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?