In a statement responding to the Murray Inquiry final report, the XY Adviser executive committee has outlined its response to a number of issues raised, including the proposal upfront risk commissions are no higher than ongoing.
“XY Adviser agrees that ‘churning’ of insurance policies is an issue that needs to be addressed,” the statement said.
However, it adds that the “proposed changes to insurance premiums will require most financial advisers to charge a fee directly to their clients for insurance advice to cover the costs of providing this advice” which, in turn, “will result in a lower take up of insurance by middle and lower income Australians, further increasing the existing underinsurance problem in Australia”.
“An unfortunate consequence of the proposal is that advisers will be only able to cater to the top end of the market, which does not address the churning issue,” said XY Adviser co-founder Ray Jaramis of Treysta Wealth Management in Sydney.
More broadly, fellow committee member and AP Financial Solutions adviser and mortgage broker Adrian Patty said the lobby group welcomes the report in general, and that XY Adviser endorses any policy changes that will result in better outcomes for the industry and clients.
Increasing the clawback on upfronts only to 3yrs could be another option. This will deter those advisers that constantly churn. If we were to go to level only,we would need to charge a fee for the insurance advice to make it commercially viable. This could also lead to advisers being reluctant to give risk only advice as many advisers these days are focused on the ongoing relationship and are moving away from the transactional advice of the past.
[quote name=”Clayton Daniel”]Decreasing incentives for stepped policies and increasing incentives for level policies could be a potential solution.[/quote]
I agree Clayton. Surely it is better to hold a Level policy for 20 years rather than a stepped policy for 5 and then re-write it because it becomes too expensive. Maybe Life Insurance needs to go down the same path as Health Insurance.
Decreasing incentives for stepped policies and increasing incentives for level policies could be a potential solution.
The issue with moving to level commission is that unless an insurance premium is circa $10k, it will not be commercial to provide advice to clients. In my opinion I think it will also be difficult to tell a 25 year old that had just purchased their first home that wants income protection, that they are required to pay $2k+ for advice out of pocket. This is an outcome that will leave more Aussies worse off and further increase the under insurance issue we are seeing currently. All under the guise of eliminating churn, when surely there are more effective ways to do this.
The solution for both mortgage broking and insurance is the same, a level ongoing commission in return for keeping the business “in force”. Adviser businesses in need of working capital can easily borrow against such diversified revenue stream. No clawback of upfront and lower cost for consumers would ensue.