The debate about financial advice commissions shifts to insurance

The debate about financial advice commissions has moved onto insurance products.

When the so-called Ripoll Inquiry (the Parliamentary Joint Committee into Financial Services) tabled its recommendations in the Parliament last year, it left a number of specific questions unanswered.

Arguably foremost among those unanswered questions was the future status of commissions applying to the sale of insurance products, particularly life.

The absence of any specific mention of commissions on insurance products in the Parliamentary Committee’s final report not unnaturally gave rise to the initial interpretation that, somehow, advice with respect to insurance products would be treated differently to advice relating to investment products.

In circumstances where Australia continues to battle the problem of high levels of underinsurance, a laissez faire approach to insurance and commissions did not (and does not) seem unreasonable.

However, the issue was complicated again when the committee chair, Bernie Ripoll, indicated that the report encompassed all commissions, not just those applying to investment advice.

More recently, the board of the Financial Planning Association (FPA) has made clear it believes it would be inappropriate to move to a fee-for-service policy on insurance.

The FPA board felt “the barriers to changing risk products to a fee-for-service basis and … the cost of advice for life insurance would be too high for many consumers, resulting in further underinsurance”.

“Until we are able to deduct the costs of up-front fees as a tax deduction then commission based advice remains the most cost effective manner by which the widest range of consumers can secure insurance cover,” the FPA board announcement said.

Notwithstanding the position stated by the FPA and the entrenched pro-insurance commission position adopted by the Association of Financial Advisers, a heated debate has erupted in the industry around planner criticisms of the impact of high up-front commissions and claims by some (arguably small) dealer groups that they are now rebating commissions and adopting a fee-for-service model.

Much as some have blamed the media, it is a debate borne of industry participants themselves.

A consequence of the increasingly strident debate that has erupted in the industry is that it has elevated a second-rank issue to the first-rank — something that must further empower those groups which have been campaigning against commissions, per se.

The life insurance business gave birth to financial planning but it has continued as a sector in its own right. While the provision of advice on insurance is fundamental to a holistic offering, a distinction needs to be drawn between advice relating to ‘product’ and advice relating to ‘investment’.

The danger for the industry is that, in similar fashion to the debate around commissions relating to investment advice, those fuelling the debate are creating their own self-fulfilling prophecy.