The value of risk focused financial planning practices would plummet if the Trowbridge report’s remuneration recommendations are implemented, according to business brokers.
“If Trowbridge’s recommendations were all implemented in the next 12 months, within two years, half the life agents would leave,” says John Birt, principal, Radar Results.
Birt has conducted his own analysis among around 12 risk focused financial planners, who provided their views on Trowbridge’s recommendations. One of the points that emerged is that the minimum cost to put in place a basic life insurance policy is $1,200.
“That’s just the cost. But you need the profit on top,” Birt says. He believes this only accounts for around one-third of the overall upfront remuneration needed.
“Some advisers are moving in the direction of taking less upfront and adding more to the trail. But not to the degree Trowbridge has recommended, it’s rather extreme.”
He suggests fee-for-service will eventually be commonplace within life insurance advice, “but not for another 20 years or so. The public has to be ready to accept it”.
“I think the Trowbridge report, if it is implemented, is going to have a devastating impact on life insurance businesses…my take is, I couldn’t see it being introduced in its current format,” Birt says.
He believes eliminating ‘churn’ was the starting point for the formation of the Life Insurance and Advice Working Group (LIAWG) that engaged Trowbridge to conduct the review.
“I think life insurance companies would have enough information now that if there’s any advisers or agents who are churning, against the interests of the provider and the client, they should be able to be identified pretty easily.”
He sees potential underservicing of younger clients and the report’s five-year rule as the biggest pitfalls. The five-year rule means the Initial Advice Payment of $1,200 can only be paid once every five years, with the aim of addressing the issue of policy churn.
Premium of risk businesses will erode
Chris Wrightson, chief executive of Centurion Market Makers, refers to figures showing the average value of financial planning practices over the last five years has fallen: “Throughout that period of time, risk and super practices have traded at a premium to other like financial planning businesses in terms of size.”
“We see that premium just disappearing now as a function of implementing the Trowbridge recommendations. So clearly, risk only practices would fall in value the most,” he says.
Wrightson compares the current environment for life insurance advice to the pre-Future of Financial Advice (FoFA) period for the overall planning sector. “All the systems and operationalising were being done, but practice owners did very little other than those sorts of things, they waited to see what it would involve, the implementation date, before they made any real business change.
“I think the marketplace generally will take a view that is, ‘okay, the long term outcome from any of that stuff is that…this part of the advice marketplace is going to get more regulated.’ And perhaps remuneration is going to drop, but how great that drop is…will impact how people will respond, and as a result, people aren’t going to do much.
“You might not see such an immediate impact, but in the medium to long term you will,” Wrightson says.
Birt raises the point that although upfront payments are considerably lower under Trowbridge’s recommendations, the ongoing rate of 20 per cent commission is around double the current average of 10 per cent.
“I don’t know if they would deteriorate, because if you’re replacing a 10 per cent trail with a 20 per cent trail, then that actually doubles the value of the business.
“And if all the policies have already been written already, then there’s no change in the valuation. It could actually see practice prices…escalating, because generally businesses are sold on recurring revenue, not upfront,” he says.
However, Wrightson believes this fails to consider a few key points. “While the revenue might be higher, the multiple will be lower. The opportunity to increase client policies and get 100 per cent upfront has ben removed.
“So there’s just not going toe be the demand for risk businesses that there was, and reduced demand gives you reduced prices.”
