Insurance commission level doesn’t ‘cover the cost’ of advice

Speaking on a recent ifa webcast, PPS Mutual chief executive Michael Pillemer said the lowering of commission levels has had a significant impact on the ability of firms to add more advisers.

“The 60 per cent upfront commission is still not commercial in a lot of instances, and it doesn’t cover the cost of actually doing the work,” Pillemer said.

“I think that’s a problem, particularly when it comes to financing new advisers into the business.”

While he acknowledged it would be difficult to see commissions going back to their pre-Life Insurance Framework (LIF) levels, moving them higher would help the situation.

“In the absence of moving to something like an 80 per cent upfront, which is probably more reasonable, advisers either need to take it on the chin or look at perhaps supplementing the upfront commissions with fees or raising funding to help finance new people into the business.”

According to Lifespan Financial Planning CEO Eugene Ardino, also appearing on the webcast, in an environment with all the insurers paying the same rate of commission, the conflict for advisers is “minimal”.

“The only conflict is, do you recommend insurance, or do you recommend too much insurance? And the reality is, most clients don’t buy enough insurance because it’s very expensive,” Ardino said.

He added that the reduction in commissions to 60 per cent upfront has also been a factor in increasing premiums.

“I don’t know that that conflict is going to or has done any significant damage … but I accept that there is a conflict there,” Ardino said.

“Whereas, when you consider the damage that reducing commissions has done to the insurance industry and to [clients] who are now not buying insurance because advisers aren’t prepared to work with them because it’s not commercial for them to work with them.

“And we’ve seen the impact. The evidence is there. We’ve seen the volume of insurance being bought by consumers fall off a cliff in the last seven or eight years, right? And then that, I believe, is one of the significant factors that’s impacting this incredible increase in premiums.”

Importantly, Ardino added, any changes need to be done in a way that doesn’t exacerbate the under-insurance problem in Australia.

“I think we want people to buy insurance. I don’t want to be encouraging people to buy insurance from TV ads or directly, because often those products are inferior. Often clients don’t know what they’re buying,” he said.

“I would rather have an environment where we can have more people, more consumers, buying insurance, accessing advice to buy insurance.

“I also think that as an advice community, we’ve professionalised over the last eight or 10 years, so I feel we’re far better equipped to deal and to manage those potential conflicts.”

Ultimately, he added, access to insurance advice is simply “too important”.

“Anything we can do to make it more accessible, I think we should really consider doing so. For me, I’d rather see commissions go back to where they were, or some way back to where they were,” Ardino said.

“I think that the advice community, the advice profession, is more than equipped to deal with those potential conflicts, which I think aren’t that bad, so far as conflicts go anyway, and they already exist, just at a lower level.”