High up-front commissions were never sustainable but, for many advisers’ businesses, operating under a 60/20 commission model will be unsustainable.
This process behind the proposed industry framework has been driven by John Trowbridge and some members of the FSC who have no understanding of the challenges facing the average adviser.
An article in the Australian Financial Review suggested that the vast majority of advisers who don’t use a fee-for-service model simply haven’t asked their client to accept a fee. I have, and the response from clients who know what I can do for them (some of them have even claimed on polices I set up for them), is they wouldn’t have proceeded past the line, “this is my fee”.
This article highlights the misinformation and lack of understanding of what average advisers are faced with. The industry average case is about $2,500 per annum which fee-for-advice advocates admit a fee for these clients is not appropriate. Does that mean as we move towards a fee-for-advice model the average client will not be seen by advisers?
Fee-for-service in risk advice will lead to huge numbers of Australians saying 'no' to advice and being uninsured, under-insured or see them go to through direct insurance which is inferior cover at a higher cost. The clients who take up the fee-for-advice option will now (without the benefit of rebates and discounts) pay premiums plus a fee. Where is the win for the consumer?
Therefore, my issues with this framework are:
- The commission levels are not ideal but are better than 20/20 and will be manageable for the higher-producing adviser moving forward. Smaller-producing advisers will have major issues and many will need to leave the industry. Some would say this is okay, but I would suggest everyone started somewhere and more than likely they didn’t start at the top of the tree. How many great future risk advisers will we lose?
- What is very concerning is the three-year clawback. I understand that this has been done to stop churning and my understanding from what I’ve read is it is the only reason it has been applied. If I rewrite a case with another insurer in the first of the three-year period, I don’t have an issue with getting a clawback. However, I do have an issue with getting a clawback in year two or three when the client cancels the cover through no fault of my own – such as losing their job, other personal issues or changes in circumstance like selling a business. I also have a problem with getting a clawback if another adviser rewrites a case I’ve written. If stopping churning is the only reason this three-year clawback has been applied then the only time a year two or three clawback should be applied is if the adviser themself has instigated the cancellation. Advisers need certainty in what they will earn, and this policy takes that certainty away.
- Also – and personally this point relates only to my passion for the independent and non-aligned industry – at 80/20, 70/20 and especially 60/20 commission models, new risk advisers cannot start up their own practice. I’ve crunched numbers which show if a new adviser writes $80,000 in their first year (which would be a great effort), they would clear $30,000. I don’t know how many graduates who will find that attractive, but even financial planning firms will not be able to afford to hire (or keep) risk advisers at these levels. Has this been considered? What measures will the industry put in place to entice new people to become risk advisers? If none, we have just begun the end of the non-aligned risk adviser. The only new advisers will be through the banks and will never leave.
The most concerning of this outcome, however, is it will not benefit the average Australian consumer. In fact it will mean that less people will access advice and those who do will pay greater premiums, as well as an advice fee. Premiums will not drop, in fact it is likely they will increase. We have an underinsurance issue in Australia, so to fix this we will make advice more expensive, harder to access (less advisers) and not reduce premiums, but may increase the premiums going forward? There is so many downsides for the average Australian and not one upside.
Ben Day is a specialist life insurance adviser at Fitzpatrick Financial Services and a director of consultancy Risk Sales Tools.