Opinion: No commissions to boost insurance

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Business analyst and management adviser Max Franchitto has opened up the debate on why commissions may not be a good idea for risk advisers:

Why is Life Risk insurance the basis of all financial planning? ANSWER: Because it secures wealth accumulation activity (by the individual) and its premature end, simple but a fact.

Hence there is no argument to be had as to why “All Australians” should be adequately and regularly insured. It’s a must do.

With the implementation of FoFA and the call for no conflict of interest and placing the client needs at the centre of all advice, the issue of commissions does raise some debate.

The actuarial feedback is that aside from mortality and morbidity rates, the other factor which impacts the calculation of life risk premiums is “commissions” (which are part of the overall policy management costs), hence we need to face the mathematical fact that abolishing commissions may have a downward impact on the cost of premiums.

The advisory reason for not having commissions is that; a fee for service (time) based regime puts all policies on an even playing field, whereby the only comparison to be made rests in the “features & benefits” for the client.

The argument put forward by some; that commission allows affordability (to advice) for those who cannot afford a fee is somewhat flawed. This is so, because another important fact is that for decades we have had commissioned life risk products and yet still 80% of the Australian population remains uninsured or under-insured. We seem to sell to the same 20% over and over …..(dare we say; churning? another hot potato topic).

The commission rates of 100- 125% of first years premium in upfront policies, and the 70-80%  for level/hybrid policies, are no longer a balanced pricing model for the service offered. Most advisors have done the macro level type research even before the fact find with the client, so its no longer a ten hour process to find the right policy and prepare the paperwork (as recently claimed by one advisor to me).

Lets consider this; no commissions, a flat fee for service scaled only to sum insured, and maybe we will begin to insure more Australians (more than 20%), even if underinsured but at least they have some protection. In this case some is better than none.

The fundamental question is; are commissions on the sale of anything appropriate when “best independent advice” is the required approach in a PROFESSION?

Over to you for reflection.

PS :The author is a firm believer in Life insurance and has Trauma , Income Protection and Life cover, some originally in place since 1991.

  • Matthew Ross on 12/09/2013 12:03:13 PM

    Mark you will get the last word on this...why do you give a stuff what I or any adviser thinks?

    You said it, all that matters is what your clients think...

  • Mark Thompson on 12/09/2013 11:55:55 AM

    Geez Matthew, you can probably tell that I'm a bloke who likes the last word. I think the problem is how you perceive commissions and not the perception of your clients/consumers. I've got many well heeled clients/professionals and none give a continental that I'm paid a commission.

  • Matthew Ross on 12/09/2013 11:44:25 AM

    Fair call Mark.

    But I don't think that this has anything to do with moral high grounds.

    All that matters is how clients/consumer perceive commissions.

  • Mark Thompson on 12/09/2013 11:19:36 AM

    Hi Matthew Ross, you are jumping to a whole of conclusions about service. I questioned the justification for a high adviser fee in year 2 of a standard wealth accumulation phase super fund. That's not to say that I will not charge an additional fee for Actual service that is required with the passing of time triggered by changing circumstances, legislation etc. My whole point of engaging in this dialogue is say that there is no moral high ground for those that charge fees as opposed to those that take commission and charge fees.

  • Matthew Ross on 12/09/2013 8:26:14 AM

    Mark, no need to say sorry for smashing any paradigms. We need debate like this to smash through things.

    I agree with your points that reducing life insurance cover over time is a very valuable service and agree that an adviser earning $2,500pa (1% x $250k super) and does nothing for it is rip off. But you're making an assumption that a clients' financial life can be "set and forget".

    Advisers that charge these fees may uncover complexities you aren't aware of. Complexities surrounding their spending, cash-flow, business, estate planning, wealth accumulation outside superannuation; hell the adviser might be buying and selling investments on a daily basis and beating the market by $6,000 per annum (which I highly doubt because if they had that skill they should be getting paid > $600,000 to head up an actively managed fund). I don't agree with % of FUM as a way to charge, but my point is about complexities.

    It sounds like (you may correct me and say you just did it for this one client) you're providing a limited service for a very low cost. My concern is that your clients may not take advantage of opportunities because you're not offering a service or being paid to offer a service that enables you to do this.

    Very few clients are 100% set and forget. Perhaps you specialise in very simple cases, but as humans we're complicated and life is never that simple.

    I believe that financial advisers should have a limited number of clients. Having 500 clients that pay you $600 per year doesn't put you in a position where you can explain what the changes in the Federal Budget mean to each of them. At the other end of the scale, charging someone $2,500pa just to manage the asset allocation of their superannuation account isn't value for money either.

    What makes most sense to me is looking at the complexities the client faces over the next 12 months and saying "for me to be your adviser and help you manage all these complexities, my fee is $X".

    Simple, transparent and the client is taken care of which is what they are paying for.

  • Mark Thompson on 11/09/2013 3:33:39 PM

    So Matthew (Ross), How does a pathetically low fee of $500 for advice on a roll over and then an ongoing monthly fee of $50 sound? I'm basically buying insurance business with low advice fees like that would send most businesses broke. Re you long term view, if you had a client on stepped premiums that are fully rebated then the premiums still go up and if you are on level premiums and accept CPI then insurance premiums go up. Ideally a client should be decreasing their need for insurance as their account balance and wealth accumulation strategies make insurance redundant. Can anyone tell how charging a fee of 1% of FUM that may bring in $2K or $3K per annum in year 2 of a set and forget super fund is not a quasi rip off? I'm sorry if I have smashed your paradigm on fees v commission.

  • Matthew Ross on 11/09/2013 2:05:15 PM

    So Mark (Thompson) the total cost upfront was substantially less, but what about over 5 years, 10 years and 20 years?

    What was the client going to pay in total premiums for insurance over that time under your method and the other adviser?

    By rebating the commission isn't the client substantially better off by paying the upfront fee?

    Not saying one is better than the other because it depends on what ongoing service is being offered and paid for too. Just focusing here on the raw maths and whether Mark you're focusing just on the short-term or the long term too.

  • Mark Thompson on 11/09/2013 11:42:01 AM

    I once compared me taking full commission on insurance linked to a client's super, but with a low fee with another adviser who was totally fee for service and full rebate of insurance commission. The super advice for both was an uncomplicated no-brainer. My total cost to the client was substantially less than the 'no commission' adviser. I considered that he over charged his client with his fee and he despised me for taking a commission, but which client was better off?

  • Joe on 11/09/2013 9:40:46 AM

    Yet again, a simplistic view of a not so complicated yet multifaceted issue. Underinsurance is not a simple function of commission vs fee, there are many variables that affect the client decision to purchase and at the right level. Would Insurers welcome the elimination of commissions? YES, absolutely. Would this result in a ‘like for like’ reduction in premiums? Hmmmm… look at some retailers who make you pay for shopping bags and see if the savings they have made in providing bags has been reflected in the pricing of their goods. It’s all relative. Change is always good when there is a need, however in this instance, the change may not be the panacea that some are seeking. By way of example; removing the cost of commissions may/should (at best) reduce the premium by 20% - 30% give or take, now, ask a client with no insurance if they would now consider purchasing that policy (some may, others may not), now ask the same client if they would pay a fee for this advice, and I bet a larger proportion would likely still remain uninsured or underinsured. Let’s not forget that ‘some’ insurance is not always better than ‘no’ insurance, the wrong cover or baseless amounts of cover are akin to throwing money down the drain and are at the heart of the poor reputation suffered by our industry (advisers and insurers alike). Getting to understand the client psyche is a core function of the adviser. Clients do not typically seek the services of an adviser in the same fashion as they seek the services of a doctor, lawyer or accountant. The latter services are sought by clients as there is usually a distinct and compelling reason (medical, litigious or keeping the tax department at bay), insurance, although important, is typically an afterthought that needs to be prompted at regular intervals, people will not typically pay for prompts, they will pay to solve pressing issues, Insurance is not a pressing issue until claim time.

  • Wf1 on 5/09/2013 4:12:18 PM

    NO Comms - No interest. sorry but most clients won't pay for risk only advice and i am in business so if i cant make enough to cover my costs i'm not going to write insurance therefore wont help underinsurance at all, or we will end up with a whole heap of ads on TV from Real etc... And i guarantee they are making money from it, no matter what you call it.

  • David Khenkin on 5/09/2013 11:56:27 AM

    Gotta love it how everyone is concerned about how much money financial planners make or how we charge for the amount of work we do. Last time I noticed we are required to disclose our fees to our clients and if they are happy to pay or see us get paid...what is the issue if we are acting in their interest and they are achieving their goals and we are mitigating risk?
    Being a holistic financial planner myself I recently picked up the fact that a new client and his wife had no wills and no business interruption insurance on a business that pays them incomes of $500,000 per annum and is heavily reliant on equipment and premises. I did this as part of my duty of care to the client. So initially, what was supposed to be a basic risk SOA ended up having to cover 2 other areas which then ended up being even more work because of issues I found with their investments. I didn't charge the client an SOA fee for all this work and took the comms the insurer paid me as payment for all the work. I knew the insurances would go through as clients are healthy. If I was to charge the client a fee for service on the amount of work I did plus they paid the discounted premium (0% comm to me, 30% discount to client) I calculated they would have been $3,000 worse off. That business analyst, and I use this term loosely, should join the Rudd government...I'm sure with the level of business acumen they have on their front bench, he would be a shining star...and take over the "lets screw the economy ministry"

  • Jamie Forster on 5/09/2013 10:56:46 AM

    Max

    Your experience is established. However, you offer some very definite and specific comments without citing any basis for those comments.

    You refer to “actuarial feedback” that suggest that commissions have a significant impact on the “calculation of life risk premiums”. The actuarial feedback that I have had is that commissions have no more of an impact on premiums than the extra marketing and distribution costs of direct cover. Furthermore, even if retail, advised policies did cost more (which the evidence refutes) your argument does not recognise the value that an adviser brings to the table and that a higher premium may, on that basis, be acceptable to the client. Finally, your argument also ignores the competitive tension that a robust and healthy advisory industry places on premiums. Pricing, whether it be insurance or cupcakes, is complex with many shades of grey. To view it as you have is to grossly over-simplify it.

    You then need to say that “we need to face the mathematical fact that abolishing commissions may have a downward impact on the cost of premiums”.

    It is also a mathematical fact that abolishing commissions may have an upward impact on the cost of premiums.

    What is not a mathematical fact is what abolishing commissions will actually do.

    With respect to your argument that the “reason for not having commissions is that; a fee for service (time) based regime puts all policies on an even playing field, whereby the only comparison to be made rests in the “features & benefits” for the client” the insurance market is highly competitive and, the differences in commissions between one insurer and another are minimal. If an adviser were to be more influenced in their recommendations by an extra very tiny percentage then they would not last very long. More importantly, there is zero evidence to suggest that adviser actually recommend policies on this basis. The extraordinary success of Macquarie Life, who do not have a tied distribution force and who pay the lowest commission in the market, stands in direct rebuttal to your suggestion that advisers are recommending policies based on their remuneration rather than the policies merits.

    Like anyone, you are entitled to your comments. Furthermore, given your experience and time in the industry, your comments carry weight. However, your comments question the integrity and professionalism of those of us who are remunerated by way of commission. It is my opinion that commissions remain the fairest and most appropriate way for specialist risk advisers to be remunerated. It is also factual to say that competence and specialisation are a far more universal measure of professionalism than the method in which a person is remunerated.

    Whilst I would never question the integrity or ethics of a competitor or offer an opinion on their business model without being asked, it is my opinion that hourly based charges or single fee charging not only fails to align to the client’s interest but is also commercially flawed. Frankly, I would not provide advice if I could not be appropriately remunerated. Your unsubstantiated claims therefore stand as a direct threat to my business model as well as many others.

    At the moment, my clients are very comfortable with the way in which I am remunerated. If, in the future, I meet someone who is not, they may arrange their own cover or seek advice elsewhere.

  • Innocent Observer on 5/09/2013 10:23:10 AM

    @Max - you clearly still miss the point, and you clearly have no practical real-world experience to support your assertions.

    It's interesting that you dismiss observations of your ignorance on this matter with an arrogant, yet unimpressive, self-important spiel. To make the point clear: reading the other comments gave you the benefit of the doubt (innocent ignorance) and should have given you a fair idea that you might need to read up on the issues at play. Duly noted that you somehow missed this.

    And I'm not sure what an award for "best of the recruits" 30-odd years ago has to do with anything, but the fact you think that is in anyway relevant or adds to your credibility is telling in itself.

    And finally bringing it back to basics (and your claim that life risk is the basis for all financial planning): you clearly don't understand the purpose of insurance.

    ie. The idea that insurance is the backbone of all advice is wrong. The idea that everyone needs insurance is wrong.

  • Jamie Forster on 5/09/2013 10:18:29 AM

    Pat

    I'm sorry if my "wit" didn't pass muster: my daughters hold a similar view.

    As to my understanding of "the concept" I am not sure what "concept" you are referring to.

    If you are talking about receiving fair and reasonable remuneration for providing a professional service, as a business owner, employer and accredited risk specialist I have a keen and daily interest in this topic.

    Whilst a fee for service method of remuneration may work for some, it does not work for my business. I accept responsibility for my advice and, in doing so, take on professional liability. I believe I am entitled to be remunerated for not only my expertise and time but also the risk I accept in providing advice.

    For instance, all things being equal, if a piece of advice takes 15 hours but the first piece is for a $100,000 policy and the second is for a $5,000,000 policy the professional risk associated with the second policy is 50 times as great. Obstetricians showed that they understand this risk when they raised their fees in response to a spike in litigation.

    Furthermore, I accept responsibility for my advice from the time that it is given right up until a claim is finalised or it the policy is cancelled. It is my opinion that I am entitled to be remunerated for accepting this responsibility. It is my view that it is commercially naïve to accept responsibility for hundreds of millions of potential professional liability and not seek to be remunerated for it. It is my view that it is commercially naïve to review and service insurance clients without being remunerated for it.

    Like many things in life, the current commission model is not perfect. For instance, I don't get paid if an application is declined. However, in my opinion, it is better than all of the other remuneration models that have been tried and, in my opinion, will ultimately fail.

  • Liam on 5/09/2013 9:58:55 AM

    Pat if that is your belief, then market that to your clients and you will find like-minded clients - possibly for life. There is no need dictate to others how they should charge or why it is wrong to accept commissions. I think people should develop a remuneration system that they are comfortable with, and use it to gain a market advantage, and get focussed on insuring people, not telling others why they are a crook for charging.

    Clients are capable adults, let them make up their minds. I am yet to find a client who has had a problem with payment via commission, but if there was one, they may be a suitable client for Pat's practice.

    But I don't believe commission is the reason for underinsurance. Someone needs to service the policy.

  • Pat on 5/09/2013 9:46:39 AM

    Sorry, John, but this comment: "We have charged fee for service in the past for insurance work where the commission was not enough to make the client profitable" is one of the the problems I have with the commission model. You mention that you may reduce a commission by 20% to win a large case, however, this suggests you will not reduce the commissions on a large case because you are receiving excess profit.

    We often see cases of premiums north of $5,000 (ex-commission). On the commission model, say 100% commission, the adviser would receive a commission potentially of $7,000. How much work is involved to get such a case across? (I know it is an unanswerable question).

  • Max on 5/09/2013 9:43:27 AM

    I am impressed by the feedback my article has generated, it shows that the industry is in a dichotomy of thinking and practice. I am equally impressed that some people have attacked my understanding of Life Risk products without obviously doing the back ground search. For the record;
    I started by selling Life Risk with AMP in 1982 was awarded best New Recruit in Australia in my first year "centurion Status", I spent the 80's and 90's managing advisers then called life agents, I was one of a team of four who designed the Asteron ( Sun Alliance Trauma policy) I hold the No. 1 policy and my wife claimed on her No. 4 policy, the advisor at time of claim is still running for the hills as he did not want to fight with the company that paid him the commissions, so I had to do the claims work myself.
    I have since leaving management in '99 with over 150 financial advisory firms and at least 6 dealer groups, I still conduct workshops from tiome to time on how to "sell" risk products because I know "how to back the hearse in and make them sniff the flowers"

    So I am sorry if I don't have the pedigree to make a comment without being attacked for my lack of appreciation of the concepts.....LOL

    Good Selling!!!!

  • John Cook on 5/09/2013 9:38:16 AM

    Come on Guys personal criticism is not on, you don’t have to like what someone is saying but they have the right to say it
    We should pride ourselves on being able to discuss the issues without this childish behaviour and dare I say it bullying.
    There are different business models out there ,the one you use works for you , but if you have a closed mind to change you will be left behind .
    I don’t agree with the no commissions suggestion, but on large cases we have reduced our commission from 100% to 80% to win a case, and we have been well remunerated at that rate
    My feeling is that the people who need the advice at this point can get advice cheaply as it is built into the product .
    As before the low rate of insurance within Super where most are group schemes and no commissions paid still shows that its not commissions stoping people taking up insurance.
    Do the Industry funds need to look at advice for insurance, they have calculators on many of the web sites asking how much should you be insured for , would be interested to see the figures on the use of this and the conversion rate
    We have charged fee for service in the past for insurance work where the commission was not enough to make the client profitable.
    Your thoughts
    John

  • Pat on 5/09/2013 9:11:55 AM

    Jamie, your attempt at wit (I can't imagine it was an attempt at logic) shows you fail to understand the concept.

    I will let you get back to trying to work out what is being said.

  • Jamie Forster on 5/09/2013 9:05:02 AM

    Interesting point of view Pat.

    On a similar point, after a childhood of poor flossing I recently had to have a crown put on my teeth.

    The crown was much, much more than a simple filling.

    Had the dentist not charged me for his time it would have been more affordable. He refused.

    Then, following my divorce, I went to my solicitor to review my estate plan. Amongst other things, a TDT was to be included in the estate planning arrangements.

    My solicitor's costs for doing this were greater than when she prepared my original plan. Furthermore, she was far more expensive than the will kit from the newsagent.

    I pointed this out to her and suggested that she reduce her fee. She laughed at me.

    Then, my dog bit me. I needed to have an operation to clean out the wound. I was obviously suspicious that he was only recommending surgery because he wanted to justify charging me more. My wife pointed out that I was an idiot and to get the surgery. He also refused to rebate his fees.

    It's been a tough couple of years dealing with all of these, obviously conflicted, people gouging money out of me. I can help but think that I would be significantly better off if I had declined to have my teeth repaired by a professional, left my finger to heal itself and done my estate plan on the newsagent will kit.

    **SARC**

  • Pat on 5/09/2013 8:48:03 AM

    Morgan - yes they do. From our experience, many clients will hold a level of critical illness and IPP cover for a long term. Therefore, there are benefits in using a level premium structure. They have often been discouraged from doing so because of the high premium loaded up with commission. Therefore, stripping out the commission makes the level premium immediately comparable to the stepped premium quoted elsewhere that included the commission. And yes, even with the fee for service if stand alone advice, the client is often better off.

  • Morgan Ladyman on 4/09/2013 7:01:17 PM

    Pat 4/9/13 @ 10:02am

    Your comments about level policies versus stepped policies has no relevance to commission, you do know that commission is paid on both or rebated on both.

    In regards to your comments on Financial Planning Benefit (FPB) I presume you realise that this is often not paid when it is held by a superfund and also not paid on income protection claims (income Protection claims are where the majority of the work is done).

  • Bill H on 4/09/2013 2:00:20 PM

    So.... Observer101.. who are you and what is your name?
    Concerning the Financial Planning Benefit (FPB), this is paid to the adviser who provides advice to the beneficiary after the claim is paid. The FPB is not part of the claims process at all. No FPB is paid if no advice has been given. This is not a handout.

  • Jamie Forster on 4/09/2013 1:57:09 PM

    Observer101 on 4/09/2013 1:02:16 PM

    "I note that all the personal attacks come from individuals who have undisclosed names"

    I note the (deliberate??) irony in anonymously criticising people for remaining anonymous.

    "a balanced view"

    The response to this article, both anonymous and identified, would suggest that it is not balanced.

    "with plenty of mathematical reasoning"

    There is zero reasoning mathematical or otherwise. Even if there were, mathematical logic requires variables and assumptions, ideally empirical. There is a marked absence of logic, let alone maths, let alone variables or assumptions, let alone empirical basis. The practical failings of the author’s basis was well made in the response from the ‘life insurance actuary’. Furthermore, the very fact that life insurance that does not pay commissions (including direct cover) is more expensive than retail cover stands in direct rebuttal to the article and to your comments.

    "if commissions were not critical to revenue success why would you fight so hard to hold on to them"

    Because advisers work in a commercial business and revenue success is pretty much the measure of the success of any commercial enterprise. Just as it is for your GP, your dentist, your accountant and your lawyer. What sort of moron would not pay heed to revenue? Presumably this is your own point of view and not that of the business consultant who wrote this article.

    "in the real world professionals charge fees ...salesmen earn commissions !!!"

    So what? Tell me one profession (just one) that mandates the manner in which the professional is remunerated. Of all the criteria that define a profession, the method of remuneration is not one.

    This is practically illustrated by the fact that each of the professions charge differently based on the type of service they charge. Doctors, lawyers, accountants and dentists all charge differently to each other depending on the manner in which they engage with each other. Surely if the differences within a profession demand different methods of charging, surely differences between professions must also demand different methods of charging.

  • Morgan Ladyman on 4/09/2013 1:42:50 PM

    Observer101 - I noticed you also didn't disclose your real name and yet you have a dig at people that charge commissions.

    Your comment 'in the real world professionals charge fees ...salesmen earn commissions !!!' is a joke. It might be a hard pill to swallow for you, however all professionals are salesmen (e.g. a professional salesmen). You are selling a service to your clients and therefore a salesmen.

  • Martin Ball on 4/09/2013 1:35:23 PM

    The comment that professionals charge fees and salesmen receive commissions is both inflammatory and childish. There is room for both and really should be the choice of the client. I am sure Accountants and Lawyers would be happy to consider both options if they had an option. You can only charge direct fee's if there is no other way to be paid. This fee for service debate really is a joke and a disgrace. So long as the client receives good advice and the fee structure is transparent then how about we give the client choice on how they wish to pay. Do we suggest that doctors don't provide excellent advice because it may be covered by bulk billing and we feel we are being rushed through to generate increased revenue. Does it concern us that drug companies might influence our doctors decision. Maybe we trust our doctor. Do I trust my Accountant more because he charges a direct fee. He is expensive but do I trust him more. No. Why is a Lawyer more trust worthy because he charges fee's. Is he/she really?. Where are lawyers on the trust scale?. Perhaps financial planners are less trust worthy because we get blamed more for adverse movements in the financial markets. How about we move on and stop worrying so much about which fee structure is more trustworthy. It has nothing to do with it. Oh and I have used my real name both times.

  • Observer101 on 4/09/2013 1:02:16 PM

    I note that all the personal attacks come from individuals who have undisclosed names; having said this I think this article presented a balanced view with plenty of mathematical reasoning; as far as practical experience is concerned I know the author and he has sold, created and designed life insurance products , owned a business, consulted to more than 100 firms nationally so maybe he does understand the process.....but then I suppose if commissions were not critical to revenue success why would you fight so hard to hold on to them....in the real world professionals charge fees ...salesmen earn commissions !!!

  • Pat on 4/09/2013 10:02:19 AM

    We have been charging fee for service on risk for 8 years; clients have been saving 30% on premiums for that period of time. Those clients are now considerably better off with their level premium policies compared to a stepped commission laden premium. Policies include a financial planning benefit to cover the cost of advice at the point of claim.

    Clients' insurance portfolios are reviewed regularly.

  • John on 4/09/2013 10:01:21 AM

    There are no commissions paid on Industry group insurance funds, or Group superannuation plans yet there is still high under insurance so the augment is flawed.
    It’s not commissions stoping the population taking out insurance it’s the people themselves.

  • Alistair on 4/09/2013 8:56:59 AM

    Once again another individual with NO experience in the industry in a practical sense makes comments about a topic for his own self importance. I would suggest that his comments belong in a dustbin in the outback. The result of his comments would see under insurance climb as very few would be prepared to pay for risk advice. In fact if you are going to make assertions as stupid as this then where do you stop. Do you look also at mortgage brokers, telco's health insurers, utility distributors, general insurers and their brokers....As a business analyst....you really haven't thought this one through and are making yourself look like an uneducated fool when it comes to this topic. Go back and do your research. Perhaps you are merely a Labor party or Union stooge...business analyst....circus clown more like

  • Jamie Forster on 4/09/2013 8:31:39 AM

    I note that the author of this article cites that they believe in insurance and, in fact has "Trauma , Income Protection and Life cover" in place.

    Other than being a "firm believer" in insurance, the author has established absolutely no expertise or experience upon which he is making his claims. Nor is he putting forward a skerrick of evidence substantiate any of his other claims.

    The evidence, that is actual fact-based evidence, is that direct products are, on a like-for-like basis, typically more expensive than retail products.

    Distribution costs money, whether that is paying an adviser a commission or the marketing and other costs of marketing direct products.

    As to the suggestion that the bulk of the work has already been done during the course of financial planning, this might well be the case for an adviser who is a jack of all trades who does little more than broker policies and adds little in the way of genuine expertise. However, it ignores the gradual progression of the financial planning towards professionalism and that specialisation is a core feature of all the established professions.

    Once again, this claim is not supported by the facts.

    As a specialist risk adviser, I expect to be remunerated not only for my time but also my specialist expertise and deep knowledge of this topic. Furthermore, as a specialist who always conducts myself as a professional I take professional responsibility for my advice. In taking responsibility I am, like any other professional, accepting the risk associated with that responsibility. It is patently ridiculous to suggest that the professional risk associated with a $5,000,000 policy is the same as the professional risk associated with a $100,000 policy.

    If the author has a preference for fee-based charging, that is his choice and I would never question his integrity. I would point out that what differentiates an adviser as a professional has far more to do with competence, with specialisation based on specific and deep expertise a particular feature, than it has to do with method of remuneration.

    I would also point out to advisers who elect to provide risk advice on a flat fee basis that at some point in the future they will be responsible for hundreds of millions of dollars of contingent liability, including the associated professional risk, and will not be being remunerated for that. Whilst they could allow for that by front-loading the original fee, such an approach would make fee-based advice even more cost-prohibitive and therefore beyond the reach of most ordinary clients.

    Such a limited understanding of 'risk' in my opinion, should disqualify someone from providing advice to clients on their risk.

  • John a on 3/09/2013 5:11:57 PM

    As a planner, it dosnt make any difference how we are paid (commissions or fee for service) as a) most insurers offer the same % commissions and b) the key is to get clients to understand why they need cover and how much they need .... 99% of clients dont care how we are paid!

  • Life Insurance Actuary on 3/09/2013 4:30:24 PM

    I am an actuary that works in the profession and the author has not done his research well enough. Direct models have higher upfront costs than commission through advisers and they have higher lapse rates and lower customer satisfaction levels and are also more expensive. Lapse rates from salaried advisers are often also higher. So commission does not (an average) lead to churning or problems. CCI has misselling problems and group insurance is volatile in its price with no customer support. The adviser model remains the most superior and profitable for all parties and the best option for the client. A fee for service model causes tax, affordability and operational complications and makes no sense for anyone. The issue aound take up rates is largely caused by life insurance being optional, highly taxed and with no government incentives like seen with PHI.

  • Mike on 3/09/2013 4:12:54 PM

    1st Question
    You say you believe in NO commission.
    That being said how much are you prepared to pay for Advice & completion of application forms & followup of applications submitted that need further assistance to process??
    What you are missing is that most planners do do work in the BEST interest of clients & follow up clients on a regular basis- this all takes time & resources.
    If you go down Industry fund I see this as dangerous as I have case where a clients existing insurance was cancelled through an industry fund & client not told except when found - fund said its in the PDS why cancelled & they allowed insurance to cancel without contacting client Prior to cancelling - I bet you would be right up the planner but some reason people out there let industry funds get away with it cause they don't pay commission.
    Wake up commission helps pay for a service which most planners do well.
    I consider they no commission approach could lead to less insurance cover.

  • Lindsay on 3/09/2013 4:12:48 PM

    Unfortunately, the writer does not understand the process of providing risk advice. I am an advocate of fee for service but not all prospective clients would agree with him.
    1. About 5 years ago when deciding to go FFS entirely, offered FFS to prospective risk purchaser. On an hourly basis, total amount was higher than it would have been if paid upfront commission. Stopped doing FFS on risk at that point but still advised it was available and estimated costs.
    2. Prospective risk purchaser and outlined SOA fee $1,100 prospective client said did not want that and wanted commission.
    It indicates that new clients should go commission and maybe, only maybe, existing Clients reduced upfront commission if the new policy is better for the client than the existing one. The second client did not accept preassessment cover. No payment.

  • Innocent Observer on 3/09/2013 4:06:14 PM

    Wow.

    For a business analyst willing to give his 2 cents he clearly hasn't put in the time to understand the issues.

    Hell, if underinsurance was only due to price-sensitive consumers avoiding the additional commission-related cost of cover, then how on earth do the over-the-phone insurance providers thrive? (in my experience the costs are between 3 and 8 times the cost of the policies we recommend, not to mention over-the-phone policies are reverse-underwritten and have more exclusions than any adviser-recommended policy). ...and I think if he spent 5 minutes on Google he would have seen that the lapse rate on adviser-written policies is a fraction of those in the direct-insurance market...

    Oh, and to claim that life insurance is "the basis for all financial planning" is a ridiculous assertion (maybe he forgot that money is no use to you when you're dead?)

  • Dave on 3/09/2013 4:01:11 PM

    Sorry, but did they not try this in the UK? and it infact increased the under insurance issue because clients were not prepared to pay for the advice. Just as much advisers, I assume, could not justify the time taken to place a Risk policy (including advice documents) vs what clients were prepared to pay for this service.
    So what did this do, moved clients to an internet/phone based providers where the skills needed to complete risk sale are lacking and sales dropped accordingly.

  • Liam on 3/09/2013 3:52:11 PM

    I would argue that "no" it has nothing to do with commissions. It is not as though the uninsured 80% have gone out and bought direct insurance. Plus Direct Insurance is suffering from high lapse rates, so we would still face the underinsurance problem.

    A majority of people won't pay fee for service for insurance advice - how many clients like having to pay fee for service to get a Will? Some will (namely people with the means to), but most don't want to pay a fee, then a premium for the product.

    Furthermore, most commission rates are relatively similar. I am yet to meet an adviser who uses a particular insurer because they pay 2.5% more than another. Considering the difficulty of putting the cover on the books, Advisers are usually more concerned about the policy quality, pricing and underwriting, with servicing and claims at the back end.

    Some people just can't be helped. You can tell them and you can tell them, but you can't tell them. I have a friend that fell off his deck, nearly died, leaving 3 kids, but got lucky with regard to where he hit his head on the concrete. He has since made a full and quick recovery. Has he since looked at his insurance... no. And I don't think it is because advisers are taking insurance either!

    Some people will care enough about their families to insure themselves, whereas many others would prefer to remain ignorant.

  • Ben on 3/09/2013 3:50:32 PM

    Its great that a business analyst who has no idea about the process of implementing insurance policies, assessing the right amount of cover, explaining the different policies, structuring the insurance for optimum tax deductability and most importantly helping in the lengthy claims process, is given a forum for discussion on this website. It takes at least 5 hours to properly implement an insurance policy (best case scenario). If there are exclusions or revised terms then often advisers need to book a third appointment to see the client and explain these terms, not to mention all the compliance regulation that the Government in its infinite wisdom has placed on advisers. Then there is the most important part. Claims. Clients left to deal with insurance companies on their own WILL have adverse claims experience or as in the case of 2 of my clients this year not even know that they can claim. How can a client be expected to know all the ins and outs of claims?

    If we were to charge a fee for implementing policies correctly and preparing claims then this flat fee would have to be around $2,000 per client and then an extra fee for the claim, plus a review fee of around $500 each year. This is fine for the rich who can afford the fee to implement proper cover and which under this system will reduce the cost. But the regular Aussie (who needs the advice and assistance the most) will not want to pay the fee and will go and get the insurance without advice and be stuck with an unadvised and inferior policy (or even worse have no policy at all as there is noone to sell them a policy as there is no money in it for the adviser) which will further exacerbate the under insurance problem.

    I can see how upfront commissions could be seen as excessive, however without some sort of commission there will be no one to sell insurance and no one to help with claims and no one will have any insurance at all.

    You might want to think about your comments before making them public in the future. Or better yet stick to something you know the first thing about.

  • Paul on 3/09/2013 3:49:45 PM

    Very interesting commentary from another individual espousing that the commssion scenario with Risk advice is flawed, who has never worked directly in the advice industry or the insurance industry for that matter. Always, such a simplistic approach, commissions somehow effect affordability"of Risk insurance. The fact is that "commoditising" advice is not working for the Financial Planning industry, only for the banks and Industry Super Funds that control it. The reason that only 20% of Australians have insurance, I think comes back to how these were brought up, what level of education they have and the fact that most people are lazy. Life insurance is something that most think is a good idea, but most say it, rather than act on it. It is the old 80/20 rule in alot of respects.
    I can give one fact to the writer, if an individual engages a professional adviser for advice, generally they will deal with an insurance issue within their affordability. Those that go on-line to "research" in most cases are confused, mis-informed or simply misled about what insurance does and how it does it and tend to not take the risk of getting the wrong thing or wasting their hard earned money on the wrong thing.
    Advice and education is the key. I would suggest if there was far more realistic compliance and regulation, then perhaps more qualified advisers would have a greater impact on the 80% that do not have cover. As for "churning", yet another assumption, based on NO fact. Peoples situations and needs change and as a result advisers alter existing insurance arrangements. If they do not, they risk losing the client altogether to someone who will respond. Does churning exist? Of course, but it is a very small percentage of advisers actually doing it. Are there crooked accountants and solicitors? Of course there are, but they represent the vast majority of these professions. Are there rotten real estate agents out there? Of course, but I think they would be the majority. The fact is, in all walks of life, there are those that do the wrong thing or "try" to make a fast buck, you can't stop it, you can only reduce the impact of these individuals and with greater access to professional advice and education, these bad few would have a lesser impact. There is no such thing as a perfect world and with the layer upon layer upon layer of compliance by Govt, it has achieved little in removing the bad apples, just made it more expensive for the consumer and reduced profitibility of individuals in the advice industry.

  • Grumpy old man....not on 3/09/2013 3:47:35 PM

    I believe that this article's purpose is only to "stir the pot." It provides us with no evidence and the comments are inflammatory.
    If this author truly believes in what he says, will he be willing to pay a fee (on top of the new insurance premiums) to get advice to show that his existing cover has definitions, features and benefits that are outdated and it is in his best interest to change policies? Will an adviser wish to invest in the time to educate the client and justify with research for a flat fee to change his existing policies?
    If the client is diabetic or obese, will the adviser spend the extra time to pre underwrite the market place for the best deal for the client and is this an extra cost to the client?
    I have not seen that group insurance premiums have come down yet by 20% and I have heard that there may be some premium increases from one Big provider soon, which will negate the cost savings to the clients.
    May the stirring commence......................

  • Morgan on 3/09/2013 3:46:46 PM

    I believe the premium is not relevant when people take out insurance and therefore this would make commissions also not relevant.

    The reason 80% of people don't take insurance is because they haven't spoken to a financial planner, they think they are invincible, they believe insurance companies won't pay claims and an incredibly small proportion of people think it is expensive (these people will still think it is expensive if you remove the commissions and certainly won't pay a service fee to get insurance in place).

  • MG on 3/09/2013 3:41:02 PM

    What about Total and Permanent Disability? It's like taking out insurance on your house against damage, etc. - but not insuring it against fire. Simple, yet very important.
    Aside from the debate on commissions, may I add one small observation regarding the under-insurance and no-insurance problem. People generally do not like the idea of paying for something and not receiving something in return. Perhaps we should be re-visiting the idea of the old style endowment policies - even if it means premiums are slightly higher to include the investment component. Clients may welcome the idea of paying for protection for themselves and their families - and if nothing happens in terms suffering an illness, death or disability, the proceeds of the policy at whatever elected maturity date can add to their retirement funding. There may be other benefits as well - people will want to keep their insurance covers for the full period and not switch if necessary as this will surely affect the investment component.

  • gf in Bris on 3/09/2013 3:37:54 PM

    Every Australian thinks he is immortal and will live to 70 or 80. He will not take any cover or even the proper cover because of this attitude!!
    That's why advisers have to run the 'hearse' past every client, to make them aware of the circumstances & consequences. Many a time it will take years of hard work to allow a client to see them about life covers. Advisers need to be rewarded for the time, & the time we spend to convince clients to retain the cover for themselves & their families. If commissions are withdrawn, cover amounts will reduce, & covers wont stay on the books, thus less people will be insured & more will depend on the state & the likes of the Salvos for handouts. Think about cause and effect before the baby is thrown out with the bath water!!!! And lets have some common sense so we can still provide a service to the average Ozzie!

  • Martin Ball on 3/09/2013 3:33:02 PM

    Under FOFA it is no quicker to provide adequate insurance advice. You still need to interview the client, you still need to undertake a needs analysis, ensure the right product is then selected, compare against other products to be replaced, write a compliant SOA , meet with the client to discuss the SOA and complete the paperwork, send the paperwork away and undertake further follow up re medicals, bloods, questions etc. To do it properly is not a couple of hours. It is at least 10 hours for most clients if the careful and structured advice is prepared. I am pretty sure some insurance salesmen/women out there would not be undertaking adequate analysis or preparing a compliant advice document. Oh I don't forget some clients believe it or not will make a claim at some point. I am here to help.

  • Ben on 3/09/2013 3:28:47 PM

    So Mr Author on what basis do you determine the 'flat rate fee'? If someone comes in and says "I want" how do you charge them a flat fee compared to the person who says "I have no idea" and you need to complete a full needs analysis, look at what they currently have (not just the amount but the definitions within their existing insurances), determine what types of cover they need, how much they need of each, where best to hold it (in or out of super), stepped or level premiums, agreed or indemnity, what waiting period based on their situation (do they have sick leave, if so how much etc), what benefit period, their affordability and so on. You really have no idea do you. Yes you may have some cover but do you know the ins and outs of how those amounts etc were determined or did you just pick them? We do not throw a blanket over everyone and say you should all have the same types and levels of cover. If that were the case then yes let's charge a flat, standard fee for everyone. Wouldn't life be simple and grand in that event. Oh and on top of that will the flat fee be sufficient to cover our professional indemnity, our continual education, our salaries, our super, our insurance, our admin, our ongoing costs such as phones, computers, electricity, the cost to produce the Statement of Advice, the time to complete the application and follow up any further requirements etc? Unfortunately it is not as simple as 'here have some cover and that'll be $xxxx'. Dare I say it but I think many of those calling for changes in the insurance space probably don't have cover and have no idea of the work involved in getting the right cover for them. Since when has cost been the only criteria for appropriateness? And your comment that it doesn't take ten hours to do the work, you again have no idea. Work out the time for an initial meeting, do the research and determine the strategy, produce the SoA, have a meeting to present the SoA, complete the insurance application and then any other follow up work (and back office admin). Tell me you can do this in an hour or two and if you can then I would hate to be your client knowing that you have put little to no effort into ensuring I am appropriately covered (yet you still charge me a fee for it). Greed is what is stopping people from being covered. They simply do not want to pay insurance premiums because 'nothing will happen to them'. Oh and lastly in the last 19 years I have been planning I have NEVER churned any one of my clients through insurance and I am sure the majority of 'real planners' haven't either.

  • David Khenkin on 3/09/2013 3:25:58 PM

    Another twit...

    Even mediocre advisers know that commissions can be reduced by the adviser recommending a particular product and thereby providing a client with substantial discounts...in some cases up to 40% of original full commission premium...effectively creating fee for service as the financial planner is charging for the statement of advice only and receiving 0% commissions.

    Also, would love to see complicated clients with multiple structures pay advisers large fee for service amounts for statements of advice out of their pocket and then pay the premiums for the cover as well.

    Where are these people educated?

  • jwp on 3/09/2013 3:21:19 PM

    who is Max Franchitto ? again

  • Jamie Forster on 12/09/2013 12:16:54 PM

    I think that the response to this article is neatly summed up in the last couple of posts by Mark and Matthew.

    From their discussion, it is clear that business models are different and that charging methods are therefore also different: just as it is in the established professions of law and medicine amongst others.

    Whilst I have my reservations about the merits of models other than my own (otherwise I would surely have adopted those models) I would not disparage a specific business’s model unless my opinion was sought. I would certainly not cast a moral judgement on someone who takes a different approach to mine.

    Matthew, you say that you "don't think that this has anything to do with moral high grounds". I am sure that you are sincere when you say that. However, the fact is that there are many others who are: you only have to read this article and some of the comments to see this. Furthermore, plenty of advisers are marketing their services on the basis that their fee model is morally superior to other models including mine. It is one thing to compete for business by stating your credentials and service offering honestly: to even indulge in a little bit of 'mere puffery'. However, to compete on the basis of the false assertion that the way you charge is morally superior is misleading and unethical. To be clear Matthew, I am not suggesting that you do this. To those that do, I wonder what you have to offer if you have to win business on the basis of the way that you charge.

    You also say that "all that matters is how clients/consumer perceive commissions". I 'm not sure that this is "all that matters", however, as you raised it, I can say with confidence that 100% of my clients know how I charge, what I charge, what I am paid and have a positive perception of it.

    Should I ever meet someone who is uncomfortable with the way in which I charge they are perfectly entitled to seek advice elsewhere.

WP forum is the place for positive industry interaction and welcomes your professional and informed opinion.

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