The Life Insurance Framework (LIF) is set to have a huge downward effect on most risk advice practices, with very few able to survive "such a big hit", research from Dover Financial Advisers has found.
In a study of the effects the LIF will have on new risk specialist practices from 2018 onwards, the dealer group found that a new practice opening its doors on 1 July 2018 faces a drop in real value of commission income by as much as 40 per cent.
“This dramatic drop in the real value of gross income is an existential threat for most risk insurance practices. Few will survive such a big hit to their top line,” the dealer group said.
“The new practice will recover somewhat in subsequent years as the increased trailer commissions are paid, but not completely, leaving the typical new risk insurance practice about 20 per cent worse off after seven to eight years.”
“This is a much worse result than most other observers are predicting,” the dealer group added.
According to the dealer group, many observers of the effects of the LIF are merely comparing the halving of the first year commission with the doubling of the subsequent year commissions and concluding “all will be well”.
In fact, Dover said that these observers are ignoring the effects of the two-year clawback period, increases to lapse rates and the time value of money.
“The drop in the real value of the adviser's gross commission income will be matched by an equal increase in the real value of the insurer's gross commission income,” Dover Financial said.
“It’s a zero sum game that will be won by the insurers. It’s a profit shift from advisers to insurers worth hundreds of millions of dollars,” the dealer group said.
Dover explained that risk advisers should start making business changes now, as waiting to act until 2018 will be too late to prepare for the effects the reform will have.
“Risk advisers should [work] now to adapt to their changing environment. This includes practical advice on improving their systems, reducing the length, time and scope of their statements of advice, emphasising strategies over product placement, and widening the range of services provided to clients,” the group said.
Dover has released an e-book titled Fifty ideas to take your risk insurance practice from good to great, which explores the research and the current state of play.