Life commissions and ostriches

There’s no point fighting it. It’s inevitable, not least due to the inappropriate advice practices of the past.

The real risk to life advisers is not the change from upfront to level or hybrid commissions. The real threat is the complete abolition of commissions for life advice.

The industry should see the opportunity to move to level and/or hybrid commissions as an olive branch and a chance to assist in cleaning up the churning practices that have so bedevilled the industry in the past. It’s the chance to ‘encourage’ life risk advice practices that have a shot of universally being in clients’ best interests, without throwing the commission-based remuneration baby out with the bath water.

Anyone who thinks otherwise is living in a parallel universe that ignores the evidence of widespread misconduct that have so conclusively been presented through numerous industry studies, FOS determinations and ASIC reviews.

They’re also ignoring the trend towards client-determined remuneration models that are already in place for investment advice and are currently under serious consideration for mortgage broking services.

Not only that, it makes good business sense.

I think advisers whose business models depend on 100-120 per cent upfront commissions and 10-15 per cent trail demonstrate short-term thinking. Recurring income models based on, for example, a 30 per cent ongoing commission will result in much higher overall valuations. After some initial transitional cash flow challenges, the numbers will speak for themselves. And the staged introduction of the changes will assist with the cash flow challenges.

It’s not as if life brokers have to do an awful lot to earn the ongoing commission. Stay in touch with the client, review their insurance needs periodically and only make a change when it’s really needed. Contrast this with general insurance brokers who, at best, earn 22-25 per cent level commission and potentially have to completely re-market their non-automatically renewable policies year on year.

What I say to the opponents of this reform is, be careful what you wish for. Keep the existing regime, allow the existing practices to continue, and you face a very real risk of complete abolition of commissions for life advice.

For those of you who are AFA members, don’t fetter your industry organisation’s ability to effectively represent you with government.

Claire Wivell Plater is the managing director at The Fold Legal.