Synchron Director, Don Trapnell says the financial advice industry has its head in the clouds if it sincerely believes a fee-for-service model for risk advice is a more professional way to charge clients than a commissions model.
“There is an argument that to be more professional, advisers should charge a fee – either a fee for service or a fee to supplement a reduction in commissions,” he says.
“For the life of me, I can’t understand how charging a fee is viewed by some as a hallmark of professionalism and I can’t understand the argument that says receiving a commission translates to being less professional.”
Mr Trapnell says that because under a commissions model advisers are only paid if they receive a result for the client, the model might actually be more professional than a fee-for-service model. Within Synchron, advisers charge as they wish – fee-for-service or a commission model – with no impact on their professionalism. What is important is the cover itself, that it is sustainable and it can be called on when a consumer needs it most.
“Would clients be happy to pay a fee-for-service then find out they don’t actually get insurance cover because they haven’t been accepted? Or because the premiums were too high and they couldn’t afford to pay them?” he says.
“In a fee-for-service world, the adviser would still have to be paid for the work done trying to get cover, whereas under a commission model the adviser would only get paid if the client were successful in getting cover and the policy stays on the books. There is merit to both approaches, but let’s not hold out fee-for-service as though it is the holy grail.”
Mr Trapnell continues to argue that international experience demonstrates that fee-for-service only risk advice does not work.
“In the United Kingdom, there was recognition that life insurance is a grudge purchase, so while commissions on investment products were removed, commissions on life insurance were not,” he says. “In the Netherlands, commissions were removed on life insurance products with devastating effect. Within 18 months, every off-shore life insurance company left the Dutch market. Within that same 18-month period, those that were left suffered a substantial negative new business growth.”
All that said, Mr Trapnell says he is not suggesting turning back the clock in relation to commissions disclosure. He also says now is not the time to lobby for changes to the Life Insurance Framework.
“Let’s get the legislation bedded down first,” he says. “It’s four years before the 60% cap on upfront commissions comes in. If we can get the legislation bedded down now, we will be able to refine it and maybe then we can look at reviewing the cap in line with what it actually costs to run a risk advice.”
