There is work to be done in educating consumers about the value of risk advice, and while the life insurance industry has made great strides in addressing issues surrounding conflicted remuneration, it must continue working collaboratively with industry and government to ensure clients are firmly at the centre of the advice equation.
These were some of the conclusions experienced risk advisers came to – alongside leaders of the country’s largest insurance companies and CEOs of industry representative bodies – in front of the policy makers and regulators who will be making decisions that could reshape the advised life insurance industry in the coming months and years.
They came armed with research, case studies and a united voice to attend a discussion entitled Guided by evidence: Articulating the value of risk insurance advice, initiated by AIA Australia and facilitated by Professional Planner.
The discussion follows an event series which began in Melbourne in June and will build towards the inaugural AIA Australia/Professional Planner Risk Advice Summit in late September. Those in attendance spoke of the challenges that the industry is facing in maintaining sustainable business models that deliver advice, which significantly improves the lives of average Australians.
Among the participants was Senator the Hon. Jane Hume, Assistant Minister for Superannuation, Financial Services and Financial Technology, and the latest minister in charge of setting the rules which govern the advice industry.
She was joined by ASIC’s executive director of wealth management, Joanna Bird, who is responsible for leading the mandated review of the risk advice industry which in 2021, will assess the effectiveness of the Life Insurance Framework (LIF) to date. Shadow and Assistant Shadow Financial Services Ministers Hon. Stephen Jones and Hon. Matt Thistlethwaite also joined the discussion.
There to chair the discussion and reflect on what has changed for the advice industry was Hon. Bernie Ripoll, the former Australian Labor Party MP who was the financial services minister in charge of leading the sweeping legislative changes to address conflicts of interest in advice under the Future of Financial Advice (FoFA) reforms.
“The biggest reform that I’ve seen since the pre-FoFA days is a cultural shift, aside from any regulation or legislative change. Halfway through the banking royal commission we saw organisations and business models changing to anticipate what would be in the future, so we’ve already seen a lot of that. Right now in front of us we’ve got FASEA [Financial Adviser Standards and Ethics Authority] with new education standards. So we’ve got the whole weight of change coming on the sector all at once,” Ripoll said.
ASIC’s Bird outlined the scope and timeframe for the regulator’s mandated review, three-years on from the implementation of LIF. The ASIC review was given greater significance following a recommendation in the Hayne royal commission’s final report, which called for commissions to be reduced to zero unless the review showed clear justification for retaining them.
Much of the discussion during the Canberra roundtable was devoted to broadening the conversation beyond reference to the remuneration of risk advisers. Participants drew on data and case studies to demonstrate that conflict-free advice was not mutually exclusive with commission-based remuneration.
“We do need to concentrate on the value that we bring to both the Australian public and the economy around life insurance advice and there is, in the broader context, a large number of Australians who do have an unmet advice need,” Financial Planning Association CEO Dante De Gori said.
“But we also do need to face into the reality of the challenges we are facing and why people aren’t getting advice, whether it’s life insurance advice or advice in general,” De Gori continued. “One of those challenges is cost.”
De Gori sat shoulder to shoulder with Association of Financial Advisers CEO Phil Kewin. Combined, the two associations represent approximately 15,000 advisers across the wealth management and risk advice spectrum.
“We shouldn’t lose sight of the fact that there are a number of pieces to this puzzle, it’s not just remuneration, it’s definitely about educating the public. But we need to do a better job in explaining that value and the reason why we provide value to the consumer, to the economy and to the standard of living,” De Gori added.
A MORE LEVEL PLAYING FIELD
The LIF reforms went a long way towards levelling the playing field so insurance companies can’t perpetuate conflicted advice by paying higher commissions than their competitors, Damien Mu, AIA Australia’s CEO, highlighted.
Prior to the LIF changes implemented in 2018, commissions could lead to conflicts as insurers were able to set their own commission level, from 100 per cent to 120 per cent typically, so advisers could then in theory place business where they could get the greatest return.
However, in a post-LIF environment, where commission levels are regulated and fixed, the commission conflict has been taken out of the equation because there is no financial incentive for advisers to recommend one product or insurer over another, Mu outlined. “Now I think the industry can say that we’ve made significant progress to address a number of those issues through policy change, through standards that we’ve implemented, through other initiatives, and now we need to get in front of this issue and really lay the foundation for how we set up a sustainable advice industry to serve Australians. The biggest issue to address is not commissions but how we have legislation that supports a quality advice industry to meet the underserved and widening need risk advice needs for Australians. We need a growing advice industry,” Mu said.
The often-referenced underinsurance problem, combined with the challenges that the risk advice industry faces when it comes to articulating the need for tailored advice, were two pressing areas both the politicians and industry representatives discussed during the roundtable.
“I think we need to remember that insurance is very much a grudge purchase that people undertake when it comes to the industry justifying life risk commissions,” Allan Hansell, the Financial Services Council’s director of policy, said.
“Because of the very intangible nature of the contract between the insurer and the insured and the fact that it’s very difficult for people to conceptualise the need for cover, the level of cover, etcetera, there’s a lot more work that needs to go into an advisor helping a client, both realising the importance and the value of life insurance and also choosing a level of cover,” Hansell noted.
“Many Australians wouldn’t walk out of a showroom buying a car without being insured. But walking into their first full-time job, people don’t think about being insured or getting themselves insured when they’re buying a home or whatever the case may be. So, it’s not in the actual connection – people aren’t making that connection in terms of the cover, but then also they’re not making the connection of the advice to support them on getting that cover,” the FPA’s De Gori highlighted.
MIND THE GAP
There’s been no shortage of research regarding the underinsurance gap in Australia. Rice Warner estimates that the gap between life cover held and cover required to maintain current living standards is $2,166 billion for death cover, $7,912 billion for TPD and $589 billion for income protection.
Median life cover is only 37 per cent of the income replacement level – the level required to replace the expected net income of the insured and maintain current living standards until the insured would have reached age 65 – based on the actuary’s 2015 Underinsurance in Australia report.
“We all come from the perspective of wanting to see more people insured, said
Hon. Matt Thistlethwaite MP, Shadow Assistant Minister for Financial Services.
“We all know that Australians are underinsured and because of that, there are increasing social costs. There are costs on the Australian budget through our health system and the NDIS [National Disability Insurance Scheme] that we need to deal with as a society. So, the challenge for us is how we do that and how we as a parliament deliver the policies that encourage people to take out more insurance, both life and general insurance in other areas, in a confident manner,” Thistlethwaite added.
Through the recent royal commission and other commissions that have addressed issues in the banking, advice and superannuation sectors, average Australians are becoming more aware of payment structures such as commissions, and they’re more attuned to getting value for money for the services they receive from the financial services industry, Thistlethwaite continued.
“You need to justify why commission payments are there if there’s a perceived conflict and those are the issues that you need to address, I think, as an industry,” he said.
DIGGING INTO COMMISSIONS
Marisa Broome, a practicing financial adviser and practice owner with Wealth Advice and chair of the FPA, highlighted that her clients don’t see conflicted remuneration when they pay her a fee for advice and then pay a commission for the risk adviser’s service she refers them to.
“They value it [the risk advice], they understand what they’re paying and they understand it’s a different way of doing it. They don’t actually make that distinction between the two of us and they have a relationship with both of us to walk down that path to make sure their needs are actually being met,” Broome described.
“Conflicted remuneration is something we talk about as an industry and as a profession. It’s something that is perceived as being evil, but it’s actually not an evil thing if the client knows how they’re paying and what they’re paying and what they’re getting and they’re seeing that value,” she explained.
“The research we’ve done shows that customers do not want to pay a fee for life insurance. It’s different to investments where you’ve got a couple of hundred thousand dollars of investable assets and are you willing to pay a fee for the advice associated with that, relative to life insurance where you don’t know if you want it or need it. It’s a very different conversation about paying a fee upfront for that life insurance,” Tim Bailey, Zurich Financial Services chief executive, life and investments, said.
Results from Zurich’s customer survey, as outlined in its Risk Advice Disconnect paper, revealed that 78 per cent of consumers would only be willing to pay $500 or less for risk advice, while 28 per cent are unwilling to pay a fee at all, and none were willing to pay $2,000 or more.
“The work we have done with consumers highlights there is a significant gap between what customers are willing to pay upfront compared to the actual cost to advisers to provide advice and implement a policy,” Bailey said.
The paper estimated that the cost of providing advice to implement a policy is around $2,714.
“We realise there’s been some significant upheavals and we want to make sure that we work collaboratively with you to make sure that all Australians have the most appropriate insurance that suits them and that actually serves their purpose and serves their needs,” Senator Hume said.
Advisers and business owners around the table painted a picture of the challenges the industry is currently facing to stay in business in light of regulatory changes and recommendations from the royal commission to reduce commissions to zero pending the regulator’s review.
“The sad thing is that the sector is under extreme stress at a time when we need more advice. I’m not sure how small business people are expected to employ staff, do study, find clients, pay the bills, open the doors, pay the superannuation and then have to go back to school,” Wayne Handley, Bombora Advice managing director, said.
Hume spent time at the table listening, and did acknowledge the challenges that the industry faces, as well as the myriad benefits of advice.
“Yours is an extraordinarily important industry, not just in this building, but to Australians more broadly,” she said.