Risk advisers facing an opt-in dilemma

The opt-in requirement will touch the day-to-day operations of risk advisers who have switched to some form of fee remuneration model, writes Sue Laing.

With the passing of the Future of Financial Advice legislation amendments now behind us and implementation less than 12 months away, many life risk advisers will soon be tackling an important decision.

Over the past several years there has been strong encouragement for commission-based models to transition to fee-based, or fee and commission-based, advice.

This is particularly pertinent to life risk advising where commissions are still an allowable and very valid remuneration method.

The catchcry has been along the lines of “don't wait until it’s forced on us” (referring to the possible banning of commissions some time) and “get professional and value what you do more” (referring to the drive to change clients’ perceptions of life risk advice being purely transactional).

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Both objectives are valid.

At the same time, opt-in will now touch the day-to-day operation of those life risk advisers who have transitioned to a model that has some sort of ongoing fee for review-triggered advice and in some cases for claims assistance.

Had these advisers not made any transition but retained a commission-based-only model (as others indeed have), then they would have no new requirements to comply with.

There is for these advisers, however, the possibility of having to adapt later if commissions come again under the microscope.

Which is the better position to be in?

Most commentators and advisers have brushed off the opt-in requirement as being easy and inexpensive to fulfil; many others have opined that there will be a cost to business and it will not be insubstantial.

The answer will emerge with time; meanwhile, there are two scenarios to consider where fees are being charged for life risk advice and support:

1. The delivery of opt-in to clients who do opt in, where all’s well until next review; and
2. The delivery of opt-in to clients who don’t opt in, with the subsequent management of the risks for those clients and for the adviser.

The first is easy – clients continue to receive advice and therefore receive appropriate input into the impact of family and/or business events as they move through their life stages.

The second is not so straightforward in the life risk space – because this space is where clients are more likely (more than investment clients, that is) not to understand the ramifications and not to opt in, and advisers need to recognise this and cater well to the mindset that drives it.

Why?

When a life insurance package solution is established – regardless of how thorough, tailored and educational the advice process was that led to its implementation – future engagement is at risk of the natural perceptions consumers retain about insurance.

It has a set-and-forget image, as easily evidenced by the numbers of untouched old (and unadvised) policies on insurers’ books – and indeed the surge of success of online sales, which are the epitome of set-and-forget.

Investment advisers are not quite so vulnerable, given that most consumers these days understand only too well the vagaries of the market and how their adviser should be on hand to coach them through these.

Yet we must acknowledge that in practical terms, failing to review a life sum insured after a life event could be far more financially impactful than market movements on funds under management.

It’s up to us to get that message across, as consumers on the whole remain unaware and disbelieving of the value of reviews on life insurance portfolios.

Common but not necessarily regular events such as taking on an investment property mortgage, aged parents becoming dependants, absorbing a large salary increase by taking on higher living costs or more debt, or incurring an unplanned-for tax debt in a business, can all make a real difference to life risk funding needs.

Do most consumers make this connection easily? No.

If something goes wrong some time after one of these events has shifted the client family’s needs, it’s possible for the client’s estate – living or deceased - to be some hundreds of thousands of dollars short.

In the past, client families lived with these shortfalls; in the future, someone might be looked towards to lay blame, and law firms are making sure this awareness increases.

It’s another example of advisers needing to watch their backs.

The solution can be simple, and like a lot of risk management measures, the secret lies in having a “robust and repeatable process” (a direct quote from an adviser who has a history of getting these things right) that’s followed religiously as an embedded business activity.

In this case, it’s the process around the client’s invitation to opt in - the ‘renewal notice’ - and its non-regulated content, which should in every notice list a number of specific items for the client to do. The last of these is to sign the opt-in if they choose to.

There’s more important stuff before that.

Imagine a current style of annual review letter which, rather than simply flag that the time has come around for a review, asks the client to consider a list of specific events and when the adviser follows up with a call, confirm which, if any, of those events has occurred in their life since last contact.

This differs markedly from the common review letter we’ve all seen: “If anything has changed in your circumstances please respond and we will arrange a review”.

The average client won’t know what the adviser is looking for. What constitutes a relevant “change in circumstances”?

Having a list makes the thinking easy for a client and they are far more likely to check this list than to think of relevant changes unprompted.

Then opt-in is invited and then that should be followed by a description of the effect of not reviewing cover (not opting in) if any of the events have in fact occurred.

This description will encompass such outcomes of death or disability as:

• becoming ‘self-insured’ to whatever extent;
• failing to meet a goal of extinguishing debt and hence possibly losing home and other assets;
• failing to meet lifestyle or special needs;
• failing to meet future plans for children; and
• critically, failure of retirement planning for the surviving partner.

This health warning serves to highlight to the client what the real effect of not opting-in could be for them. There is nothing that precludes this directed thinking wording within the renewal notice required under Section 962K(2).

It makes sense to add the dangers, and to do so in a language that the client will understand. It’s for their benefit even more than for the adviser’s.

Susan Laing is the founder of The Risk Store.