There’s a lot of talk about strategic goals-based advice at the moment, fuelled by the imminent remuneration changes under LIF.
Advisers are being told that by providing strategic advice they can manage regulatory and compliance changes, lift client engagement, boost revenue and profitability and future-proof their business.
All that may be true but for many insurance advisers, strategic advice isn’t realistically achievable.
Some just don’t have the desire, skills or time to make the leap from comprehensive insurance advice to holistic advice on everything from wealth accumulation to estate planning and aged care.
That doesn’t mean they’re any less committed to their clients or less professional than the strategic adviser across the road. There’s room enough for both specialists and generalists in this industry. However, the specialist model is under intense pressure.
From 1 January 2018, when the benefit ratio for new risk business falls to 80 per cent of first year’s premium and 20 per cent of second and subsequent years’ premium, many risk specialists will experience an immediate 20 to 30 per cent drop in upfront revenue. If they do nothing to evolve their business model, their income will ultimately halve by 1 January 2020 (against 2017 upfront commission levels) when the benefit ratio plunges to 60 per cent plus a 20 per cent trail.
Simple calculations show from 1 January 2018, it’ll take risk advisers five to six years to generate the same net income they earn today and roughly seven to eight years from 1 January 2020.
Baby steps
It’s clear that risk advisers need to take action to maintain their revenues and circumvent a cash flow crisis but strategic advice may not be the only solution.
Some will go down that route and do very well, especially those that have a sophisticated client base with complex personal and business needs. However, it’s not a silver bullet.
Neither is seeing more clients, selling more insurance to existing clients or transitioning to a fee-based model.
It’s estimated that advisers would need to see 25-50 per cent more clients in 2018 and double current numbers from 2020 to maintain 2017 cash flow levels.
That’s not a sustainable strategy Neither is upselling existing clients.
Advisers can, and many have, tried to charge a fee for pure risk advice but that doesn’t mean customers will pay for it. Even if an adviser rebates the upfront commission and charges a higher fee commensurate to the amount of work required to secure cover, it’s difficult for advisers to justify their ongoing value year after year.
This means there must be another option. Perhaps it’s as simple as supplementing risk advice with low-touch personal advice around super consolidation – saving, budgeting and cash flow management – and simple superannuation portfolio management, which they can charge a fee for. For the risk specialist who understands the superannuation implications for benefit payments already, this may be a natural extension.
It may be a stretch initially but it would enable advisers to continue servicing the $2,000-$3,000 premium client and collecting commissions while plugging the revenue gap with palatable fees.
Product manufacturers also have an important role to play in terms of designing simple solutions that add value for the client and drive practice efficiencies. For example, a managed account solution administered on a simple master trust or wrap platform would allow advisers to oversee the construction, management and administration of a client portfolio in line with pre-agreed objectives without the need for them to pick investments, keep on top of macroeconomic issues and send out a record of advice for every portfolio change.
Advisers oversee their clients’ financial affairs, but day-to-day portfolio management is effectively outsourced to investment specialists.
Similarly, with technology advisers can automate parts of the advice process such as sending out regular client newsletters and account balance information. The addition of a client-only section to a corporate website could empower clients to update their details, book a meeting, register for seminars, access pre-recorded educational videos and podcasts, and submit queries online.
That’s an extremely valuable service but it’s a far cry from strategic advice.
With LIF less than eight months away, the uncertainty facing many risk specialists is tangible.
Few can afford not to offer additional streams of advice so they either find a way to do it or outsource it to a referral partner. Tougher clawback provisions under LIF mean there’s more to lose than ever, and advisers who don’t act decisively run the risk of losing clients to someone who can better service their needs.
Christopher Blaxland-Walker is general manager distribution at ClearView
Agreed, very good article and definitely the perspective from a practitioner and how likely the events will play out.
It will play out exactly how policy makers intend it to.
Insurance advice will become an ancillary service to other areas of advice.
Those who have access to advice will have the luxury of having their assets and income protected adequately.
The ones who cannot afford advice, will have default insurance of Life/TPD, perhaps Income Protection but no access to Trauma.
I have a friend, whose father recently passed away from cancer. They don’t even know if they have any insurance through their super fund.
They are not struggling, because they still have mother and daughter living at home to repay the mortgage together.
But don’t worry, the proposed policies are designed so the wider public will not get ripped off and are better off.
Chris, this is the best most sensible article written since all the LIF ‘experts’ have entered the marketing arena telling us Risk advisers how to flick the magic switch!
You are on the money IMO – Keep it simple, stick to your niche and supplement with advice clients want and are willing to pay for.