A fee-for-service remuneration approach to life insurance advice would create a considerable drop in earnings and overall business values for financial planners, according to the head of Centurion Market Makers.
“I don’t think clients would remunerate advisers [through fees] as well for life insurance as commissions currently do…the fees wouldn’t match the current commissions,” says Chris Wrightson, CEO of Centurion, a financial planning business brokerage firm.
“The value of insurance practices would fall if commissions were removed, because some of the opportunity would be lost.”
He explains that life insurance companies effectively fund the commission out of retained earnings or statutory funds, saying upfront that they’re going to receive the premiums over many years.
“There are a lot of people out there that would baulk at it if you try and equate that to the client experience,” Wrightson says.
Insurance practices in high demand
He says life insurance advice businesses attract higher multiples than investment-based businesses, attributing this to two key reasons.
Firstly, they are less affected by market movements, with insurance policies seeing minimal impact from a declining share market relative to investment products.
Commissions are the other value driver. “The upfront commission is very attractive, because life offices fund upfront the equivalent earnings; there’s a funding mechanism in place.
“If life offices remove that funding mechanism, they won’t sell for as much, they’ll fall in value,” Wrightson says.
Financial adviser perspective
In some ways, Neil Salkow, director of financial planning business Roskow Independent Advisory, agrees.
“But there’s definitely going to be a challenge for life insurance-only guys if they move to a fee only basis, because I don’t know how much value they add on an ongoing basis.
“The value of our business is in the relationship and the ongoing service we provide. We don’t do transactions, where clients don’t want a strategic partnership, just someone to look after the product side of things.
However, while Roskow only provides advice on a fee basis, he doesn’t necessarily see a problem with life insurance focused financial planners charging commissions. “As long as you disclose your conflicts and make it very clear that that’s how you get paid, I don’t know that I have a massive issue with it. If an adviser only provides life insurance advice, nothing else, I don’t see the issue with commissions as long as it’s disclosed. As soon as you bring strategy and investments into the mix, this doesn’t work,” he says.*
In terms of overall business value for life insurance only advisers, he believes it depends on whether the client is going to pay an ongoing fee for ongoing advice, or just a fee for one-off advice.
*This paragraph was amended to better reflect Neil Roskow’s view that commissions charged by risk advisers may be acceptable in some cases, only when they are fully disclosed and entirely focused on life insurance advice.
