Risk advisers will now face the same challenges as other small businesses

Risk practice principals will become more like other small business owners if the proposed changes to life insurance advice are enacted, says Michael Rice, chief executive officer, Rice Warner.

“In a way, it’s similar to any other business: you put the work in at the start, and only get the return later on. They’re going to have to treat their book of business as a valuable client base,” Rice says.

He realises the proposed shift to halve upfront commissions from 120 per cent to 60 per cent over three years will mean some risk advisers starting a new business may struggle to fund their operations initially. “They’ll have to borrow money to fund themselves…but that’s the same as any small business.”

While some reports have suggested financial planners could lose more than $225 million per year in revenue under the proposed changes, Rice dismisses this figure as “something worked out on the back of an envelope.”

Ultimately, he expects insurance advice will become more profitable for advisers, anticipating premiums will decline if the proposed measure are enacted. “Generally I think it’s a pretty positive move. It’s not draconian,” Rice says.

The reforms would also help align the remuneration model of life insurance advice with the same fee-based approach mandated across investment advice, products and strategies.

“There’s nothing wrong with commissions…but because life insurance is such an integrated part of financial services, it’s probably better that the remuneration basis be the same across all those products and strategies,” Rice says.

“The difficulty though is this has been the main form of remuneration for so many years is you need a transition to change it.”

The new norm

Rice expects fee-for-service life insurance advice will become the industry standard in the years ahead. “I think that will happen eventually. It will be interesting to watch.”

He also suggests the proposed reforms will be unreservedly welcomed by accountants, who are largely opposed to commission payment structures. “Often the accountants are uncomfortable with commissions, they prefer to charge a fee.”

This is particularly prescient, given CPA Australia’s recent re-emergence as an Australian Financial Services Licensee.

The Trowbridge response

John Trowbridge, architect of the initial report produced by the Life Insurance and Advice Working Group, also welcomes the industry groups’ reaction.

“I am pleased to see that the essence of these recommendations during an initial three year transition period is to be adopted,” he says.

He also welcomes the short timeframe, despite some misgivings from the AFA and FPA. “It is important that these reforms are introduced quickly and constructively by the industry to initiate the cultural changes needed.

“The challenge is to strengthen the quality of advice, reduce conflicts of interest, offer improved value and services to consumers and extend the coverage of worthwhile life insurance protection across the Australian community.”