A punishment for all advisers

Clawbacks were supposedly introduced in response to the churning debate. But why punish advisers while potentially rewarding other advisers for replacing an existing policy issued within the previous three years?

The life offices have preferred to ‘pass the buck’ to advisers rather than taking a little more effort in administering a simpler and fairer system – that is, to pay no new commission on any policy replacing one issued within the previous three years.

For the consumer – the most important people in this whole conundrum – clawbacks do not benefit them, nor would the simpler solution be of any detriment to them.

The clawback policy, while possibly unintentionally, disadvantages all advisers.

Sure, punish the genuine ‘churner’ with clawbacks and the simplest solution combined. But in doing so, remove the unfair financial restraints to be placed on someone who follows a moral compass.

Ever since the Murray Report the simple solution has been to pay no new business commission on any policy replacing one issued within the previous three years. So why has this not been adopted in favor of clawbacks?

Ease and convenience for the life offices is the basic answer.

Paying no new business commission on a policy being replaced [one issued within the last three years] would require the new life office to seek proof the existing policy to be replaced has been in force with 36 months premiums paid before granting payment of the 60 per cent new business commission (Plus GST from 1 July 2018). Thus it would involve an extra layer of prudential practice for the life offices to implement and no doubt create some extra time-lag within the overall new business process.

Of course, it is far quicker and easier to just clawback 30 per cent or 60 per cent of an adviser’s income even when that adviser has absolutely no involvement in the replacement of an existing policy.

So please, enough of the rhetoric from risk product providers about wanting to help the adviser through these difficult transitional times. Clawbacks have always been on the life office agenda and they have now got what they wanted.

The above said, I have never had an issue – and totally agree – with 100 per cent clawbacks in the first year. To be perfectly frank, I don’t really have an issue with a 50 per cent clawback in the second year either. In 30 years of advising I have only had two policies genuinely cancelled within two years of issuance (Both of which were out of my control). By the bye, I have never ‘churned’ a client’s policy.

What about the questionable advisers who survive the 120 per cent upfront commission cull? The annual premiums my clients pay average to about $8,000 a year. Do you think there remains an incentive for another adviser to come on the scene and offer the client an “apples to apples” replacement policy? Of course there is: 60 per cent, plus GST, of a $8,000 premium is nothing to sneeze at, and they won’t have to worry about a clawback from their $4,800 (plus GST from 1 July 2018) new business commission earn.

So this other adviser re-writes my client’s policy after it has been in force for, say, 30 months. Notwithstanding my surprise at not having “secured” my client’s business over the longer term – but let’s face it, human beings are just that, human – the replacing adviser receives 60 per cent (plus GST) and I cop a 30 per cent (including GST) clawback on income I earned two and a half years ago.

How is this in anyway fair?

Having renewal only commission payable on ANY policy being rewritten within three years of issuance clearly protects the original adviser against an unfair financial loss while NOT rewarding the replacing adviser.

But who arguably misses out in the “simple solution” scenario? Apparently, the life office does.

Let’s say a client pays $20,000 premiums to Life Office “X” over 30 months (starting from 1 July 2018]) then cancels the policy (for example, another adviser rewrites the business end of 2020). The original writing adviser would have received 60 per cent of the first year’s premium and 20 per cent of the next 18 months of premiums paid (plus GST). Let us say a total of $4,000 first year and $2,000 over the remaining 18 months; a total of $6,000 less a 30 per cent claw-back to the life office of $1,200.

Are we to believe the net of commission premiums receipted by the life office of $14,800 in the above example does not cover their costs? The client has not claimed (hence they can be freshly underwritten elsewhere), so how has the life office lost on this deal?

Of course, there are reinsurance commissions, underwriting and policy implementation costs and so on and so forth. But does clawing back $1,200 from an innocent party make that much financial difference?

I have no problems taking all steps necessary to eradicate serial churners from our industry, but not to the detriment of ethical adviser businesses.

Phil Smith is a director of Dawes Smith & Partners