Commissions and clawbacks: The biggest hurdles for holistic advisers in risk

Recent years have seen Australia fall into an underinsurance crisis as the rising cost of living and lack of financial advisers providing risk advice has left many without cover.

Although it seems the high cost of living will be slow to ease, Risk Hub founder Marc Fabris said there are options available to address the lack of risk advisers, as the primary hurdle keeping financial advisers from engaging in risk conversations is that it’s not financially viable for them.

This situation has largely come about following the introduction of the Life Insurance Framework (LIF) in 2018, which capped new business commissions at 66 per cent and trail commissions at 22 per cent, meaning it was no longer profitable for many holistic advisers to provide risk advice.

With the federal election now expected to occur in May, Fabris said discussions around commission reforms have become more positive as politicians look to garner support.

“I think most would agree the biggest thing is financial viability. That’s not going to happen in five minutes but we do really need that LIF commission cap looked at,” Fabris said on The ifa Show.

“I feel that noise has been more positive than we’ve had for a long time, hence why I kind of bring it up and say, well, it’s really got to happen and it does. Just look at the numbers. It’s not viable.”

For example, speaking at an AIOFP dinner in Canberra late last year, shadow financial services minister Luke Howarth said it is “time to look at the life insurance framework commission caps”.

The shadow minister stated that the upfront commission cap under LIF has made it “unviable for advisers to sell life insurance to some people”.

Notably, Howarth’s thoughts on the trail commission cap appears to be relatively in line with industry perspectives, adding that the 20 per cent is “about right”.

“[Financial Services Minister Stephen] Jones has made it really clear that it isn’t even on his radar, and he’s told industry to down tools and any policy development around commissions. Their priority is the super funds and group policies. This is not part of it,” the shadow minister said at the time.

“Bill Shorten, good fellow, I was there for his outgoing speech the other day, but he tried to ban all commissions, so it’s hard to see a Labor government making any changes to these commission caps.”

Although no specific details have been disclosed about what reforms may look like, Fabris suggested that raising the new business commissions to 80 per cent would be “more feasible, more acceptable”.

But what about the clawback period?

Looking beyond the commission cap discussion, Fabris said that the current two-year clawback period for risk advice commissions is also in need of a review to get holistic advisers engaging in the risk space again.

“You might say it’s not unreasonable for commissions to be repaid in the case of early termination but that’s not really the issue,” he said.

“The issue here is the concern for an adviser’s viability of writing business and the risk of doing all of that work and all of that work being unpaid.”

Notably, Michelle Levy addressed the topic of clawbacks in the Quality of Advice Review (QAR), stating in early 2023 that “commission and clawback rates should be maintained at the current levels”.

However, Fabris countered that the risk of a clawback has acted as a serious barrier keeping holistic advisers out of the sector.

“The issue here is not about the profitability in the first couple of years of policies. The issue here is about the preparedness to write risk because of the concern of write back regardless of whether that looks like occurring or not,” he said.

“What we’re simply looking at here is it’s barely viable in most cases as it stands but then to look and say, ‘Well, I’m going to lose most of it if this policy goes off the books for one reason or another in the next two years’.

“That’s pretty tough to take as a conversation with someone who you’re going, ‘Let’s move you from one in 10 of your SOAs having a risk recommendation to five or eight or nine,’ when you look at that as a risk.”

While raising the commissions could help entice holistic advisers back into the advice space, Fabris said that “clawback absolutely needs a review”.

“It’s easy to dismiss it and say, ‘Well, it’s not unreasonable to have a two-year clawback.’ Well, no, it’s not, but the issue isn’t about defending profitability,” he said.

“The issue is about preparedness to promote risk advice with the concern around what’s going to happen to my bottom line.”

To hear more from Marc Fabris, tune in here.