Life advisers arrive at a fork in the road

The Financial Services Reform Bill reforms will have a significant impact on the operations of life insurance agents. Nicole Szollos looks at some of the changes already taking place and what is expected in the new environment.

Many financial planners and life agents can easily list the amount and type of changes which have gone through the industry over the last two decades.

The shift from selling only life products to the provision of a greater range of product and services has been evidence, and reason, for those changes.

While the changes set to become law with the introduction of the Financial Services Reform Bill (FSRB) are just another step, this time the changes are being driven by regulation and for life agents the biggest issue is the change to licensing arrangements.

InsureInvest practice manager Frank McDowell says under FSRB the structure of life insurance will move towards the general insurance model, and one significant change will be the demise of the present multi-agency structure.

Under the new single licensing regulatory system, the individual agent will no longer be able to have more than one direct relationship with a dealer group, a structure that broadened the range of products that agents could access.

In the new legislative environment, life agents find themselves with a couple of choices. They can become a registered agent or broker by obtaining their own license, or alternatively become an authorised representative of a single dealer group who becomes their licensee.

In McDowell's view it is the latter option that will attract the majority of life agents. He believes they will choose to become authorised representatives due to the expensive and detailed process and the issue of responsibility involved with getting their own license.

"It is more demanding for life advisers to have a license and keep the authority to operate, and there is more work to be done," McDowell says.

He says individuals will pass up going for their own license due to the cost involved as it is easier for bigger groups to spread expenses over a greater number of clients.

"The GST and new regulations have both increased costs. Consolidation is a way to survive changes with people pooling together and sharing costs," he says.

Migration between life insurance and financial planning groups has also become more active in the lead up to the change of working environments.

The Association of Financial Advisers (AFA) incoming national president Joe Nowak says life advisers moving into financial planning are in the solid position since they have clients who are likely to purchase both types of products.

"The business structure of life advisers working in financial planning represents a grouping together of practices that get all the relevant disciplines working together," Nowak says.

One of the year's big moves is evidence of this with life broking firm IFMA being bought by Professional Investments Services (PIS) from Norwich Union.

IFMA NSW state manager Michael Eddy says the result of the acquisition was IFMA life agents becoming authorised representatives of PIS. With PIS as their licensee, agents have access to IFMA products as well as the products of 14 other life companies.

Eddy says that although the structural change under FSRB will change authority under the single licensing regime, the concept of life brokers remains intact.

AXA is another of the big fund managers who has already implemented changes to the dealer group model and incorporated life agents in preparation for the incoming changes.

AXA national dealer manager Mark Birrell says the group has been in a "transitional timeframe" for about 12 months, and has seen the majority of previously tied life agents signing sole agency agreements.

The sole agent can then become a proper authority of one of AXA's three dealer groups, AXA Financial Planning, Charter Financial Planning, and the new Altus Financial Services.

Once training and accreditation is in place, the agent is authorised to give advice and sell products. Agents are being up-skilled in the process of making them proper authority holders says Birrell, and must complete DFP 1, 2 and 5 plus an AXA run financial training course on asset allocation.

Once the agent is an authorised representative of AXA, they can sell products offered by any of the three groups, however they can also sell life insurance products from other fund managers as long as the product is on the AXA approved product list. In this way, says Birrell, the model can be likened to the old multi-agent model.

The onus of responsibility and compliance is also a key area of change that will affect the decision a life agent makes.

If the agent chooses to become licensed, complete responsibility will naturally lie with them while if they choose to work as an authorised representative of a dealer, the licensee holds the regulative responsibility.

Eddy agrees that most life agents will probably opt for becoming an authorised representative, not least because they have to pay a $50,000 assurity with the Australian Securities and Investment Commission (ASIC).

"The agent has full liability for compliance, audits, training for themselves and others, and it becomes expensive to set up a business," Eddy says.

The tighter system of regulation under FSRB is a move for greater competency within the industry, and will enforce greater disclosure of the product by the agent and dealer to the client. McDowell says this will be effective regardless of the firm and is a move to reduce the incidences of fraud and increase consumer protection.

One alternative suggested to replace the multi agent is the cross-endorsement model. Under this structure the agent can have multiple relationships with several dealer groups, but only if each licensee agrees with the other relationships. McDowell says there would need to be a distinction between the products for this model to work, while Eddy believes that the multi agency system will completely die out with FSRB changes and cross-endorsement is not an alternative structure.

"It would be foolhardy for companies to enter into cross-endorsement, especially if they have a life agent arm," Eddy says.

A final choice on offer for a life agent is to leave the industry altogether and this is a likely option for agents who have devoted many years to their work.

At the end of last September Birrell says there were 150 out of 1,200 AXA life advisers who did not yet have a proper authority holder. He says 55 are currently making the transition, leaving just under 100 who will need to undergo the AXA training next year. Birrell believes about 30 of these agents are 55 years plus, and will probably choose to retire rather than go through the re-educating process.

Eddy agrees that it could be the right time for some advisers nearing retirement age to finish up.

"Ten per cent that write through us are 60 years plus, and would have to either re-educate or re-build. They would probably opt to leave."

For Nowak the educational direction is a positive one for the new era of the industry, but he says some of the older agents have been forced to make decisions that they otherwise might not have.

"Some existing agents in their 50's couldn't handle it and have suffered anxiety over the education changes. They have either left the business or suffered from health problems," he says.

"The changes to the life insurance industry are part of the industry's business future and it would have happened eventually, even without the FSRB changes."

Changes to Life Agents structure under CLERP 6 reforms

BEFORE FSRB

NEW MODEL

Tied Agent - has relationship with one product manufacturer only, and offers the best product to their client within that range.

The agent can continue to be an authorised representative (proper authority holder) of one licensee.

Registered Life Broker - has own license and access to the market, and can pick up products as they see best for their clients.

The broker can decide to obtain their own license thereby committing to full responsibility and all expenses of the business.

Multi-agent - this adviser has more than one arranged relationship with licensees, and can select the product best suited to their client but is responsible to all manufacturers.

Possible new model but most difficult to implement - cross-endorsement.

If the agent wanted to offer products from several licensees, the different licensees would need to agree that the authorised rep could carry their product at the same time as carrying another's.