Fortnum Financial Advisers will scrap upfront commissions on life insurance advice from July 1 2015, becoming the latest Australian Financial Services licensee to make the change.
It follows similar announcements from AMP and Centrepoint Alliance at the start of May. Ray Miles, executive chairman of Fortnum, believes the financial planning industry has only a very limited timeframe to respond before the government opts for the wholesale implementation of Trowbridge’s unpopular recommendations.
Under the planned changes, Fortnum advisers will charge either a fee-for-service on insurance advice, or receive hybrid or level commissions.
“If we don’t self-regulate, we’ll have it imposed on us. Across the AFA, the FPA and other associations, the point has been made pretty clearly.
“I don’t think anyone in their right mind thinks the Trowbridge report is going to work. You can’t just not pay someone for work they’re doing. So unless someone can come up with a way for fee-for-service to work…what we have to do is make sure the industry is sustainable,” Miles says.
He reiterates the commonly held view that fee-based models of life insurance remuneration work only in limited circumstances, where holistic advice is being provided or where high-net worth individuals are being advised.
“The biggest issue of all is if you have a 35-year-old on $1 million of cover, the premium is about $1,200. If you charge a fee for that and the guy has any health issues…you can’t charge a client $6,000 for a $1,200 premium.”
As far as fixing the life insurance remuneration system, he says, “the commission system is imperfect…but that’s just how it is.”
Banks need to follow suit
In the absence of a unified mandate from the adviser associations FPA or AFA, which Miles believes is extremely unlikely, he hopes the large wealth players will soon enforce similar remuneration changes.
Speaking about AMP’s announced shift, Miles says, “I applaud them for that…it was a good stance to take, and that’s 25 per cent of the industry.
“Now we need the banks and the insurers [to commit to] no more upfront commissions from 1 July. If that happens, the problem goes away,” Miles says.
By “problem”, he means the looming threat of government enforcing Trowbridge’s recommendations for a $1,200 initial advice payment and ongoing fees of 20 per cent.
A major concern he has with a pure fee-based approach to risk advice relates to the lack of changes to premiums.
“The problem we have with fee-for-service is that if you dial a commission down, the premium doesn’t go down proportionately. It should go down by about 40 per cent, but it’s not how it works.
“The thing that annoys me…[is that] we seem to be caught in the wash,” Miles says. He believes the life insurance companies should be more accountable for problems in the life insurance sector. “The insurers know who the churners are and they could choose not to deal with them…there’s incentives all along the track on this.
“The guys in the insurance companies get paid every week, regardless of how useless they are. We’re the ones sitting in the crossfire…insurers have got too many vested interests, too many conflicts,” Miles says.
“If they’re going to have an inquiry, it needs to be into the industry super funds themselves – their underwriting and reinsurers. And secondly, into the relationship between insurers and advisers, there’s so many back-handed incentive payments.”
Are fees the gold standard?
While many advocates of fee-for-service life insurance remuneration point to this as the only route to non-conflicted advice, Miles says there are many other things that need to change before this could work across all clients, “but how do you do it?”
“Those that do it [as fee-for-service] do it on the basis that it’s holistic advice…if someone comes to them looking for standalone life insurance, they can’t do it, they walk away,” Miles says.
Some suggest technology development is a large part of the solution, but he disagrees. “I’m yet to be convinced technology will make any difference. But at the end of the day, we’re either going to underwrite insurance upfront or at claim time.”
However, if direct life insurance became more widespread, Miles believes everyone would lose out – except the product providers.
“If you actually compare the premiums, direct insurance is twice as much as retail, certainly at least 30 to 40 per cent dearer, and the client’s making a guess of what they need, so in most cases they’ll be under-insured. There’s no win in this for anybody,” he says.
“So the difference of the retail advice industry is that it gets underwritten up front…there are already online applications forms, and a lot of automation in relation to putting the documentation together. But at the end of the day, the advice has got to be bespoke for the client, you can’t automate it.”
“If we can get everyone to hybrid and level commissions, I think that’s better for everybody.”
