Advisers earn their life/risk commission, says FSC

The Financial Services Council (FSC) has told the Royal Commission that advisers undertake a significant amount of work to justify the commission which attach to life/risk policies.

In a submission filed with the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, the FSC backed the use of commission-based remuneration and argued “life insurance policies, by their very nature, ought to be treated differently from other products”.

“We believe that consumers should be able to access financial products through any means they wish to. It is therefore important that Australians who prefer to obtain life insurance through an adviser can afford to do so and that the advice helps those consumers generally achieve more appropriate levels of cover, a better-quality policy and the benefit of thorough medical underwriting at the time the advice is given,” it said.

“… life insurance advice involves advisers undertaking a significant amount of work to establish a policy by helping the consumer through a lengthy application and underwriting process, and then on an ongoing basis,” the FSC submission said before going on to outline the process as follows:

• The advice process involves the financial adviser understanding their client’s objectives, financial situation and needs, and then determining which insurer and insurance policy is appropriate for the client.

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• The underwriting process involves the financial adviser assisting their client to complete a lengthy policy application (including fully explaining the client’s duty of disclosure) and then help their client navigate through the full underwriting process, which can entail obtaining extensive medical information over a number of weeks or months. Often this will involve the financial adviser having a number of further discussions with both their client and the life insurer.

• Providing ongoing advice as the consumer experiences life events which change their need for life insurance – for example, changes in work patterns, earnings or borrowing (say, after moving home), starting a family or relationship changes.

• Helping consumers arrange a will or nominate beneficiaries.

• Advisers can also play an important role in the claims process.

“If one assumes that premiums increase when life insurers pay commissions to advisers, in effect the upfront and ongoing commissions structure enables consumers to avoid paying adviser service fees (ASF) and instead pay a slightly higher premium over the life of the policy,” the submission said.

“This enables the consumer to afford the advice. If this argument is accepted, it might be thought that ASFs should not replace commissions, and instead they be paid over the life of the policy in equal amounts added to the premium each year. However, the adviser would not be rewarded at the commencement of the policy for the effort the adviser undertakes which is concentrated at the time of application for the policy.”

“Thus, the risk is that, if the caps on benefits/commissions are reduced to zero, people seeking advice would be required to pay for it upfront directly, rather than spreading the cost over the life of their policy. This would restrict access to advice on life insurance for low to middle income households, arguably, who are amongst those that need life insurance the most,” the FSC submission said.