Not so!
Here’s a conversation I had with one such adviser.
Jane is a financial planner and accountant based in Queensland and she called me recently to say that she wanted to become independent but her problem was insurance advice. She said that insurance simply has to be sold by commission because people won’t pay the fee.
Young families won’t buy insurance advice
“We deal with young families and singles,” she explained, “who just can’t afford what it costs to deliver reasonable insurance advice.”
I asked her what she charges, she said her firm time needed to recover $220 an hour. I pressed: “How much do you think it would cost to do a reasonable job for a young couple?” She replied $2,200.
So they can afford a big screen TV but not financial protection for their growing family? No, this isn’t an affordability issue, this is a positioning issue.
Redefining value
“Redefining value” is the name of Module 4 in PIFA’s self-paced, online course for associate members, “The Path to Professionalism”. Here’s what it says about this particular problem:
The total commission (upfront and trails) over the lifespan of an average insurance policy has been estimated at about 30 per cent of the premium. That’s how much extra it costs the consumer, an expense packaged into the premium. Take that out and you’ve made the policy 43 per cent more affordable (expense of 30 per cent divided by total premium of 70 per cent).
What’s the premium of an average policy? $1,500? $2,000? If you make that 43 per cent more affordable to a client that’s real value right there. If the client is a couple and both are covered under the one SoA, the value is twice as much. Extrapolate that value over a policy lifetime of just five years and the client is way, way in front.
Investing in independent advice
Plus they now have an adviser who is eminently trustworthy and has delivered real value that will endure for years to come. The conversation with the client can be expanded – there’s a bigger perspective to consider, like budgeting and savings strategies, funding for a home purchase, education planning for the kids, and a long-range investment program so that one day work can become optional. From small acorns do mighty oaks grow.
This young couple’s investment in your fees is actually an investment in their future. Isn’t that what insurance is about?
86% of consumers want an independent adviser
Last year, PIFA phoned 75,000 phone numbers owned by 40-55-year-olds living in Sydney, Melbourne and Brisbane. A massive majority of respondents said not only do they want advice from an independent adviser, but they’d be more likely to enter into an ongoing relationship with one.
If you haven’t looked at your options yet for transitioning to independence then you should start today. It doesn’t have to be like scaling a cliff or starting from scratch. It also doesn’t mean having to go backwards, revenue-wise. Nor does it have to take forever – depending on where you’re starting your journey, a coached process can have you largely transitioned within 90 days.
Ninety days to be independent?
Think about that – rather than having to brace for some pretty awkward conversations with clients about this independence disclosure, instead 90 days from today your practice could have a whole new value proposition.
Daniel Brammall is president of the Profession of Independent Financial Advisers.
If I or my firm doesn’t manufacture product then I / we should be considered independent. Commissions are a good way to collect payment (and important in terms of efficiency), it does not suggest I lean towards one product over another. I would prefer not to run around chasing customers for debts. Haven’t we overthought things here? You are entitled to run your business the way you want Daniel but clients don’t mind paying a commission, and nor should that change.
OMG !! Who is this turkey??
IFA is really getting hard-up getting good print! A waste of time reading!
Then, when your client needs to make an admin change, you bill them $330p/h, which leaves a nasty taste in their mouth, and so next time they need to change something they either wont or will try do it themselves, and likely end up replacing the advisers policy with some online junk.
These gurus always go on about working out your cost to serve a client – commission or fee, the client likely pays the same amount in most instances.
“So they can afford a big screen TV but not financial protection for their growing family? No, this isn’t an affordability issue, this is a positioning issue.”
David’s message is simple – get paid $2,200 for starting a policy, maintaining it and doing any claims management, though perhaps the latter would also be paid for by the client (?!)
Currently an $2,000 stepped premium policy for a 40-year old male has a value today of some $8,000. This value will be realised over 10 years to a financial adviser, based on a discount cashflow analysis taking into account lapse rates. the time value of money and various other items.
David’s argument is very interesting – don’t write insurance for $8,000, make do with $2,200 and [b]you too can call yourself independent![/b]. This doesn’t take into account what the adviser should be paid for the annual review (anything?) and will the client really pay another lump sum if it is in his or her interest to switch? What about a marginal claim, will the client pay a lump sum? What about an insurance application that leads to a loading or exclusion and the client should keep their existing policy (which pays commission)? What about a policy that the client, after 6 weeks to 6 months’ work, rejects (rightly or wrongly) and the adviser spent some 30 hours on it?
Has David really found working answers for all these issues even when dealing with clients who are impecunious young mums and dads or is he just suggesting that you receive some 70% less so you can call yourself independent?
Here’s a radical idea Daniel… Why not give consumers a choice!! Explain the short and long term implications of commissions v fees and let them decide whether they want small savings in the short term or large savings in the long term. But of course giving consumers a choice would be violating the “independent” definition of s923A.
Giving consumers a choice would help those who place more importance on short term rather than long term savings to still get good quality insurance advice. But supporters of the s923A definition seem to think that consumers who prioritise short term savings when purchasing insurance should be denied that advice.
Personally I think that approach is quite unethical. It will push a great many consumers into junk insurance and underinsurance. I will not be taking the choice of fees OR commissions away from my clients, even if it does mean I can’t comply with the overly restrictive way “independent” is defined in the Corps Act.
” Plus they now have an adviser who is eminently trustworthy “.!!!
It is beyond comprehension that Brammall actually believes that simply because an adviser rebates the commission and charges a fee for service is significantly more trustworthy than one who provides quality, experienced and technically proficient advice and who is remunerated via a legally acceptable from of remuneration and allows the client to access affordable advice and appropriate product.
This has been the never ending call from this man ever since he got on the bandwagon.
Advisers don’t mind one bit if Daniel Barmmall and his loyal band of followers want to be independent and only charge a fee for service or flat dollar fee only, but what really gets under the skin is the consistent comments and comparison that advisers who do not subscribe to his practice all the time are somehow inferior and less “trustworthy” than his model.
Providing the client with choice in regard to how they pay for advice is important.
Why should Daniel Brammall feel he has the elevation to dictate terms to the consumer and potentially remove choice?
It is this continuing evangelistic mentality from the PIFA that dilutes any sense of respect or credence.
If PIFA phoned 75,000 people last year, why doesn’t Daniel Brammall provide the exact questions that were asked to IFA so they can be published ?
These were uninitiated calls and was the PIFA promoted as an alternative and independent option ?
If so, this could potentially be in breach of the hawking provisions, if the benefits of engaging one of their members was mentioned.
This article is nothing more than an advertorial.
Daniel hasn’t paid anything to IFA to get a plug in.
The real issue is that Brammall doesn’t want to accept any other method other than his own and frames those who do as untrustworthy or unprofessional.
The most ironic part is that I have never met a competent risk adviser who charges a fee instead of comms. The only ones I have met are ‘holistic’ advisers who are out of their depth with the slightest hint of complexity.
Thanks for your thoughts on fee for service, Daniel. I understand the positioning argument you have articulated, however, having attended many such courses (which I suspect may have similarities to the one you are offering) over my 35 year career, the simple fact is that most people would rather buy the flat screen TV than obtain advice for their insurance requirements, no matter how you position it. Paying for insurance advice can also transcend so called socio-economic boundaries. For example, mid last year, we acted for a very well heeled client who was referred from an excellent centre of influence. The client understood our proposition (he specifically noted that he didnt want to pay commissions and want to pay a fee. He understood our fee proposal & wanted to proceed. Given the client’s medical & familial history, we advised the client that it would be a challenging & time consuming case. We explained the circumstances provided an indication of the likely fee. The client accepted that & we obtained a signed letter of engagement. We successfully arranged the required cover. The fee came in a bit lower than anticipated, and we invoiced the client for the lower amount, thinking he would be happy with that. Not so. Despite chasing the client for months, he refused to pay. His basic reason was he didn’t want to pay for insurance advice. When we spoke with the CoI, he was perplexed as his dealings with this client had always been excellent and professional. The CoI approached the client, but the client dismissed him out of hand. After many attempts, we had to get lawyers involved and after the third letter from our lawyer attaching a draft statement of claim did he finally relent & pay. We have removed ourselves as his adviser because we want nothing further to do with him. Yes, a one off bad experience, but illustrates the problem.
And that reminds me, it’s all very well to dial comms down to zero & charge a fee to arrange the cover, but what about charging fees for claims management when there is no other remuneration? Some of these IPP & TPD claims can drag on for years. I’d be interested to hear from anyone on that aspect.
Daniel,
Theres so much to tear apart in what you’ve said its hard to find a place to start.
For one, if fee for service risk advice is feasible why has it failed in every market it has been forced upon?
I regularly attend industry events and speak with people from insurance companies at all levels, BDM’s to CEO’s. Why does not one of them know a single advisor of substance that manages a specialist risk advice business operating on a fee for service model?
The figure you have anecdotally used of $2,200 is well below what would be required to make a risk advice business viable. The very least amount of time it can take to prepare risk advice would be 10 hours and cases such as this are few and far between.
Instead of the self-serving anecdotal evidence you are referring to, why not point to something a bit more scientific such as Zurich’s whitepaper? Zurich outsourced their research to Rice-Warner and didn’t call respondents themselves as PIFA have done.
You mention that 86% of consumers prefer an independent advisor as though this tells a story. When you contrast it with Zurich’s research that states 78% of consumers would be unwilling to pay more than $500 for insurance advice, you realise how meaningless the 86% statistic is.
Finally, the underinsurance problem in Australia is a salient truth. I assume you take it to be coincidental that since slashing adviser remuneration the underinsurance problem has excarcebated significantly.
Sure, i agree that the risk advice space will be able to lay claim to a greater degree of professionalism should commssions be axed. However, there will be no risk advice industry.
With new business rates continuing to plumment, insurers will simply be forced to move wholly into the direct and group spaces. Resulting in a worsened underinsurance problem.
Your article smacks of irony. You are espousing the benefits of being independent while doing a very poor job at masquerading your egregious conflicts of interest.
The battle you should be picking is around why on earth uniform commissions result in a lack of independence. No adviser can receive and form of kick back or incentive from an insurer and commission rates are essentially government mandated.
Except premiums are going up 25% per year and this couple will need to be paying at least $2,200 every couple of years to move to lower-cost policies. None of my clients seems to care that I take insurance commission and when I give them the option to pay an upfront fee, with me not receiving commissions they have always said no.
except for a ;lot of advisers, a really good way of offsetting the advice costs is to actually earn a commission,there may not always be a need to charge a fee, the trail commission may be just the ticket in allowing an adviser to provide incidental advice / support when the big ticket advice may not be needed as often.
I am still confused about how life commissions make someone “less” independent, it might be an issue if half the industry paid comm’s and the other half didn’t, but Everyone pays life commissions and more over at the same rate, sure there may be an argument that some advisers will up sell unnecessarily, I suspect however that really isn’t anywhere near the prob,em supposedly was, a bit like the furpfy around supposed widespread churning which we now know to have been a total beat up by you know who!