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The demise of the small business advice practice

What - or who - is really responsible for the demise of the small business advice practice?

The cost of giving financial advice, the squeeze on adviser revenue and the extra demands of FASEA, are putting the many advisers who run solo businesses under intense pressure. Add to that the fact that many licensees no longer want one-person-band advice practices in their networks, and we are starting to see a mass exodus of advisers from the industry.

That's a terrible outcome and not just for the thousands of affected advisers around the country. It's a terrible outcome because we know from experience that most of these advisers are providing great service to their clients. Remove them from the advice landscape and their clients will in all likelihood no longer access financial advice.

We all know that the cost to service is increasing because of higher compliance, regulatory and education obligations, and we all know that the pressure on revenue, particularly in the risk space, is occurring because of the downward pressure on commission as a form of remuneration. This downward pressure has occurred because commission has become a dirty word and we think it's worth investigating why.

The squeeze on commissions occurred with the introduction of the Life Insurance Framework (LIF). LIF was a result of the findings of the Trowbridge Report and ASIC Report 413.

These three things came about following a debate that was predicated on what I believe was a falsehood, perpetuated by the Financial Services Council (FSC), an organisation dominated by banks, fund managers and large institutions. In my opinion, that debate wrongly accused the Australian life insurance community of a culture of churn, falsely arguing that advisers regularly rewrote business in order to earn high upfront commissions.

At the time Synchron called on the life insurance industry to provide evidence that a culture of churn actually existed and no one heeded the call. Our own internal research revealed that in fact our advisers wrote most of their new business with the insurer paying the lowest commissions and the least of their new business with the insurer paying the highest commissions. Therefore, the amount insurers were paying in commissions had no bearing on where our advisers placed their new business.

This is what led us to research other markets, research which we continue to this day. Part of that research was around commissions and as a result we can now compare lapse rates in the UK and New Zealand with lapse rates in Australia.

Commissions in the UK are typically up to 220% upfront with 1.5% renewal and a five-year responsibility period. In the UK, a lot of life insurance is also sold through friendly societies where commissions are generally around 180% upfront, with 2.5% renewal and a five-year responsibility period.

In New Zealand commissions vary between insurers, but typically are up to 220% upfront with 10% renewal plus a volume bonus and a two-year responsibility period. Volume bonuses ceased with regulatory changes on 1 September 2019 and there is a government push to lower commissions. New Zealand insurers have told us this is likely to mean commissions will be around 150% upfront, up to 20% renewal and a two-year responsibility period.

Here in Australia, of course, commissions will, at the end of this year, be lowered to 60% upfront and 20% renewal with a two-year responsibility period.

If the premise the FSC gave us six years ago was correct and a culture of churn, predicated on high upfront commissions did in fact exist, one would expect New Zealand would have the highest lapse rate of the three markets.

The reality is that Australia, New Zealand and the UK all have the same national lapse rate - around 14%, give or take half a percent.

So that debunks any assertion that a culture of churn comes about because of high upfront commissions - and yet that was what LIF legislation was built around. It was built around the premise that consumers are better served by an adviser who doesn't receive commissions.

According to recent figures from APRA, there has been a substantial reduction in new life insurance sales in Australia in the last reporting period. Fewer people are getting life insurance, and the insurance pool is getting smaller. Ultimately, as we have warned time and time again, there will be a blow out in Australia's social security bill, it's now a matter of when, not if.

There is a strong argument that this has been brought about by what I believe to be an utter fabrication perpetuated by an FSC dominated by banks, fund managers and institutions.

So, what was the motive?

There could also be a strong argument that says by forcing government intervention, institutions that held life insurance books were able to double the value of those books and sell out of their life insurance businesses (as most now have) at huge profits, long before the current proverbial hit the fan.

No prizes for guessing who is now paying for it: Australian financial advisers and consumers.

And the question must be asked: don't they always?

16 comments so far

Well said. Thanks for speaking up Don.

WARREN LOUDON  |  28 OCT 2019   2.37PM

Well said Don as now one of the (Synchron)Advisers how has left the industries that I loved because of the unfair pressure and unreasonable demands on education

BARRY HALPERN  |  28 OCT 2019   6.23PM

Well said don. It seems strange that everyone who works in our industry knows the truth. The regulators, politicians and many of the ceos who were, and some still are , in senior positions colluded via the fsc to achieve an outcome for there shareholders , at the expense of both consumers and financial planners.

MARK DUNSFORD  |  28 OCT 2019   7.33PM

Great work Don. Love your work!

KATHERINE HAYES  |  28 OCT 2019   8.44PM

Great stuff Don. It's great to have Synchron at least parade actual facts. Which is something ASIC, lollies, fasea...all struggle with

DANIEL BOCE  |  29 OCT 2019   3.10PM

And advisers are living by "the best interests duty"...?.

We are but pawns bringing in the money to a treacherous parent....

where is the grunt of our industry associations, or are they paper tigers, pandering to those questionable fasea folk ( who now offer advisers their own specially designed courses to educate us to being good people) , the government and its ignorant ministers and bureacrats and last but not least the institutions and their money hungry boards who are happy to bite the hands that feed them.....

shame on them all

JOHN WALKER  |  4 NOV 2019   8.25AM

Thank you for your very responsible and articulate piece Don. By the time the regulators and the government wake up and look around at the carnage they have created, it will be too late to remedy the position. Who'll get the blame then? Why, those lazy financial advisers who have been around for so long getting fat (not) on those high commissions, and who can't be bothered doing yet more useless study and exams. Like me for instance. By then I won't care what they say, but I will still be suffering angst when I think of all my clients who won't be able to afford good advice and who will be left to the wolves in sheep's clothing, aka banks and other financial institutions. The media also have a lot to answer for. Jumping on the bandwagon of lies so they can grow fat on their advertising revenue. Conflicts of interest? Everywhere you look.

SUE ALLEN  |  4 NOV 2019   8.54AM

Great article Don...but my question is how could this be allowed to happen and why aren't the people responsible for it being held accountable for the carnage its caused the broader market, advisers and the industry? And politicians, who used to stand for free enterprise also need to answer some serious questions!

WARREN B  |  29 OCT 2019   11.46AM

It was the argument at the time, and if I recall correctly, that one insurer did provide "evidence" of churn, only to have it demonstrated they had included DEATH CLAIMS in their statistics!! Oh goodness - people should maintain their insurance after they are dead! That is obviously the adviser's fault too!

Thank you again Don for stepping up and speaking out for advisers everywhere!

RYAN GRANT  |  30 OCT 2019   1.21PM

Thank you Don.

100% correct on all accounts.

Appreciate your bravery and raising the obvious and explaining it in terms that regulators should be able to such...let's hope they fix things before the industry and advisers die a slow painful.death....of course ....after which changes will be made...and hopefully not too late.

TERRY JOHNSON  |  4 NOV 2019   8.57AM

Why is it that this industry and regulators cannot get their heads around incentive based remuneration and simply design it to support the desired outcome.

So, if the object is to get people approriately covered and for that cover to remain in force, why not remove upfront commission and replace it with a trailing commission based on the policy remaining in force.

Advisers needing cash flow support while building a book could and institutions should support reasonable borrowing against the future book revenue. If in force revenue declines the loan must be reduced and in the event of default the ongoing revenue is applied to clearance.

This could easily be designed as a relatively low risk process which rewards those who professionally and diligently get people covered and keep them covered. Commission in not a dirty word it is just results based remuneration.


We have to ask 'where have the (so-called) professional associations been throughout the savage attack on financial advisers over the past 10 or more years'?

The answer is 'Being diplomatic' and cosying up to all and sundry government bodies and the big end of town, rather than doing what they were being paid (handsomely) for; that is to go in to bat for advisers and lock horns with the 'opposing forces' and refuse to admit defeat.

They have failed utterly. They have not represented the interests of their adviser-members, and by association the greater Australian public. The evidence is the disastrous state of the entire financial services profession and the entire regulatory regime.

JACK WELLINGS  |  4 NOV 2019   11.45AM

Great article Don. What i don't undertand is why Abbott did not ppuit his foot on it right from the start when he won the election instead of putting an ineffective minister in place. This whole thing began with julia's govt. The AFA and the FPA HAVE BEEN AS USELESS AS a creame donut in the sun. It is time to give the UFAA FULL SUPORT BY EVERY ONE.

JOHN GILLIES  |  4 NOV 2019   11.55AM

Why was this allowed to happen? What do our industry bodies do, other than organise golf days,, irrelevant functions and a financial planning week NO ONE in the public is aware of? Take a look at the mortgage broking industry..... the RC also was to effect them, their industry body acted IMMEDIATELY, and they will not be touched.

MICHAEL FAVA  |  4 NOV 2019   8.21AM

Thank You Don,

This is a Culling exercise by the Govt, the real Losers are the Clients & Experienced advisers being driven out of the Industry, the Loss of Experience will also simply drive consumers into Low quality Direct Products without a meaningful trusted adviser guiding them through Lifes Journey.

The Final Nail is the revised version of FASEA Standard 3 which is an absolute disgrace !

All this is simply playing into the Regulators hands and to the the Big Banks & Industry Funds who are totally Conflicted in my View.

This is a real Shame for All Existing & New advisers Post 1 Jan 2020.

MARCELLO BLASI  |  6 NOV 2019   1.04PM

Its true small business people work very long hours to grow their businesses. That too has been my experience over the past 28 years. Now when I could be retired and collecting the Age Pension I am returning to Uni studies so that I can continue doing what I love, looking after my client base which I have worked so hard to grow and maintain.

I can't understand why the FSC, our politicians, the FPA and AFA have decimated our industry. They have a lot to answer for.

This week I wrote a small life insurance policy for an existing client, total time estimated for our meetings, my travel, writing the SOA and implementation, follow up and accounting for any unexpected changes is 12 hours. Commission was $520, so essentially I am working for $43 per hour and then if the policy lapses through no fault of my own, I have worked for zero. For this reason, Financial planners are turning away from writing small policies which are essential for protecting the financial situation of low income people.

During the Royal Commission, I observed that the Commissioner did not really believe in life insurance. On the contrary, my experience over the years is that the claims paid out to my clients have made a huge difference to their well being and financial situation.

I believe all young people should have Life & TPD with their super which is so low cost it seems ridiculous that they don't have it, especially with a low super balance as the insurance attached makes a small super policy valuable.

As a small financial planning business owner, I am hoping to remain viable but the road ahead will not be easy and I certainly do not have time or money to attend expensive conferences.

SANDRA BURMEISTER  |  11 NOV 2019   12.05PM
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