The roar of disapproval that greeted John Trowbridge’s review of the life insurance sector in March this year has died down to a hum of dissatisfaction.
In mid-April, Assistant Treasurer Josh Frydenberg declared the industry had only weeks to put forth a credible alternative. In response, the Financial Planning Association (FPA) came together with the Association of Financial Advisers (AFA) and Financial Services Council (FSC) to draft the Life Insurance Framework. Frydenberg endorsed this on June 25.
Some have suggested that generating intense debate was Trowbridge’s aim all along in recommending level commissions; that it was designed to soften up the industry for revised measures. These would still prove unpopular, but less so, when compared with the initial options.
To avoid the imposition of what the AFA and many of its members saw as draconian recommendations, national president Deborah Kent reiterated the need for a sufficiently robust alternative from industry. “I don’t know that a lot of the advisers out there understand it was level [commissions that were suggested] in the FSI [Financial System Inquiry]…we may have ended
up with something a lot worse,” Kent says.
Chris Unwin, a 20-year veteran risk adviser and training consultant, agrees: “I think that when the original Trowbridge report came out, it seemed the original proposal of 20 per cent flat was a classic example of throwing a grenade into the room and seeing what the fallout was.”
He says a hybrid model of 80 per cent upfront commission and 20 per cent ongoing would have been preferred, “but I don’t think 60 per cent will be the end of the world”.
Unwin believes the three-year transitional period makes this considerably more palatable, though he has mixed feelings about the doubling of ongoing commissions, which will increase to 20 per cent. On the one hand, he has concerns this could see life insurance premiums rise, which would exacerbate rather than reduce the level of underinsurance among Australians. On the other, this increased ongoing commission partially offsets the reduction in upfront commission. “It’s a trade-off, [so long as] you’re prepared to put your head down for the first few years,” Unwin says. “And look at what the long-term payback is: your ongoing commission is going to be doubled, once you’ve done the hard graft.
“It’s not all bad…it’s creating a shake-up. I think [some risk advisers] have become lazy, and there’s certainly not the same level of activity as when I joined the business, either when I was in the UK or when I came out here 20 years ago.”
Some advisers are concerned about the workload required to generate enough income from life insurance advice under the proposed changes. Unwin says that in one online forum, there were complaints that a new adviser would need to take on 20 to 25 clients in a 12-month period. “My question there is, ‘And? What are you doing the rest of the time?’” he says.
While he concedes it will be challenging and believes the changes will give a better long-term outcome in making advisers fine-tune their skills, the retention or “clawback” provisions are one area of the proposed changes he opposes. They would mean an adviser has to repay all of the first year’s commission if a client cancels a policy within 12 months, diminishing to a clawback of 60 per cent or 30 per cent if cancelled in the second or third year, respectively.
“I agree with the groundswell of opinion, that that’s a bit discriminatory,” Unwin says. “I think it should only apply if a policy lapses at the instigation of the adviser. It should be more specifically targeted at churners.”
David Bourke, principal of a specialist risk and superannuation practice on the eastern outskirts of Brisbane, takes a less sanguine view: “It’s very upsetting. A lot of my friends who run professional risk practices are devastated; they share my sentiment.”
He has run Bourke Financial Services, an authorised representative of TAL-owned Australian financial services licensee Affinia, for 18 years. Bourke expects his firm of three planners – which has been working under a hybrid commission model for some time and also provides superannuation and other advice – will be able to weather the changes.
“But a lot of my friends are going to have to let staff go. That’s the unintended consequence of this 60 per cent upfront commission that’s proposed,” he says.
“While the 80 per cent is fine, that should have been where it settled. I just think the 60 per cent [commission] framework is just extremely restrictive.”
