Trowbridge - adapting to inevitable change

The final recommendations of the Review of Retail Life Insurance Advice undertaken by John Trowbridge and his panel are proof that it is foolish to believe that you can undo decades of precedent and practice without creating commercial casualties.

And, assuming the industry adopts the Trowbridge recommendations, it is those advisers heavily focused on risk who will be the major casualties of the report. Many of those advisers will have read the Australian Securities and Investments Commission’s recent scathing assessment of the life/risk industry and been braced for change. Many will not, and must now be considering their futures.

But what must be said about the report delivered by John Trowbridge is that it reflects a pragmatic assessment of the commercial realities which have governed life/risk sales in Australia and a fair effort on Trowbridge’s part to find an equitable answer. Status quo was not an option and he was never going to make everyone happy.

As advisers seek to come to terms with the Trowbridge recommendations they would do well to recognise that they encompass a three-year period of transition and recognition that they carry with them significant commercial consequences. Quite simply, the days of big up-front commissions are at an end.

Here is the reform model which sits at the core of the Trowbridge recommendations:

• “The Reform Model can be described as level commissions supplemented by an Initial Advice Payment available at a client’s first policy inception and then no more often than once every five

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years, where:

• the level commission is a maximum of 20 per cent of premiums;
• the Initial Advice Payment (IAP) is paid by the insurer to the adviser on a per client basis (usually the insured life);
• the IAP is available to the adviser when a client first takes out a life insurance policy and then no more often than once every five years (the “five year rule”); and
• the IAP is a maximum of $1,200 or, for customers with annual premiums below $2,000, no more than 60 per cent of the first year’s premiums.

Further, to support the integrity of the Reform Model, it is recommended that:

• the IAP be available only on advised business (i.e. for personal advice only and not available for general advice, either through direct sales or other agency sales or through group life policies inside superannuation funds);
• existing arrangements for retention periods (‘clawbacks’) apply to commission on the first year’s premium and to the IAP if there is one;
• all commission or other payments from insurer to adviser be fully transparent to the client with the adviser disclosing clearly whether any insurer payments represent full, partial or nil commissions; and
• the adviser and client remain free to agree on fees for service that are additional to the insurance premium.

According to Trowbridge, the single IAP is intended to address the problem of an adviser having a financial incentive to replace a client’s existing policy with a new one, because it will mean that when new policies are written for existing advised clients, no payments beyond the level commission are made until at least five years after the last IAP was paid.

He explained that setting the IAP at $1200 was intended to make a contribution to cost recovery for advisers while falling short of full cost recovery, which was variously estimated at between about $1500 and $3500 per client.

“It is aimed at delivering a balance between acknowledging the initial costs of advisers and eliminating any behavioural doubt as to whether the client’s interests are being placed ahead of the adviser’s own interests,” he said.

So the question for the industry must now be whether it can leave behind decades of precedent and practice to embrace the Trowbridge model or whether it represents a bridge too far.

Those faced with that question must, however, consider that the alternative will be a prescriptive approach overseen by ASIC and, perhaps, sharpened by a future Federal Labor Government.