.
Renee Hancock is the head of life product at ClearView
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