Today’s risk adviser is staring at a big decision. The Life Insurance Framework (LIF) reforms have been reintroduced into Parliament in October, which if implemented will phase down upfront commissions from 120 per cent to 60 per cent in an effort to avoid potential conflicts of interests.

However, advisers hoping to stay afloat in a post-LIF world must consider making serious changes to their operations to depend less on high commissions, says Elixir Consulting managing director Sue Viskovic.

“We know the [proposed] Life Insurance Framework has created all sorts of frustrations and new conversations in the industry, and what it’s really pointing to is the fact that a lot of advisers at the moment, they don’t have control of their business and their revenue flows into their business,” she says.

“It is totally dependent on the premiums that they write for clients and the amount of money that insurers are prepared to pay them in return for those premiums.”

But cutting out commissions is easier said than done, Ms Viskovic says, and there are several parts to restructuring a risk advice pricing model.

“This is about how you deliver services, your efficiencies in your business, the type of clients you work with, how you market to them, how you present your services,” she says.

“All of that is really intricately linked with how you get paid for those services.”

Choosing the right pricing model

According to Ms Viskovic, there are three types of pricing models used today: commissions only, fees only and a hybrid model combining commissions and fees.

But there are pros and cons with each route. For example, when it comes to adopting a pure fee-for-service model, Ms Viskovic says advisers will need to articulate the value that they’re bringing to the table and separate from the product itself.

“If a client does go through the process and they can’t for whatever reason get covered, whether it would be health issues or otherwise, there is a fear that the client is going to begrudge the payment that they’ve made to the advice because they’ve actually ended up with nothing,” she says.

“But when you really dig down into what an adviser does, there absolutely is a huge amount of value that they are bringing, even if the client doesn’t get covered.” Ms Viskovic adds that this move also requires new administrative processes because those who have never charged a fee before will need to figure out

how to invoice, how to collect revenue and how to set up direct debit payments.

She says that while it’s not an insurmountable challenge, “for some advisers, that’s a new challenge they have not seen before”.

Still, fee-for-service is definitely doable, according to Adrian Patty.

This includes Jason Meotti of Financial Fitness WA, who says he has been depending on both commissions and fees for the last five to six years. But there are instances where he still opts for the upfront commission route, and that is when the client is asking for a one-off service.

“For example, if it’s someone recently self-employed looking for an income protection policy, these clients are not prepared to pay a lot of advice fees,” Mr Meotti says.

“They are not prepared to pay a higher upfront for a statement of advice, because basically they are just coming in asking you to only do an execution, effectively. “Because of the costs of setting it up, the only way you can make that viable is to use an upfront model.”

Is it the end of commissions?

As LIF inches closer to implementation, concerns continue to swirl through the industry around the legislation’s potentially destructive ramifications.

Many believe that LIF will not address the industry’s so-called churning problem, whereby an adviser recommends a client take out a new life insurance policy for the reason of triggering commissions without any consumer benefit.

Financial Fitness’ Mr Meotti believes it will instead put the viability of the life insurance sector in Australia at stake.

The principal adviser at AP Financial Solutions made the big decision earlier this year to turn his practice into a no-commission, fixed-fee structure for risk advice.

He says he likes the way this model “forces my clients to see value in what I’m doing when I get their cover in place”. And for him, true value lies in maintaining a long-term adviser-client relationship.

“At the moment, I keep the cost of my insurance-only advice at a level that many advisers would find unacceptable – $2,200 including implementation,” Mr Patty says.

“Once I’ve covered the cost to serve it’s not a huge profit, but my business is all about the long-term and building value over time.

“My focus is on all clients I deal with being ongoing clients.”

Mr Patty adds that his administrative processes did not change much after changing the way he charges clients for risk advice. Instead, the biggest challenge for him was how to communicate to clients his service proposition.

“To help with this, I created a marketing one-pager that articulates the difference in insurance premiums over time,” Mr Patty says.

“Once you show clients the longer term dollar savings mentioned above, they can really see how the savings can contribute to their longer term wealth.”

However, there are others advisers in the space successfully using a hybrid model.

“The end result will be less advisers working with consumers, and clients dealing directly with insurers and taking out policies that are more expensive, less comprehensive and harder to claim on,” he says.

“Such a scenario will only increase the level of underinsurance in Australia.” Mr Meotti adds that LIF will also leave advisers in conflict with ASIC’s best interests duty.

He cites a case where he wrote a policy for a client, where one of two insurers with the available policy was marginally in front of the other insurer. The client received a 10 per cent increase in premiums each year over two years.

“If I were to be under the new LIF rules, at year one when that 10 per cent increase went in, I would not be following my client’s best interests if I did not seek to review that,” Mr Meotti says.

“What that would mean under this circumstance is that I would recommend that the client change, I’ve done all that work initially and I don’t get paid.

“I’ve effectively written the policy twice and have been paid once, and then I would be a target of ASIC’s ‘churning’ because I’ve transferred this person around in one year.”

Elixir’s Ms Viskovic says it is hard to predict whether LIF will mean the end of commissions in advice.

She adds, however, that this should be the least of advisers’ problems.

“Every industry, every profession and every market around the globe now has to rethink how they deliver services to consumers, and understand that they have to evolve,” Ms Viskovic says.

“I have seen models, and I’m seeing more and more of them every day, where advisers are completely replacing commissions with a fee. It works for a lot of markets.

“I see advisers being very successful in it, so I think that myth that clients won’t pay a fee for insurance advice is definitely a myth. We’ve busted that.”

Adrian Flores

Adrian Flores is a deputy editor at Momentum Media, focusing mainly on banking, wealth management and financial services. He has also written for Public Accountant, Accountants Daily and The CEO Magazine.

You can contact him on [email protected].