Life insurance not a risky play under FSR

Industry figures tend to agree that the Financial Services Reform Act (FSRA) is keeping advisers who choose to offer risk advice busy. But opinions are divided on whether it’s going to give them or their clients a better deal.

Some dealerships, looking to provide more holistic advice, are recommending their advisers take on risk, confident they will meet the requirements of FSRA. Others are recommending it, but are not providing the necessary support. And then there are those too afraid to touch risk at all.

It is advisers in the middle group who are at the greatest risk of falling foul of new regulations, says Sue Laing, principal of Laing Advisory Services.

“The old insurance code of practice didn’t have any legislative penalties attached to it and, of course, the FSRA does.”

Laing says she is a big fan of the new regime saying it will give advisers a greater chance to shine.

“The statement of advice (SOA) requirements are broader and therefore there’s more freedom within those requirements for a risk adviser to couch the information in whatever way they think is good communication to their client.”

Robin Yates from the Association of Financial Advisers (AFA) agrees there is nothing wrong with giving a good SOA. It’s the length of SOAs he’s concerned about.

“You can hardly look over an SOA briefly. I just saw one from a leading life company that was about 71 pages.

“When you think that the attention span of the average Australian male is about 2.4 A4 pages, you wonder what’s going to happen to the rest of them.”

Echoing Yates is Rob Pedersen, an adviser with Matrix who made the switch to financial planning from an insurance background in the 1980s.

“One of the best things about this whole compliance regime is advice is in writing, so advisers can review the client situation, whereas before they didn’t have to substantiate anything.”

But he says when you’re offering a stand-alone product, like an income protection policy, the compliance burden can make it not worth doing.

“I saw a 42-page plan to sell an income protection policy. That just defeats the purpose of the whole thing.”

So why are these documents so long? Pedersen says it comes down to the fear factor.

“I think most of the compliance people are so scared to leave anything out they’re forcing the adviser to put in too much information that confuses the client.”

Advisers aren’t the only ones who are suffering by having to draw up monster SOAs. Pedersen says clients lose out as the cost of drawing up a plan often outweighs the income generated.

“The time and effort needed to generate a plan almost becomes not worthwhile for the adviser and they will walk away from that market which is sad because when insurance is most needed is when you have a young family,” Pedersen says.

Another concern expressed by advisers is they still have to provide SOAs before their client commits to buying a product.

Yates believes advisers could end up composing a lengthy SOA and get nothing in return.

Laing understands Yates’ concern but has little pity for advisers who put themselves in this situation.

“These comments would be valid if there were no longer a new and clear distinction between advice and dealing. The days of making a sale to a client and then doing all the paper work to support whatever the outcome is are gone,” Laing says.

“The most important part as far as the legislation is concerned is the advice given to them, not the dealing that’s done thereafter.”

“Advisers will have to move into the higher echelon of advice giving and dealerships will have to give advisers proper support in the advice giving process.”

Kerry Anderson, national risk consultant from Asteron Financial Services says she has noticed increased levels of commitment from advisers to want to educate themselves.

“They are asking heaps of technical questions about how products actually work.”

She says Asteron have been doing a lot of workshops with advisers on income protection and disclosure that help advisers make sure their clients disclose their history at the time of application.

But not all dealerships will be able to provide such good in house support.

Laing says that for most advisers to achieve best practice there will have to be an improvement in what she calls ‘the dearth’ of educative assistance that exists.