The commissions debate

Recent comments attributed to three high-profile financial planners in Money Management have seemingly established the lines of delineation between risk advisers and financial planners. In separate reports, Peter Roan and Neil Kendall, and then John Hewison, were quoted on how they rebate commissions and then charge fees for establishing insurance policies for clients. The responses from readers were, in some cases, white-hot with emotion. One theme of the responses was the issue of underinsurance — a subject that has been given much currency in recent years.

While wielding the blowtorch of risk adviser discontent, Roan et al have highlighted that they run more broad-based financial planning businesses than specialist risk writers, whose primary source of income arises from insurance policies being established for clients. This is nothing more than a reflection of different cash flows within the financial services sector. The three advisers’ businesses provide portfolio management services — something that I suspect is the major driver of income in those businesses. Granted, some criticism of the comments attributed to the advisers took issue with technical aspects of their comments, however the overriding issue is that Roan, Kendall and Hewison have the capacity to have choice around how they are paid for risk.

To some extent in their respective businesses, these advisers have the relative ‘luxury’ of being able to design a different payment model for risk income — a fee-for-service model that reflects a consistent theme in their overall approach to doing business. Contrast this with someone who has very little, if any, portfolio management services income in their business and is heavily, if not solely, reliant on commissions from establishing insurance policies for their business income. An adviser whose major income component is commission from insurance policies is in a substantially different position to a portfolio management business.

More broadly, this disparity reflects the continuing evolution of financial planning services in this country. We may never reach a nationwide situation where financial planners are one-stop shops for all things financial. In the second decade of the 21st century there remain plenty of specialist risk writers who continue to be paid commissions — and while some readers will be surprised to hear me say this, it is not always such a bad thing.

We will never see a return to the days when people used insurance policies as (un-indexed) savings policies and every suburb, town and village seemed to be awash with great swathes of insurance agents selling policies. Those days are gone, but my basic observation is that there remain significant numbers of insurance advisers who started their careers in that now bygone era. I am in no doubt that many of them will have a loyal policy holder base, and that some such advisers will have moved to offer more broad-based financial planning services. And yes, there will likely be some rotten apples in there too — but they exist in all forms of business. Moreover, these people are serving an important socio-economic function through securing the financial risks that way too many Australians are running. Indeed, there can be no doubt that one of the Achilles’ heels of a nation of households running five times the debt of twenty years ago is the risk of death or disability within families.

The reality is that 18-year-old apprentices and 30-something mortgagors who are up to their proverbial neck in debt are rarely prepared to acknowledge their own mortality, and as such, insurance is hardly ever top of mind for them. Quite simply, the people who need insurance most rarely walk into a financial services business and ask for an appropriate amount of life or disability insurance. At the end of the day — most often — these products have to be ‘sold’ through a process of people being confronted with the financial vulnerability they are incurring for themselves and their family.

Regardless of whether that ‘selling’ is done by a financial planner or a risk only adviser, for their own sake and the sake of the nation, it must be done. Granted that it might not have to be ‘sold’ if it were less expensive — which could in part be achieved through commission reductions or eradication — but that’s not economically feasible across the whole sector right now. Although, I must say there remains a so-called ‘first mover advantage’ for the taking for any specialist risk advice firm willing to differentiate itself from the rest by creating a workable model for fees.

In time traditional risk-only advisers will, generally speaking, retire and the Financial Planning Association’s recent decision — to reverse a requirement that from July 2012 banned payments to advisers by product manufacturers — will permit a more realistic transition for such people who also wish to be FPA members. In the greater scheme of things, this is not such a bad outcome. With many, if not most, planning firms now moving to fee-for-service on their portfolio management services, eventually there will emerge a much greater prevalence of that ‘luxury’ of being able to charge fees on insurance policies because of a diversification of income sources within financial planning businesses.

As the older generation of risk advisers retires, eventually there will emerge a new generation for whom charging fees will simply be the way business is done. Costs will reduce and concomitant with that, consumers will be less fearful that they are being advised to establish insurances because of the real or perceived conflicted interests of the advisers. In recent months I have witnessed some very innovative models for charging fees on insurance policies that are good for the client and good for the firm. As such, ideas gain greater proliferation the more comfortable financial planners become with the question: ‘How can I survive in business while charging fees on insurance?’

While in this instance Roan, Kendall and Hewison took the heat out of some readers’ rejection of their comments, it’s perhaps time for us all to think more fully about the possibilities that lie ahead to increase consumer confidence in financial services generally. Progress, in life and business, is often achieved when people take what appear to be radical positions. Yet time often proves such positions to be the norm — the accepted way of doing things.

In the late 1980s those charging fees for portfolio management services were extremely rare. Now, more than 20 years later, there is a raft of momentum that is rapidly moving financial planning to fee-for-service. In time, with innovative thinking driving new approaches to risk advice remuneration, we might well see a similar outcome. However, in these the transition years, it remains a first priority that where it is required, insurance be established to protect individuals, their families and the economy.

But one thing is clear: Roan, Kendall and Hewison are proof positive that broad-based financial planning businesses can provide risk advice on fee-for-service. In doing so, they have thrown down the gauntlet for similar businesses to do the same.

Ray Griffin is the principal of ConsultGriffin and is a veteran financial planning industry observer.