A further pullback on insurance advice commissions and the elimination of payment method choice would create significantly worse consumer outcomes according to provider ClearView, which has made the issue a priority in its reform agenda for 2022.
The insurance and investment firm has identified advice simplification, stable life insurance commission rates and sustainable income protection solutions as its three priority areas for reform.
ClearView chief executive Simon Swanson tells Professional Planer retaining commissions is “an issue of choice”.
“Consumers can either pay a fee to the financial planner for the advice they give or alternatively they can pay for the policy via commissions,” he says.
Life insurance commission rates in Australia are capped at 60 per cent upfront and 20 per cent ongoing, which ClearView calls “appropriate”.
Further reductions in the commission rate or its removal altogether would cause “significant” harm to an industry that is already struggling with heightened regulation and compliance, Swanson says, on top of a widening underinsurance gap and decreased advice affordability.
“We’ll be making a submission to the Quality of Advice Review on the issue of commissions,” he notes.
“Just leave commissions as they are for the time being. We don’t believe the industry is ready for the removal of commissions and I don’t see them being reduced either.”
Shadow financial services minister Stephen Jones has vehemently called for banning risk commissions and, with the election weeks away, could soon be responsible for leading the sector.
“I’ve got to say I start with a bias against it,” Jones said in late 2020. “The burden lies upon the industry at large to prove that a commission-based sales model that’s attached to an advising sector is able to provide a service to consumers that is not conflicted… I think that’s an enormous challenge.”
Both Jones and ClearView will wait for the outcome of the Quality of Advice Review, which will include a review of the Life Insurance Framework.
“I’m sure Stephen will listen to everyone’s view on the issue and come to a decision that’s in the best interest of the public,” Swanson says.
Tax deductibility
ClearView’s reform agenda also calls for tax deductibility of financial advice fees to reduce the net cost to the client and increase affordability.
“If I see an accountant for advice I can get that as a tax deduction so a financial planner giving advice should be tax deductible as well,” Swanson says.
Additionally, the government has been called on to consider making life insurance premiums tax deductible.
“It won’t happen in the short term,” he says. “There are enough fiscal issues the government has to front at this point, but it is something we should be arguing for long term.”
Swanson contends there’s a rebate for health insurance premiums, while there is also a precedent to include life insurance.
“We need to go back to where the industry was in the ‘70s where life insurance premiums were tax deductible,” he says.
Clearview also supports better usage of records of advice instead of statements of advice in cases of “simpler” advice, as well as the removal of Safe Harbour steps.
For Individual Disability Income Protection (IDII), the provider supports APRA’s decision to suspend the introduction of IDII products for at least another two years.
ClearView removed itself from delivering advice last year with the sale of its advice arm to Centrepoint, which it retains a stake in.
Trailing commissions are a vexed issue, mainly because the client sees no value in them. The thing to remember is that the trail is there to do a number of things, one of which is monitor, record and update the client information, and provide a review service, however the real issue here is the up front, frankly the upfront commissions are way too low.
It is not viable to provide the advice at 60% of the verge premium.
It needs to be closer to 80% + and even if that’s t the cost of a lower ongoing trail. It has been shown time and time again that the majority of consumers will not pay a fee. In our business we have reduced the volume of risk advice business by about 90% over the past 5 years, and unless something changes to make the risk advice model more profitable this will continue to be the case for other than wealthier clients.
Colourful language: desert earth, vultures, flat earth. But hey, even lawyers charge a fee and not an upfront commission let alone a trailing one. Commissions, upfront and trailing, have been a cancer on the industry. Just ask a client who discovers that their insurance provider is paying a trailing commission and has been doing it for xxx years. The author says that Australians will suffer if not properly advised and that they will not pay for advice. Well that’s a new one vis a vis “there is no such thing as a free lunch” idiom. The provider pays the commissions, they pass it on with their product price so everyone pays even the ones who don’t take out insurance. This is a very spurious argument and has raged for decades. Time to settle it. Every industry is regulated: true, some more than others. It is simply a cost of being in business. Remember the outcry when GST was announced? Shock horror, we will have to do something every three months (some monthly) and the accountants will become rich with all the extra work. Nearly 22 years later most people have a computer, they engage a bookkeeper to help them and work the costs into the goods or services they provide.
When it comes to the Life Insurance Industry, there are inalienable conditions that CANNOT be surrendered or changed.
Commission is one of these.
It has been proven beyond a shadow of doubt that the vast majority of Australians WILL NOT pay a fraction of what it costs Advisers to provide all the services around the provision of Life Insurance Advice and let me be clear on this, the Advice component is only a small part of the time it takes to comply with the miasma of confusing and overly complex Regulation that has killed off any certainty of tenure when it comes to this Industry now.
Ask any Australian and let them tell you how pleased they will be to be presented with a minimum three thousand dollar invoice and in the breakdown, find out that a large portion of the fee is to cover the costs associated with Regulations that no client and very few specialists understand or can articulate without 50 different opinions in a room with 50 people in attendance.
What we have today, is the end result of people with massive vested interests, little knowledge, big ego’s and limited abilities to listen, learn and understand of what it is that Australians want and are prepared to pay for when it comes to the provision of all the work associated with Advice around their Life and Disability needs.
How can anyone say that the current commission is sufficient when we have had thousands of Advisers leave the Industry and the remaining Advisers are cutting back on providing Insurance advice due to the cost and risk outweighing the reward.
Any argument about cutting out commission makes as much sense as saying the world is flat. That argument was proven wrong and all Australians willingly paying thousands of dollars for something they do not want to think about when there are so many higher priorities in their tight budgets, always leads us to the same conclusion, which is that commission to pay for all the work is the ONLY viable strategy for the vast majority of Australians and let the client decide if they are happy to pay fees, which is already available now and has been for many years.
There is a simple answer to a stupid strategy.
Kill commissions and the Advised Life Insurance Industry dies.
What will be left is a barren desert where only vultures can fly and all Australians will pay the price of much higher premiums for inferior, lower levels of cover policies that at claim time, there will be no-one to help, except the Litigation Lawyer who will demand a huge slice of a very diminished pie.