Commissions and churn unfairly ignored outside of life insurance
Government and regulators have focussed on upfront life insurance commissions purely as a dollar amount and have not considered how they work within the advice sector while not acting on churn in other commission based advice sectors.
ClearView Wealth managing director Simon Swanson said ‘life insurance commission bashers' were ignoring ‘incovenient facts' in the debate around advice and commission stating that churn in the mortgage broking sector was being overlooked.
Speaking during a panel session at the Money Management/DEXX&R Adviser Choice Risk Awards breakfast in Sydney yesterday Swanson said attacks on upfront life insurance commissions overlooked almost identical commissions in the areas of superannuation and mortgage broking.
"The facts are inconvenient for commission bashers. The average life insurance premium is $2500 with an average up front commission of around $3000. At the same time the average mortgage is around $500,000 and the average commission, at 60 basis points is $3000."
"At the same time the average superannuation account is between $400,000 and $500,000, and at 70 basis points, pays $3000 in adviser service fee, so the reward to adviser is same across three streams."
"However people don't rebroke their mortgage each year but the average mortgage length is four years, even though people are not paying off mortgages in four years, so it appears there is lots of churn in mortgage broking but we never hear the Government or the regulators making complaints."
Swanson said upfront commission could be handled by the sector by spreading the commission over longer periods and increasing responsibility periods back out to two years or more.
"The spreading of the cost at 13 months is the issue in many cases. If we had two year responsibility periods and if a churn occurred at the 13 month period resulted in advisers getting only half of the commission, that would change people's behaviour," he said.
"Insurance product design is capital intensive with companies buying an annuity stream from policy holder over a period and management must manage these issues in line with costs."
AUTHOR
Jason Spits
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