A middle ground on churn and clawback concerns
On all the available evidence, the financial services industry is well on its way to finding a remuneration formula capable of meeting both the Government's requirements around "churn" and advisers' concerns around proposed "claw-backs" unreasonably undermining legitimately-earned income.
In the process, it seems entirely possible that the big life/risk companies will find sufficient common ground with advisers to substantially eliminate "churn" as a perennially burning issue for the financial services industry.
Over the past fortnight, Money Management has been involved in a forum convened to discuss theFinancial Services Council's (FSC’s) life/risk remuneration framework (including the controversial claw-back proposals), as well as a roundtable involving key senior executives of life/risk companies – Asteron's Jordan Hawke, OnePath's Andrew Lowe and CommInsure Tim Browne.
The common denominator in the two exercises was an acknowledgement that "churning" was not as widespread as many of the industry's critics might have suggested, and that, for the most part, the product manufacturers were aware of those advisers guilty of such practices.
However when the question was raised about what should be done about persistent "churners" and by whom, there was little or no common ground.
The product manufacturers acknowledged they could probably readily identify the parties but argued that industry mobility precluded successfully dealing with the issue.
No one was in favour of naming and shaming.
Notwithstanding the criticism directed at the remuneration framework produced by the FSC, the absence of common ground on how to deal with the few guilty "churners" gives credibility to an approach based on clawbacks.
In the minds of many advisers, the problem with the FSC's clawback approach is that a one-size-fits-all methodology fails to take account of the large amount of work often required to obtain appropriate insurance cover for a client, and the adviser's best interests duty to move that client if a better product offering comes along.
The challenge for the FSC, the Association of Financial Advisers and the Financial Planning Association has been to refine the dynamics of the remuneration framework to ensure that the actions of a few do not end up undermining the business models of the many.
At this stage, the refinement of those dynamics seems likely to result in an environment in which, while a full range of options will continue to exist, many advisers will choose a so-called "hybrid" remuneration model capable of reducing their exposure to the clawback of upfront commissions.
What is clear, however, is that whatever methodology the industry ultimately settles upon will require that it strongly communicates to consumers not only the value of life insurance but the value-add provided by advisers who seek out and obtain the most appropriate product for their clients.
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