Two senior financial industry figures vigorously debated their opposing views on adviser remuneration during an Australian Securities and Investments Commission (ASIC) conference panel session yesterday.
Robert M C Brown AM, chairman, ADF Financial Services Consumer Council, believes fee-for-service advice in life insurance is a viable model. “Could it be that the industry’s claim that many customers will not pay a genuine fee-for-service for financial advice, including for insurance advice, is driven by its desire to not let go of its remuneration arrangements that are directly tied to product sales?” he said.
Brown argued against the common insurance company retort that removal of commissions on life insurance advice would exacerbate the high rate of underinsurance among Australian consumers.
“Could it be that the existence of insurance commissions is causing the so-called underinsurance problem in Australia? After all, commission has been the dominant remuneration model for over 100 years of life insurance selling, so why are Australians still underinsured?” he said.
Brown’s views diverged from those of fellow panelist Simon Swanson, managing director, ClearView, who doubts fee-for-service life insurance is a viable remuneration model.
“We should also seriously consider whether a level “service fee payment” model or pure “fee for service” model can be practically implemented on a universal basis,” Swanson said. He argued that removing the option of paying for insurance via commissions would discourage more Australians from taking out life insurance.
His views echoed many of those voiced last week by ClearView chief actuary, Greg Martin. These included the idea that the term “commission” should be replaced with “adviser service fee” as part of the process of shifting perceptions.
“When consumers are given the option of separating advice from implementation they’ll typically try to avoid paying for advice. They’ll shop around for a cheaper way to implement the advice,” Swanson said.
Expanding on this point, he believes any process separating payment from the advice and implementation process is “dangerous and vulnerable to gaming by clients and other attackers.”
Swanson also argued against level commissions, which the Financial System Inquiry recommends in line with ASIC’s finding of a correlation between high upfront commissions and poor advice. He believes this would see an inevitable rise in premiums, and would cause many independent advice businesses to struggle.
“Only large institutions would be able to fund the costs/revenue mismatch, forcing the majority of advisers to align themselves with an institution to survive,” Swanson said.
Before even attempting to address issues around remuneration, he suggests culture and professionalism need to be fixed.
“I support the general observations of ASIC and the FSI recommendations including the need to lift adviser education; introduce an enhanced ASIC adviser register; improve licensee ownership transparency; and give the regulator powers to ban “bad apples” from managing licensees,” Swanson said.
Brown directly challenged some of these areas within his presentation.
“Could it be that the industry is deliberately avoiding its deeper structural problems by suggesting that all can be resolved by getting rid of a few bad apples?,” he said. Brown also suggested the industry may be creating “diversions and deflections from the genuine solutions, by suggesting that advisers and consumers should be better educated.”
“Could it be that financial advisers want the right to call themselves professionals without accepting the self-regulatory public interest and ethical obligations that must accompany that descriptor,” Brown said.
Referencing the large number of inquiries and reports into the sector in recent years, he said none have comprehensively addressed remuneration practices that he believes have caused many hazards. “Although FoFA came uncomfortably close, which might explains why aspects of it were so strongly opposed by the industry.”
