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.