In the fee-for-service advisory space, it has become common for planners to rebate commissions paid on investment products where there is a trail involved. But when it comes to insurance, the process is a little more complicated, particularly for legacy portfolios. A planner who takes on a new client and inherits an existing insurance policy has two options: maintain the current policy, or switch the client into a new one. Where there is a commission built into the product, the easy option is to churn the policy; but that means going through the underwriting process all over again, which might not be in the best interests of the client. So fee-based planners, whose business is predicated on the fact that they do not receive remuneration based on product, must search for alternative arrangements.
Kate McCallum, partner at Multiforte Financial Services, says normally her firm would approach the product manufacturer to see whether they will rebate the commission. Best case scenario, the manufacturer will come to the table, but if they won’t rebate the commission they will usually direct it to Multiforte, who can then deduct it from the fees charged to the client. Yet in the case of a legacy portfolio inherited recently from a new client, McCallum has been left somewhat perplexed. A commission guarantee arrangement between the introducing adviser’s dealership and Tower means that, despite Multiforte being the servicing adviser on the account, the incumbent adviser gets to keep the trail.
“This really takes the cake,” McCallum says. “The client gets no value from the adviser that receives the commission, [and] there is no penalty for that adviser if they don’t service the client. If a new commission-based adviser took on the policy then they would have an incentive to churn the client out of their existing policy and into another one, which often leads to additional cost for the client, and at the heart of it, this debunks that whole claim that you can charge a servicing fee through a commission and they’re really the same thing. “This is absolutely a commission, there’s no value to the client at all and they have no control over it.” McCallum says her fundamental concern is that there is no connection between the service to the client and what the incumbent adviser is being paid.
“In every other industry, it’s the product manufacturer that bears the cost of any sales arrangements; in this case, it’s the client who’s bearing that cost,” she says. Multiforte plans to write to both Tower and Axa, which holds the licence for the practice, and McCallum says the client has taken it up with the old adviser as well. “There’s no doubt the insurance organisations have realised that they can’t continue to operate with these built-in commissions that you have no control over but I think there’s a real reputational risk for providers that are saying ‘we have no commission products’ when there’s these sorts of things lurking in the background,” she says. Bill Gilroy, chairman of Deploy Group, says the problem appears to be embedded in the product design.
“In reality, if there is a commission built in and somebody is getting it, then you would think you could take it away,” he says. “It appears to be a systems issue rather than anything else. It’s that source, how the product was designed and whether you can separate the cost or reduce the commission from the design.” Most of the products in today’s marketplace allow planners to dial the commission down to zero and secure a reduced insurance premium for the client. David Price, financial planner at Strategy First Financial Planning, says this reduces a client’s insurance premium by 30 per cent a year up front and every year for the life of the policy. “For our clients the average insurance is probably $3000 to $5000, so if they are saving $1500 per year that’s a considerable saving,” he says. Strategy First rebates all brokerages and commissions on insurance products.
However, Price estimates that less than 1 per cent of planners do the same. Indeed, Mark Vilo, head of marketing and products – life risk at ING Australia, says ING expected to see a trend away from commissions when the Financial Services Reform Act was introduced in 2004, yet this did not happen. ING gives planners the option to dial down commissions to zero on all of its insurance products. “Ninety-four per cent of all commissions are paid on an upfront basis,” Vilo says. David Evans, head of individual risk at MLC, says there has been a slow shift in the number of planners choosing to dial down commissions on MLC insurance products.
“It’s started to get more focused over the last 12 to 18 months,” he says. “We’ve probably seen a slow and steady uptake of advisers using the feature – 15 to 20 per cent of business being written through MLC has some sort of dial down commission but it’s definitely an area that’s getting a lot of focus. It’s an area where we’ve seen slow movement in terms of more advisers using this facility.” Planners using MLC’s insurance products have a choice as to how the product is paid for. “They can either choose to dial down the commission completely and operate on a pure fee-forservice basis, or they can dial down the commission partially and also charge a fee,” Evans explains.
“MLC is all about providing long-term cover to clients, so we’re trying to provide the full breadth of solutions and give as many options as we can to both the adviser and the client.” When recommending insurance, some planners will suggest the client take out a policy via an industry superannuation fund, particularly if the industry fund is suitable for the client’s superannuation as well. The benefit of this is the access to group life rates, which tend to be a lot cheaper than those available for individual policies. However this could be set to change.
Deploy Group is currently designing insurance products for segments of the market that don’t have the advantage of group life, such as self managed super funds (SMSFs). Gilroy says the firm is talking to underwriters with a view to creating basic products which give certain individuals access to group life rates. The commission rate would be fully disclosed, with the option to dial down according to the preference of the individual or their adviser. “The whole idea is to create awareness that large groups like this do have buying power if they have a sensible, cost-effective product,” he says. “Once we do that, the advantage for the underwriters is people will be able to access it very simply, cheaply and quickly and it’s in their interest, too. “I have been told that there are only 20 per cent of people adequately insured in superannuation.
My view is it’s better to increase the cover than reduce the premiums, so that’s what we’re trying to do. It’s a huge cost for planners if they’re doing an insurance policy and they have to go back and forth three times to get new blood pressure [readings] so we’re trying to avoid that. You do that by keeping costs down, commissions down and paperwork down.”