ClearView calls on life industry to fix conflicts of interest

Key points:
–  The LIAWG should promote vibrant competition to drive innovation, efficiency and effective outcomes for all customers.
–  The life industry’s default position should be open architecture for approved product lists while a narrow APL should be seen as an advice quality “warning sign” and not best practice. Limiting a client’s access to financial products does not generally lead to advisers meeting their “client’s best interest”.
–  Shelf space fees should be banned.
–  Scaled volume bonuses should be banned
–  The word “commission” should be replaced with a new term such as “adviser service fee” or “financial support”. Transparency of fees should be the focus.
–  Significant changes to the remuneration of financial advisers must be avoided. 

Listed life insurer and wealth manager ClearView Wealth Limited (ClearView, ASX:CVW) has urged the Chairman of the Life Insurance and Advice Working Group (LIAWG), John Trowbridge, to drop the term “commission”, crack down on anti-competitive behaviour and avoid major changes which would reduce aggregate remuneration of financial advisers. The focus of the working group should be on advisers meeting their obligations to provide quality advice and stopping anti-competitive behaviour.

Significant reduction in overall remuneration of financial advisers will severely impact the profitability and sustainability of independently-owned advice practices, forcing many advisers into institutionally-aligned dealer groups with narrow APLs as the only means to survive, according to ClearView’s submission to the LIAWG.

ClearView Managing Director Simon Swanson warned that poorly thought out, experimental changes to adviser remuneration could severely impact and strangle the independent financial planning community which was essential for the industry’s vibrant long-term future.

In ClearView’s submission, Swanson called on the LIAWG to focus on driving competition, innovation and improved customer outcomes by addressing blatant conflicts of interest which were not in the customers’ best interests, including narrow approved product lists and shelf space fees designed to influence advice, restrict competition and channel adviser flows disproportionately into related-party products.

“We believe there is an irrefutable case that the default position should be for an open architecture for Approved Product Lists (APLs) so that advisers are not unduly restricted and customers can have confidence that their adviser is genuinely meeting their best interest obligations,” Swanson said.

“Shelf space fees are inequitable in the financial services industry and we believe they should be banned. A number of dealer groups require upfront payments, which start from around $100,000 and rise to over $300,000 per annum for life insurance products, to be placed on their APL. This means that customers are often recommended a product not because it’s the most suitable and appropriate, but because of an insurance company’s willingness and ability to pay shelf space fees.”

ClearView also proposed that the words “commission” and “incentives” be abandoned because of their negative connotation and ability to draw attention away from the industry’s real issues. Instead, they should be replaced with alternative terms such as “adviser service fee” or “financial support”.

While the Trowbridge Interim Report did not identify language in regard to adviser payments and remuneration as a significant issue, Swanson said it was important to change the language. Whenever change in attitudes are called for in society, changing language to focus on the desired outcome is always an important element. This would also potentially help advisers better explain their value proposition and remuneration structure without the discussion being overshadowed by the negativity surrounding the word “commission”.

“Financial support assists financial advisers to provide advice while allowing the broader industry to deliver cost effective products. It increases the accessibility and affordability of quality insurance advice for ordinary Australians, helping to reduce Australia’s underinsurance problem otherwise the ultimate victims will be the underinsured public of Australia,” Swanson said.

He added that any proposed remuneration changes needed to be well thought out, recognise the real cost of providing advice and the unwillingness and inability of many customers to pay a fixed fee upfront for insurance advice. Advisers should be remunerated fairly for the cost of providing advice.

The ClearView submission included a detailed explanation of the eight criteria and six characteristics which ClearView believes are essential for an effective remuneration policy.