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Mandate fees for risk advice and watch the complaints grow

If we keep going the way we are headed, commissions will one day be completely banned and life insurance advisers will only be permitted to charge fees for service.

For reasons I have outlined numerous times, this is likely to ultimately mean fewer people seek life insurance advice. Most Australians will have only the automatic life insurance cover provided by their superannuation fund (if this is available to them) or direct life insurance cover bought over the phone or internet, a combination of both or - of greater concern - no life insurance cover at all.

How this is considered acceptable in a landscape of rising household debt beggars belief. The ABS Household Income, Wealth and Expenditure Survey (2015-16 - released 30/10/17) found the average amount of household debt has almost doubled in the past 12 years. The International Monetary Fund singled Australia out for having household debt which has risen to 100% of GDP, well ahead of other advanced economies which according to the IMF could spell trouble for our overall financial security.

Simple mathematics tells us that servicing household debt requires income. If that income stream is turned off because something happens to any member of a household who is helping to service the debt, that household is obviously at risk. Life, income protection, TPD and trauma insurance all help to mitigate that risk.

All the research tells us that under-insurance remains a critical issue in Australia. Rice Warner indicated the under-insurance gap is in the order of $1.8 billion:

  • $57 million per year for life insurance
  • $1,258 million per year for total and permanent disability (TPD) cover
  • $260 million per year for income protection

From this we can deduce that many Australians don't like buying life insurance of any kind.

In spite of all the evidence, the rhetoric that continues to go on and on is that risk advisers need to start charging fees. As a veteran of this industry, with 50 years' experience, I'm going to put my hand up and say clients are simply not going to pay fees for risk advice - it's hard enough to get them to pay premiums.

But let's run with the idea for a moment. Let's say a client agrees to pay a fee for an adviser to analyse their life insurance needs and source life insurance products that fulfil those needs. It's fair enough, right? The adviser puts a great deal of time and energy into that part of the process. What is going to happen if, despite all that time and energy, the client doesn't get the cover? In the client's eyes, they will have paid for something that hasn't been delivered. How long before that translates into a complaint, despite it being no fault of the adviser?

Unlike financial planners, in a commission environment, risk advisers are paid for results, not for services rendered. If a risk adviser can't, for whatever reason, get life insurance for a client, the adviser doesn't get paid. Or put another way, the client doesn't pay unless the adviser gets the insurance in place. It's hard to imagine a fairer outcome for consumers than that.

All that said, I'm optimistic about 2018. The Life Insurance Framework (LIF) is now in place and the world has not come to an end. Yes, we do face more challenges this year, FASEA being just one of them, but I believe we can successfully navigate those challenges - just as we have successfully navigated many other changes and challenges in the evolution of our profession.

It is time, however, for the powers-that-be to truly look at our landscape from a consumer perspective. If they do, then life insurance advice will live on.

6 comments so far
  Spot on Don. If government keep interfering with over the top compliance, extra admin costs, and lower commissions we won't have any new advisers entering the industry. It will gradually die and the consumer won't want anyone looking after their interests especially at claim time.
MARK DEAN  |  12 MAR 2018   8.50AM
  You're right. No prospect has chosen a fee route when given the choice and difference in premium.
With riskies likely to leave owing to unbalanced education standards by 2024, the under insurance problem will get worse.
Keep pushing...
STEVE LEGG  |  12 MAR 2018   9.13AM
  I disagree. I have provided risk insurance advice as a fee-only service, with no commissions, for over five years now. Clients are happy to pay for the service.
ANTON DIEDERICKS  |  12 MAR 2018   9.17AM

Fee-for-service risk advisers are about as common as visits from the Virgin Mary. Very few can lay claim but the few that do yell it out from the roof tops. Just look at the percentages because insurers know it's not an option.

Dealing purely with fact-experienced risk advisers know fee-for-service is a flawed proposition. I have studied insurance demand and markets at a post grad level with empirical data and any economist will tell you its a very segmented market yet it's just as important across all the segments.

With the very cream of the crop white collar workers with high incomes especially combined with holistic advice, then yes fee-for-service is an option. Unfortunately for most people requiring risk insurance this is not the case.

A self employed tradesman with a $60,000 p.a. income and a family to support can not afford to pay fee-for-service and will think you have been seeing a few too many visits from the Virgin if you suggested otherwise. Yet fee-for-service advocates would have this person denied advice and left to the mercy of direct insurers who ASIC are already having concerns about along with the industry funds policies who he will need to pay half the claim money to Perry Mason to get his hands on.

Honestly this whole trend is based purely on big institution greed and hysteria around the new "c" word. In the 50s we had communism as our go to "C' word. Now the witch hunt is commission. Forget about logic. This is politics after all!

DAVID KEENAN  |  12 MAR 2018   12.16PM

And again where are our industry defenders? Insurance companies, the AFA: We now have a situation where upfronts have been slashed - it won't stop churning (by a minority of advisers anyway); advice documents are increasingly meaningless, impersonal and clunky with many clients not bothering to read given the meaningless volume of verbage (so much for achieving better advice); and increased compliance for no tangible benefit except increase the risk of mischevious litigation and premiums continue to increase - well done government and our so called partners in this diminishing great profession.

Education requirements are offensive and simply not relevant to what a risk adviser does - having to be a member of the tax practitioners board? Any risk adviser giving tax advice is running a risky line - saying your income insurance premiums may be tax deductible and you need to speak to your accountant is hardly tax advice but some bureaucrat needs to tick a box and having to be a member of the AFA in order to be a member of the TPB? It would be nice to know what the AFA has done to defend advisers in a cycle where we are a seriously threatened species - and the two year responsibility period? - what genius thought that was a good idea - business can fall over due to life events through no fault or action of an adviser - what other industry has a two-year shadow hanging over its cash flow?

It's hard not to think that some agenda is going on - surely decision makers are not this stupid and ignorant of the value of good advisers.

GARRY MOORE  |  12 MAR 2018   12.16PM
  Great write up Don. Common sense has obviously not prevailed. Would it be fair to ask for a copy of what was discussed between the life companies and the so called authorities? Life companies have let us down big time.
How has reducing adviser commissions help the consumer? Fee for providing risk advice? How much more pathetic can this get? Great way to ruin an industry.
MIRAL THAKKER  |  12 MAR 2018   3.27PM
Link to something 08MYmH3B