QOA outlines proposals for life insurance commission
The Quality of Advice Review has stated there are benefits of retaining commission for life insurance but admits it could result in lower-quality advice for consumers.
There were currently a number of monetary and non-monetary benefits that were excluded from conflicted remuneration. This meant there were currently benefits which would otherwise be conflicted remuneration because they were reasonably likely to influence the financial product advice given to a retail client by an AFS licensee or its representative which were not prohibited.
The Corporations Act provided an exemption to the ban on conflicted remuneration for life risk insurance products (other than group life policies in superannuation or policies issued in respect of default superannuation members), which allowed commissions to be paid for the sale of life risk insurance products.
Levy said: “I have been persuaded that there are some benefits and some circumstances in which benefits which are reasonably likely to influence financial product advice should be retained, or should be retained subject to an additional requirement that the client provides their consent to the benefit.
“Where the benefits relate to general insurance and life risk insurance products, financial advisers and insurance brokers continue to play an important role in giving consumers access to financial product advice about what can and should be valuable financial products.
“In forming this view, I acknowledge that these benefits create a conflict for the adviser (or other recipient) and that this conflict creates a real risk that the quality of the advice provided by the adviser is not as good as it would be if they were paid a fee by the client for their advice.”
However, she said the risk of this was diminished by recent law changes such as anti-hawking, deferred sales of add-on insurance and design and distribution obligations. Proposals in the QOA review would also limit the opportunity for insurance products to be distributed using general advice and impose an obligation for a person to give ‘good advice’.
Levy proposed retaining the existing exemption for benefits given in relation to life risk insurance products, but requiring financial advisers (relevant providers) who provided personal advice to retail clients in relation to life risk insurance products to obtain their client’s informed consent, in writing, to receive a commission in connection with the issue of a life risk insurance product.
In order for the consumer to be able to make an informed decision, the adviser must disclose details of: • the commission the adviser will receive for the duration of the policy (e.g. any upfront and trailing benefits); and • the nature of the ongoing service that the adviser will provide to the client in relation to the life risk insurance product (e.g. assisting the client pursue and settle claims).
AUTHOR
Laura Dew
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This article makes my blood boil because Lawyers who charge minimum $750 per hour make judgements on another profession for which they don't fully understand the time and cost involved of delivering advice. Firstly, from the coalface I can confirm that 99% of my clients WILL NOT pay fee for service for risk advice at a level that is commercially viable. Insurance is a "Grudge Purchase" which people don't do willingly. We already disclose what we get paid right down to a "Financial Colonoscopy" level.....how much deeper can we go with disclosures. Commission levels now set in concrete at 60/20 are barely commercially viable as it is, so take that away and you'll likely see 98% of the remaining advisers who still do provide risk advice, leave the risk insurance advice space entirely and then watch the insurance companies panic when their whole sales force shuts up shop....all because a Lawyer said so. Please get it into your thick head....all insurers pay the same commission so there is no conflict. Actuarial mathematics and clients personal preferences determine what levels of insurance cover clients need. PLUS....we are all bound by a BEST INTEREST DUTY and risk being castigated and barred from the industry if we dare do anything wrong. It's time to show some respect to our Financial Planning professionals.
I don't get it.
The initial and second year commissions are disclosed at the point of recommendation in the SOA to which the client signs off before completing a risk application.
On annual review again, risk commissions are disclosed and any recommendation in regard to risk insurances are signed off by the client.
How many times do think this needs to be done ?
Do you think the client is concerned about how much commission an advisers earns since all companies pay the same amount.
There are some who believe that the fee for service removes conflicts.
Well lets start with the value of risk advice and decide what's the right hourly fee ?
Is it $100 per hour, $200 per hour or lets say $300 per hour.
It's been suggested by some in the industry that it takes at least 10 hours from start to completion to get a client on the books.
I know some will rationalise that a fee for service removes conflicts. Well that's not necessarily so if there is no common hourly rate for the fee for service.
Secondly there are some who rationalise that a fee for service is tax deductible, but only in the second year and beyond.
But what's wrong with that premise ?
1. No Life company guarantees annual premiums anymore, even for level rates, so even discounting the premium in the first and subsequent years, no adviser can know whether the current premium won't rise between 30.0%- 50.0% within the next 18 months -2 years..
2. But if we use the example using the fee for service and a $4,000 premium is reduced by 30.0% to $3,100 and the fee for service charge @ $300 per hour results in a non-tax deductible fee based on 10 hours work (viz $3,000), someone is being asked to pay in total $6,100 for something that would have cost $4,000 on a commission based arrangement.
Is there any adviser who thinks that they can get a client to pay 50.0% more ?
But humour me some more.
If the insurance company increases their premiums by 30.0% then that initial discount is wiped out in year 2.
But if the fee for service adviser continues with his $3000 fee for service charge and assuming the client gets a 30.0% tax deduction , the client still ends up paying $6,130
And if you compare that with the commission model, the client pays with a 30.0% increase, the client pays $5,200 in year 2.
I can't even guess what the cost of acting in claim situation would be under the fee for service model but I know what it would be under a commission model.
Here we go again. Will this debate ever end ???