Bill Shorten sprang a surprise on the planning industry with a proposal to ban insurance commissions inside superannuation. Krystine Lumanta reports on how the industry is gearing up for the challenge.
The announcement of a ban on insurance commissions inside superannuation funds caught many in the financial planning industry off guard.
The Assistant Treasurer and Minister for Financial Services, Bill Shorten, unveiled a revised Future of Financial Advice (FoFA) package in April, including a ban on upfront and trailing commissions for individual and group insurance within superannuation from July 1, 2013.
Although the proposals in FoFA remain just that – proposals – and even though the insurance commissions ban has, after opt in, attracted the greatest criticism, the industry is nevertheless already assessing how it will cope.
Paul Barrett, general manager of advice and distribution at ANZ Wealth, says there will eventually be innovation and solutions from product providers, licensees and advisers to solve the remuneration dilemma, but “there’s a long way to go”.
“I suppose we’re all grappling with that and we’ve got to work out a system for potentially enabling advisers to get paid via some kind of fee-for-service mechanism,” he says.
“And I think all of the product providers are grappling with that, so they’re thinking [about] how to actually deal with a mechanism to facilitate fee for service with insurance.”
Another challenge advisers and dealer groups will face includes “the potential criticism that the reason advisers are writing outside super is for commissions, which we know is not the case”, Barrett says.
“There are different reasons to provide insurance both inside and outside super as it stands today, and those reasons will continue.”
SOMEONE’S GOT TO GET PAID
Duncan West, executive general manager of insurance at MLC & NAB Wealth, says that “insurance represents a valid form of remuneration for advisers, and advice versus non-advice should drive the payment of commission…not a tax regime of super”.
Barrett says: “Protection of your wealth is quite a different scenario from growing your wealth. I think you can mount your case legitimately and say, well, remuneration systems need to be slightly different.
“At the end of the day, someone’s got to get paid to implement the insurance policy…whether you’re paying commission or some other fee to enable that to happen is like one and the same thing.”
Greg Cook, managing director of Eureka Financial Group, says that “making it illegal for somebody to receive a commission for selling risk insurance in super is unworkable…and an unnecessary step”.
“One wonders, why? If it’s such an important principle?” Cook says.
“Consumers buy all kinds of things where they know [and] understand that there’s a 10 per cent commission; it’s just an understood part of the transaction.”
“There should be every opportunity for [advisers] to do that if that’s the way they want to differentiate themselves in the market as practitioners.
“I’m not personally anxious about it, as I think our business can handle it either way, [but] it’s just too much of a government environment; it’s turning into a Nanny state.”
For those that don’t have a fee-for-service offering encompassing insurance, the obvious change will be the cashflow of the business.
West says: “How you have a remuneration that reflects the effort of the adviser is not straightforward in a commission-free environment.
“The need for the industry collectively – both the insurers and advisers – to strip transaction costs out so that it’s easier, quicker and cheaper to place life insurance, will place the pressure on all of us to reduce the transaction costs.”
He says the new structure that remuneration takes “will become clearer as we get closer to [the] detail of the reform”.
“It is doable.
“We already have advisers in our network who do business on a fee-for-advice basis but the challenge is whether it’s in the consumer’s best interest.”
Scott Walters, head of financial planning at Yellow Brick Road, says that as a fee-for-service organisation, they will encourage clients to pay the fee for the insurance advice.
“[But] it might still present a barrier for some clients and they may choose not to go ahead with advice, despite our best intentions,” he says.
“If practices are not already prepared to adopt a fee-for-service arrangement as true professions should do, then that will continue to present a challenge for some groups – a significant structural and business model challenge.”
According to West, a new remuneration structure on the basis of fee for service will also mean “a different discussion with the consumer”.
“It will have a significant impact on advisers’ businesses and they will need to relook at their value proposition in the light of the change of remuneration,” he says.
BLOCKING THE “NATIONAL INTEREST”
If the proposal gets the go-ahead, the obvious implication will be its effect on the underinsurance problem in Australia – the argument that many are putting forward to oppose the proposal.
Insurance provider eChoice says that as of September 2010, only 22 per cent of Australians have life insurance; and of these few that do, most are extremely underinsured.
Barrett says “insurance is in the national interest” and needs to be thought through as one of the guiding principles to the reforms.
“Having people insured – their lives, their assets, their incomes et cetera – is in the national interest because it actually reduces the strain on the welfare system,” he says.
“The second guiding principle is that you have to make it as easy as possible for people to access something that is in the national interest.
“With this particular [policy], whilst I think the intent is good, two separate regimes – one for insurance inside super and one for insurance outside super – will distort the insurance market.”
Walters says the same policy was already tried in the UK and was unsuccessful.
“About two years after the experiment, the whole thing was reversed because it exacerbated the problems of underinsurance in the UK,” he says.
Client willingness, as well as ability to pay for the fee, is another challenge for Australians already struggling with the cost of living – the very same people the policy is supposedly protecting.
“There will be some for whom the payment of a professional fee for the receipt of advice on life insurance will just be a bridge too far and that would be a shame, because we see first-hand the benefits of owning insurance,” Walters says.
INSIDE/OUTSIDE SUPER
Justin Delaney, head of insurance and platforms at Macquarie Group, says that the proposal is an unbalanced one as commission is allowed in one scenario but not in another.
“Regardless of whether or not you’re pro- or anti-commissions, the problem with the current suggestion is that [it] has created a potential conflict; and also it means that advisers are being remunerated based on what tax product is being applied to a product, which I think is problematic.
“The concern I have is more around an even playing field that is now being distorted through a potential remuneration change in terms of that structure,” Delaney says.
Walters says it doesn’t make sense to distinguish between insurance policies taken inside and outside superannuation.
“I would’ve thought the better way to think about the payment of commissions was whether the policy was advised or not advised,” he says.
“Good financial planning makes the distinction, or at least assesses the relative merit, of taking insurance inside or outside superannuation and there are pros and cons for both decisions.”
Delaney says advisers that are recommending to clients insurance within superannuation will have to look at charging an explicit service fee for that component.
“And consistently, research has shown that most consumers don’t like that proposition and would prefer to have an in-built commission to a product; and that’s just human nature I think, regardless of the economics. It’s disclosed in the statement of advice.”
However, if the Government had proposed to ban commissions over the whole spectrum of insurance, Delaney says there would be “a dramatic shift in the insurance market and I have no doubt it would exacerbate the affordability issues associated with Australians getting advice and being adequately insured”.
“Insurance is all about pooling risks and pooling client experience,” he says.
“If you think about an adviser’s practice, they might see X number of clients and only a proportion of those will either take up the offer of insurance, or some might not even be offered insurance, but [the adviser would have] still done the same amount of work.
“That’s why the current process and paradigm works.”
Delaney says whether a ban on insurance commissions in super will have a great effect on policy premiums is still vague.
“There are that many inputs in pricing a risk product that we’d certainly have to take a look at what the outcome might be.
“But the reality will be that the adviser needs to be paid for the advice, so I don’t think the price for the client will shift dramatically at all.”
Barrett says: “The level of complexity in dealing with financial planners is increasing.
“And so, groups like ours are trying to simplify and demystify financial planning to enable greater take-up.
“Moves like this one are counter to that.”
