If Einstein were here today, I think he would say we are all no longer sane.
This week John Trowbridge, the independent chairman of the Life Insurance and Advice Working Group, released a report that sent the financial planning world into a storm.
It is actually more like a hurricane, with everyone battening down, protecting their businesses and speaking with fear in their eyes.
I have read many comments by other planners, industry professionals, association members, insurance providers and the general advice community with a sense of pure disappointment.
Very few really get the bigger problem, it seems: all I see are people protecting their self-interest, not offering any decent solutions and in fact making the situation even more evident – that change needs to happen.
I have had numerous discussions over the past few years where I have upset other planners because I am so passionate about conflict-free advice. I hate commissions and I hate conflicts.
A commission is something that is paid to a seller for selling something. The more they sell of something, the bigger the commission they get. Therefore, if I am paid a commission I am incentivised financially to sell as much as I can and as often as I can.
If you ask me; commissions are solely linked to a sales industry.
Apparently the financial advice industry wants to become a trusted profession and to no longer be a sales industry. It’s something I hear every day, from everyone.
Before we go further, my first question is how can we accept commissions that are made for sales industries when we want to become a profession that is paid a fair fee based on value, expertise, risk and administration?
I want to leave that part of my argument there. Plenty of planners will be saying BUT “we can because I am ethical and I will only recommend to my clients what is in their best interests. It does not affect my advice.”
I will not list the past 20 years of controversies for the financial industry. I’m sure we all do not want to hear about forestry schemes, double-gearing Storms, CBA, Macquarie, NAB. It is clearly evident those commissions had a huge part in all of these controversies and, if the situation is not changed, will continue to do so.
Every person in Australia knows we have a huge underinsurance problem. The reason? Because 95% of Australians are underinsured. I will not bore you with stats, but the biggest reasons are cost, trust in planners, complexity of the advice and general “she’ll be right” culture.
I will back this up with ASIC’s view, stating that 3 per cent of insurance advice is good. Not my word – ASIC’s. So we have a problem: the advice is poor, conflicted and we do not have enough of it.
So let’s all be clear that commissions create conflict. A commission creates an ethical issue and a decision for the adviser: “Do I make the recommendation solely based on the client’s best interest, or do I help them to a ‘certain extent’ while potentially structuring things to suit me?’.”
Without becoming a whistleblower, I have seen and know of advisers who over-recommending cover, not choosing the most cost-efficient insurer because they are licensed through a certain organisation or cannot be bothered researching the market.
They are replacing a current policy to get paid a commission and some are sitting on huge ongoing commissions for 15 years and doing nothing for it.
Another huge issue I hate is that advisers decide how they want it to be paid. If they set up a $5,000 a year insurance policy they can decide on how much they want upfront and how much. ongoing. Do I want $6,500 upfront (yum) & $500 a year; $4,500 upfront (Sounds good) & $1,000 a year, or just $1,500 every year?
This also gives an incentive to advisers to write on higher upfront commission initially and get it again in a few years at another insurer – churning, they call it.
I am not going to hammer this home any more but the commission creates all of these conflicts and problems.
What has annoyed me further is that a lot of the industry is bagging out the report and how silly the recommendations are without any other ideas on what could help to solve this problem.
I have not had the time to read the report and in reality I am not worried because I charge a fixed fee for my insurance advice.
It was my decision to do this because I believe it is better for the client.
It is against the grain and it is hard. But I still choose to do it this way because it is better for the client, I believe in transparency and I hate conflicts. I would prefer to not have any at all and recommend what i think is best without it affecting me.
I know there are other ways.
Let’s be clear: if no one believed there were better ways to do things then present we would all be getting to work on a horse and starting a fire every night. We look at better ways, we improve, we develop and we evolve.
The industry must do this, too.
Christopher Bates is a director and independent financial planner at Canopy Private
The key issue here is not commissions or fee for service but the cost of insurance and what these costs are based upon. The simple reality is that self employed advisers are a significant cost saving to the insurance companies and fund managers. They don’t pay them salaries or have to pay rent and other costs to accommodate them. The advisers are effectively a free distribution service with minimal risk ( which lies primarily with the adviser). The mistake that is made in these discussions is to focus on commission being a dirty word rather than understand its purpose which is primarily to share the costs of the product with the distribution and also provide an incentive for the sale force. What other business or industry does not pay for distribution and does not incentivise salespeople. Advisers that move to fee for service on insurance are playing into the hands of the insurance companies ( free distribution and sales ) who do not reduce the premiums by the equivalent amount of the commission rebate and who leave all the administration and underwriting challenges with the adviser. The smart move in this industry is to establish an insurance company aligned to fee for service advisers and keep praising them for how ethical and professional they are ( and cream all the profit for themselves).
http://www.riskadviser.com.au/…
Having been challenged by Christopher (and finding his opinion belongs….?) and I submit where my opinion stands. A great article and very valid
Well said
Chris I have no issues with trust from my clients because I provide a solution they want and need, I have no trouble getting business which is 100% word of mouth and guess ………what I take commissions …… No matter what you say you are subsidising risk clients with planning fees and disgusing it as wholistic advice. You are what is wrong with this industry full of you own self righteousness. A bit like the Russian sub captain in the movie hunt for red october ( you know the one that kills his own crew ) blinded by your own arrogance.
You and the hundreds of other financial planners and advisers that have fallen for the FPA drivel and the voices of accountants in our industry that have pushed for it to be a “profession”. I don’t need numbers and letters after my name to justify what I do. My pride and reward is built on the satisfaction of knowing I have protected my clients and their families in their time of need not the ability to be seen as or called a “professional”. And in 8 years I have never been questioned by a client about commissions.
Phil, the comparison with lawyers and accountants is a bit disingenuous. They are different occupations that solve the issues that their clients have in different ways.
If I go to a lawyer for a conveyance or a will or a criminal case, I pay for their time because that’s all they have to provide me with. I may buy or sell my home, walk away with a will, but that’s it.
An accountant may do my tax return but what else is there?
As a Financial Planner I can assist my clients to set their goals and objectives. I can help them determine their investment goals. I can uncover the gaps in their financial lives if they were to die prematurely or suffer an accident or illness. I can discuss the options available to either accept the risk or pass it off to someone else for a small fee (ie insurance). Because of my experience and skill I can work with the client to find the things that are important to them, to tailor the cover to suit their needs. Only then do I work through the panel of insurers that we have available (which is pretty much the entire market) to select an insurer that provides what the client needs. Most insurers pay about the same so it doesn’t matter to me who we select, as long as they do the job for the client. I often recommend different insurers for husband compared to wife based on occupational or health differences. The insurance recommended and the comms that flow are not the driver, just the outcome of the process.
How do you (and Christopher) rationalise it with clients when the cost of discounted premiums and your advice fee are higher than the costs of premiums alone? Both in the first year and subsequent. If you weren’t subsidising your risk advice with your investment advice, do you think you would still have the same opinion?
There are many professionals who accept a payment based on a percentage of the capital expended. Architects, and professional real estate agents are obvious examples. The problem some have is, they perceive that the commission is paid by the product provider and not the client. The current 20% proposed will not be enough.I am 72 years old, 45 years in the industry here and in the UK and still work 2 days a week as a mentor. I was recruiting and technical training manager for Prudential and Colonial for 20 years. 9 out of every 10 recruits failed within 2 years despite what was relatively high commission. It is lovely to hear the comments of fresh faces but there is an awful ring of inexperience and idealism about them. The reaction from EXPERIENCED advisers is well justified. If there was an easier way to SELL sensible and practical insurance solutions to consumers New York Life, Prudential and AMP would have discovered it long ago.Let Christopher rebate all the commission he earns to his clients and charge them a fee. That model works provided you rebate the amount FIRST and hand the invoice over at the same time. If the client lapses, and some will, he will need a claw back clause, or get a NIL Commission quote for the client and one with commission and let the client choose. If the client wants to pay your fee so be it. It need not be: “my way or the highway” I don’t know about Einstein but if Solomon was here he would say “There is nothing new under the sun”
Dr Blyth, commission payments do not guarantee service at time of claim. Fee for service arrangements do not limit the service or assistance your adviser can provide to you in the event of a claim.
If you had engaged a trusted adviser in the first instance, paid a flat fee for the service and built a relationship, why couldn’t you depend on them to help you at time of claim? Why couldn’t you agree to delay any payment to the adviser for their service until after the claim was paid? Why couldn’t your adviser then assist you with making the right decisions with your claim payment once received for an agreed flat fee?
The idea that a commission protects you and a flat fee would disadvantage you at claim time makes no sense at all to me? It sounds like the salesman who sold you a high premium insurance policy which probably paid him 110% commission upfront and 20% commission ongoing said the right thing to prevent you from considering the alternative of a flat out of pocket fee which would likely have been a lot less in income for him. He probably also gives that same spiel to all of his clients and takes the gamble that very few claim and so those who don’t offset the cost of the work he does for the clients who do claim.
Wow !
Here we go again …. the same old rubbish about “business person” versus “sales person”.
Christopher, I am proud to be a salesman. People do not buy Life Insurance
it is sold. A sales person has people skills, empathy integrity amongst other
things and believe it or not they can be great business people as well!
Why can’t you be both so that the client reaps the benefits?
When you have been in the Industry any “real period of time” and when you have earned your stripes we might listen to you. It’s interesting that the only real support you receive is from one of you co workers (Chris Bates).
What’s your hidden agenda?
Thanks for the comments and if you want to chat feel free to call.
As you can imagine, in response to all your comments. I suggest you firstly have a look at my full article. RiskAdviser took the bits out they wanted from LinkedIN. It will give you better insight and show how this was just one part of what i am passionate about in relations to risk – i think there are many more ways to improve what we do.
I’m hoping a few of your questions could answered that way. Some have said i’ve talked in problems but that was just part of what i wrote. My LinkedIN article was all solutions.
Secondly, my view is just a view. Whether you disagree or agree that is fine, i’d love someone to come up with a solution that works to bring trust back in it’s entirely. We all know, whether you have been an adviser 1 or 20 years, the financial planning industry is struggling right now to become a profession and gain trust with everyday Australians.
Part, only part of this problem is conflicts and part is a misconception of what we actually do.
I question you to fundamentally understand what you do. If you sell insurance then i’m sure you want to be incentivised via commissions because the more you sell the more you make. It makes sense right?
If you sell advice, a relationship and ongoing strategic work; you will want to be paid very consistent flat fees. That also makes sense?
If you are in camp one that is fine but risk advice is fundamentally part of the financial planning world and unless it is removed than it will have to move towards what the financial planning world is doing removing conflict, commissions and greater transparency. It is worldwide moving to a relationship based model built on holistic advice. The transactional work can be and will be done by computers (another debate) but anyone who understands the power of software knows this.
To not put fuel on the fire guys but look around and you’ll realise that the reason this report was written in the first place is that it was not working. All i am saying is my view on that.
Christopher you know what I hate?
When someone who has been licensed (according to ASIC register) to give advice for less than 4 years in Australia wants to lecture us on the rights and wrongs of our industry. Sure we have lots of improvements to make, we will all agree on this.
But as Julia Gillard once said to Tony…..”I’m not going lectured by this man”
So I’m not going to be lectured by someone so inexperienced who presumes to know exactly how all advisers in Australia should give advice and treat their clients…thanks very much
Dear Christopher, have you considered what happens when your clients eventually need to claim on their insurance and they are on a fee for service model? When this discussion was had with me by my adviser, I understood clearly that I would likely have little to no money at that stage and choose the commission option. In the end I was buying peace of mind that everything will be ok financially if something went wrong.
I certainly did not want an unwanted distraction when I’m trying to concentrate on getting better. Having been on claim I can tell you I had no time or money to pay for anything, let alone the adviser to help me get what they had promised when they signed me up to the product. I was undergoing cancer treatment, my income and entitlements had ceased from the hospital and I still had a $600,000 mortgage, I had a family wondering if I was ever going to get better and I didn’t know what to tell them. The best thing that happened to me over that tough period was that I had a great guy come and take care of everything and ensured I got paid my benefits on time every time. This kept my mind at ease and I eventually years latter went into remission. Please consider giving your clients the option as you may find they reconsider the fee based model. Yours sincerely Dr Blyth
It’s a no-brainer. Commissions are conflicted and if you take them they tie you to the product provider rather than your client. (You can’t escape the simple truth that we work for whoever pays us). Therefore zero commissions from product manufacturers and a fee based on time and responsibility, invoiced to the client is the only way any professional would operate. We’ve been doing that for over 25 years so it’s NOT too difficult. So have accountants and lawyers. We need to force all product providers to offer a price that excludes any remuneration – i.e. a bare-bones price (true price) and get on with our work. Most advisers are capable and competent and would cope perfectly well, but they’d need to stand on their own two feet and THAT may be beyond too many…
The Trowbridge Reports outlines all the penalties the Adviser will incur.
Well how about the Life Office manufacturers making a few adjustments??
Ie.
Cancel Agreements with “Replacement floggersâ€. This will improve persistency; profits etc. and remove the undesirable Advisor. Remove payments being made to
appear on APL’s.
Sensible commission arrangements ie. Hybrid etc. can stand up in the future. Eg. 80/25, 80/20. Clawback to apply, (max 2years), with Level commission only on replacement business, (max 5years). Forget about IAP’s!
Share replacement, cancellation costs of Lapsed policies with the Adviser, due to
real life issues, (12 – 24 months), like divorce, job loss, bankruptcy, leaving the country etc. Why should the Adviser wear 100% of real life issues costs upfront where Real Estate, Car sales etc. do not?
Underinsurance can be improved with a decent range of products to sell that are fresh and exciting and provide solutions to needs not currently being met by the existing product range. Where has the Life Office creativity gone?
Create some fresh products to sell. Incentives for Savings, Education, Business and Estate Planning and Succession etc. Link the above with Insurance Bonds. This concept is successful!
Create Decreasing Term policies and Fixed Term policies for Mortgage and short term needs. Add options like: Double Indemnity, Premium Waiver, and Future Insurability, Loss of Job etc. (Most of these above were available 25 years ago.)
Look to the Annuity market for long term needs.
Increase age of entry for older ages, still working from 55 – 60 years to 55 – 70 years. Retirement Goal Posts have been moved ahead by the Government, move with them! Expand entry ages.
Life companies need to come to the party and except responsibility for the
improvement of the industry in the future. The Trowbridge report, if accepted would have Advisors being decimated and leave the industry in droves. Pity Mr Trowbridge could not work alongside a Risk Advisor to appreciate what it takes to find, and then secure a Client, and then service that client, as the future need arises. Only the Banks win here, with clients receiving little or no service, and of course, the Life
Office providers, win, with little or no commission to pay.
The UK tried marketing with Nil or little Commission in recent years, found the
scene unworkable and had to revise and implement Commissions again. Why is it so many are willing to complain and not recognise the efforts required to put a Life Insurance register together?
People need incentive to work and perform, and this is what we do, serving the
community at large.
Most Administration / Management people connected to our industry receive reasonable or high salaries and some receive bonuses or incentives for targets
reached. No problems here for those who are achievers, but allow us, the Risk Advisors, the right for fair compensation for our work too.
The compensation package suggested in the Trowbridge Report is unworkable, unworthy and an insult to those on the Coal Face, a Risk Advisor.
Darryl Elsley.
I’d be happy with a regulated ‘fee for referral’ of $3,600 from product providers so I could cover costs when giving risk advice. The issue is, many of my clients are middle and lower income earners and not only does the best level of cover for them not produce commissions that high, but they can’t afford to pay fees and I’m left being charitable to them because it’s my way of giving back. Meanwhile I can barely afford my rent.
You want to kill churn? Make providers pass on policy change benefits and cost cuts to existing policy holders so policy change ISN’T in the clients best interest and it can’t be done ethically.
I admire your veracity and ferocity, however, you offer no solutions and have ignored some other facts and realities. If I can’t afford to offer non-aligned advice to small clients, all they have left is the vertically integrated banks.
Commissions no doubt is a dirty word but really at the end of the day a sale is a sale whether its in the form of a commission or a fixed fee its still a sale. The churners in our industry would still sell ‘product’ again and again to increase there fees.
Chris accepts commissions – for upfront mortgage broking.
No conflict here though – no selling here though, no irony here though – no doubt rebating insurances is tied into your proposition when you flog the mortgage.
Guess what we have to SELL insurance because people need to understand its importance and they don’t knock your door down to purchase the stuff.
Good on you for writing an article when you haven’t read the report. W.A W.
Ive never had someone decline my advice to take out insurance because
I receive a disclosed commsion (upfront, hybrid or level).
However I am not sure if I can back myself to find clients like Christopher to recommend a $5,000 premium and then present an invoice for $4,000 for the service.
And if I dont recevie a trail what should be be annual Review fee or do I no longer have an obligation to service the client?
The ‘problems’ identified are smaller than the problems that the ‘solutions’ would cause. Which is a bigger risk for the nation and for clients – over-insurance or under-insurance? So ASIC thinks 3% of insurance advice is good? Well I think 3% of ASIC’s work is good. Trowbridge says compulsory low cost service will solve a lot of problems. Any economist will see that error. It come down to freedom versus big government. In a democracy the people solve their problems and under a dictator the government pretends to solve the problems of the people.
Christopher, I am intersted to understand is your sole income from risk advice? Do you therefore still charge a client a full risk advice fee when they are declined cover but you have provided the full implementation and advice service? Do you still charge this full advice fee when your client pulls out from the process when they receive an exclusion or loading they are not happy with?
If you are not a purely risk advise business do you charge a true cost recovery fee to your clients or do you subsidise the true risk advice fee within your financial pplanning advice fee? Please fill us in so we can understand your model.
That is one of the most confusing and single-minded articles I have read in a very long time…
Firstly,
there is no need to mention “forestry schemes, gearing by Storm and
banks or any other similar situation” – why? Because they are all
inherent problems of the INVESTMENT side of Financial Services. I can’t
recall the last Today/Tonight or A Current Affairs program that was
about a Risk Writer. Millions of dollars every year are being ripped off
investment clients by Investment Advisers – irrespective of whether
they charge a fee or commission.
Secondly, you are clearly not a Risk
Writer. You are speaking from a point of difference based on a
particular client demographic. Your clients, as is the case for a
majority of investment planners, are financially capable of paying
Ongoing Fees for service. If they didn’t already have money to spend you
most likely would not be interested in providing advice. You would
immediately alienate the people who need insurance the most – those who
are not financially secure. By the way, some of the worst risk advice
and product implementation I have seen in my 25 years in the industry
has come from Investment Financial Planners who charge an hourly rate!
Thirdly,
professionalism is not demonstrated by how one is remunerated but by
how one performs as an adviser. Performance for a client comes by way of
Quality Advice. Education, accountability, quality controls and
streamlined service systems will encourage professionalism. Remove
volume based & incentives from fund managers & insurers so that
there is no financial alignment. Standardise the commission across
industry so that there isn’t a benefit to align with a single insurer.
This will create competition. Industry needs to clean their system as
well as once and for all Blacklist the ‘known’ offenders (risk &
investment advisers). A rogue adviser will cheat a client no matter how
they are remunerated.
Lastly, insurance companies need to update the
systems from being purely New Business focused to actually have a system
where advisers can provide a more pro-active service for clients that
includes increasing/decreasing cover. Currently insurers do not have a
streamlined process for alteration. This will further assist with
replacement business.
In summary:
Improve Education & Accountability of all Advisers.
Blacklist, Fine and Expel Rogue Advisers – investment & risk.
Remove incentives to use a single fund manager/insurer. Implement 100% open APL.
Regulators need to start regulating.
Focus needs to be on those who do not have insurance – not those who do and how they are paying a commission.
3% of insurance advice is good? Suggest you go back and read the ASIC report with your glasses on this time Christopher. And whilst you are on your soap box, will you tell us ( honestly, no little white lies to protect your position) whats the average networth/ FUM of your clients? What fixed fee do you charge? Is it invoice or via the product? These types of comments usually come from advisers who have little understanding of the average family’s position where if can be hard enough to afford a premium little own then have to pay another fee on top to pay for the advice.
You say that you have not had time to read the report, but then criticize other advisers for their reaction to it, simply on the basis because it does not affect your business model. Smacks of ivory tower syndrome to me. Of course advisers are protecting their self interest, that is not unprofessional, if a governing body come to any industry and says we are going to limit your remuneration to the point where it will be unprofitable for your industry to exist, or you can only afford to service a segment of the market or course people will be concerned, there would be something wrong if they were not. Your facts are wrong. ASIC did not say 3% of advice was good. The assessment was not limited to the quality or appropriateness of the advice (if you read the report you’d know) it also included failures relating to administration or processing where a document was missing this could be a FSG receipt missing, ID not on file etc. You say no one is coming up with alternatives, once again I guess you don’t read, only judge, there have been numerous ideas and submission which are well though out and far more appropriate.
I personally do not accept upfront commissions, I started my business from scratch on hybrids, I do not funnel business into 1 or 2 insurers only, I pride myself on doing what is best for the client and being independent, but yes, I accept a commission and it in no way sways my decision around what I recommend for my clients as my recommendations are all based on matching cover to the outcomes a clients wants in place given a number of events occurring. But wait, you have heard that all before, but you don’t seem to be listening, perhaps because an adviser being ethical regardless of the method by which they choose to be paid is something you can’t comprehend, perhaps this says more about your own short comings than the advisers you have spoken to.
You say you have seen advisers do the wrong thing, have you reported them? You probably didn’t, it’s no skin off your nose and you don’t want the hassle, so have you really done the best by the client? If what you say is true, sounds like your perception of not being a whistle blower is more important. Once again, dealing with a conflict of interest is something you seem to have trouble dealing with, not the advisers around you. I work hard for my clients and they have no concern about the manner in which I am paid, so why should you feel the need to judge my client’s informed decision and deem it as less appropriate then your solution?
Agreed mate, it is a nightmare that way.
Dialled down to zero and charge a fixed fee.
Said a lot more on Linkedin if you want to read more. (Bit more context to where i am coming from).
Cheers
Christopher the first question in your article is one I’ve been asking myself about the financial advice industry for years. That so many financial advisers and the bodies that represent them don’t seem to see how their protestations and arguments about commissions are seen by the wider public (aka their clients and potential clients) is an ongoing source of bemusement.
It saddens me that the desired goal to be seen as respected professionals looks further off with the reactions to every new report or proposed change in regulations.
A business needs to be sustainable and you need to make a good living, but commissions are not the only way to earn. The old business model clearly isn’t working in Australia. I hope the industry can find one that does, for both advisers and the rest of us.
So why not remove insurance from financial planers and let the insurance companies sell direct to the public. That will fix the commission debate once and for all.
Oh sorry we carnt do that…
Geez Christopher, like it or hate it commission from insurance companies is the only way to reimburse agents for there work.
Clients are not going to pay for insurance premiums then pay in addition a service fee to a risk writer. They will take there business to the bank or to a direct insurer.
You can still be classed as a professional and be paid a commission, rebate, spotters fee or what ever you want to call the payment.
At the end of the day, it works.
Id suggest you get off your high horse with your righteous theories on why commissions have to go! Commissions have been part of our industry and many other industries over many decades and its people like you that seem to think that you can reinvent the wheel just because you are shoving it down the throat of everyone to say that your theories will work. Let me and the majority of the industry tell you and people like you in OUR industry that If these recommendations are adopted, it will decimate OUR industry and will leave many people, whether it be in the industry and/or the consumer disadvantaged! The only winners out of all this will only be the Banks who employ salaried financial advisers, Industry funds, and so called people like you Mr Christopher Bates. And for this reason it is clear that you are pushing your own agenda for your own benefit!
Christopher, can I assume then that you begin with a zero commission recommendation on all risk products? I read a lot about no commissions and then on deeper investigation I find that those advisers ‘rebate’ the commission. Why? Why do they do that when they can just dial the commission down to zero on a new policy and save clients thousands over the life of the policy. Finding all those bits of commission year after year and rebating to clients must be a nightmare. Surely just charging zero commission at commencement and a fee for the advice is logical?
Good on you Christopher. Poor commission selling of life insurance has distorted the market and contributed to under-insurance.