Why the life risk reforms may not be good for clients

Assistant Treasurer Josh Frydenberg's reform proposals for the life insurance industry are, effectively, a legislated reduction in commission rates with a commensurate extension of the "responsibility period" to three years.

The members of the FSC must be having trouble keeping the smiles off their faces with this massive, legislatively mandated reduction in their costs of doing business.

With this reduction in earning potential from risk advice to be legislated to take effect from 1 January 2016, already a number of financial advisers are stating their intentions to withdraw the provision of risk advice from their service offer.

This reduction of market participants will inevitably result in even less Australians obtaining appropriate insurance advice than is presently the case. And, we all know who bears the cost for this problem; the public purse!
Yet again, the adviser is painted as the villain in the piece.

Is there a problem with the present system? There is, if the insurance companies are to be believed.

According to them, it takes seven years to break even on an insurance policy that paid upfront commission, yet the average policy life, according to them, is only five years. In spite of this, no life office was prepared to address the problem voluntarily by reducing upfront commissions.

In the numerous conversations I have held with life company executives on this issue, I was repeatedly told there was no "first mover advantage" in doing anything about it.
Now, seemingly out of the blue, we have the government, with no, overt at least, pressure from any interest group, mandating a reduction in commission.

So, it's a win for the insurers and a loss for the advice community.

Don't get me wrong, I'm not arguing in favour of retaining the status quo. For years, I have gone on record for making the case that upfront commissions do the industry a dis-service. We have operated on a hybrid commission model in our business for the best part of a decade and use commission as a credit against fees for service.

My concern is simply this; as far as I can determine, there is nothing in the measures that imposes any onus on insurance companies to pass any of the resultant cost savings on to consumers in the form of premium reductions. Nothing! And, you can bet that, in the absence of said onus, what premium reductions we do see will be a fraction of the reduction in commission.

So, while the advice community bears the pain of the change imposed by these measures, there is every likelihood that the consumer will not see any benefit proportional to the costs imposed on the advice community.

In a recent conversation with respected life insurance industry consultant and commentator, Col Fullagar, we discussed the merits of a system under which advisers had the option of recommending "wholesale" risk products to their clients; in other words, policies with no embedded remuneration costs, whatsoever. This would allow the adviser to recommend the product(s) that suit his client, then charge a fee appropriate to the work involved. Said fee could either be invoiced separately or, by written agreement with the client, collected by the insurance company along with the premiums. If such a system works effectively in the investment advice space, why can the same not be implemented for risk advice?

This is a radical departure from the status quo, I know. But, if we're genuine in our attempts to improve what we are delivering to the Australian consumer, while allowing all industry participants to remain viable, then surely this is an option worth exploring?

At the moment, all we have before us are measures where the only outcome that is guaranteed to be delivered is a fillip for the "product manufacturers" at the expense of all other stakeholders.

A financial adviser since 1979, Wayne became a Director of Paramount in 1996. He is a regular presenter at industry conferences and is a regular industry commentator for the media. Wayne was also nominated for the 2013 AFA Excellence in Education award.

He specialises in the provision of advice to those clients still firmly entrenched in the accumulation phase of their financial lives and deals with issues such as debt restructuring, tax effective investing and debt reduction, superannuation and personal protection and personal cashflow management. As a CFP member of the Financial Planning Association of Australia, Wayne adheres to the highest professional standards the industry imposes on financial advisers.