Reforming risk advice commissions should be a top priority

In 2018, the Life Insurance Framework (LIF) was introduced, capping new business commissions for risk advisers at 66 per cent and trail commissions at 22 per cent on the grounds of consumer protection; however, this caused many advisers to stop providing risk advice on the basis that it was no longer profitable to do so.

There has since been an ongoing debate about whether this was the right decision, with some arguing that it disincentivised those who would churn out new life policies for the commissions while others countered that it has led to an under-insurance epidemic in Australia.

As it stands, Adviser Ratings figures from last year found that just 480 advisers were responsible for writing half of the new business during 2023, citing the LIF as the primary factor driving advisers away from the risk space.

Reflecting on his career as a risk adviser, spanning more than four decades, and the current state of the financial advice industry, Halstead Financial Services owner and risk advice specialist Alex Braun told ifa that one of the key things that needs to be addressed in the profession is the commission rate for risk advisers.

“I would like to see commissions on life insurance advice increased,” Braun said.

In particular, Braun suggested that changes to the responsibility period for risk advisers have created an “unfair” situation for advisers.

“We had a one-year responsibility period. So, if you bought a life insurance product and the adviser was paid a commission, and you stopped paying your premiums within a year, the life insurance adviser would have to refund his commission to the life office,” he said.

“These days, that guarantee period is three years. So, if I put you into a life insurance contract, and I get X amount of money for my trouble in advising you, and then within three years, you went to or marry a rich guy and you say, ‘Look, I don't need this anymore’, then I have worked for nothing. This is unfair.”

This extended period becomes particularly problematic for risk advisers as the ongoing cost-of-living pressures lead some Australians to ditch their life insurance policies due to an inability to afford it.

As the next federal election grows ever nearer, eyes have turned to the major parties to see if and what they will do to address such concerns.

Speaking at an AIOFP dinner in Canberra late last year, shadow financial services minister Luke Howarth declared that it is “time to look at the Life Insurance Framework commission caps”, stating that they have made it “unviable” for advisers to sell life insurance to some people.

While the ongoing commission rate of 20 per cent is “about right”, according to Howarth, he suggested that steps would be taken to address the upfront commission rate if the Coalition were successful in the upcoming election.

“There needs to be enough remuneration for the work done, but we also don’t want to encourage policy churning,” Howarth said at the time.

“We would need to do some consultation, talk to the life insurers and the advisers in this space to get it right. We don’t want to make changes that aren’t going to have an impact. There should be transparency, and consumers have choice about how they want to pay, whether that’s a fee or a commission.”

In another show of support from the Coalition, shadow treasurer Angus Taylor said that, although he would not commit to rolling regulation back to pre-LIF conditions, there does need to be a reassessment of the current framework as there is “no doubt” that the lower commission levels have contributed heavily to the under-insurance issue.

“We have to get that fixed. Now, what that looks like, I think, is the really important question. Have we got the commission framework wrong? I think that’s a good question,” the shadow treasurer said in January.

“I’m not going to say going back to the old position is necessarily the right answer. What I am going to say is that the position we were in back then meant that the products were getting out there to the people who needed them, and that’s not happening at the moment.”