Who Pays for Advice and How?
Consumers and life insurance advisers face uncertain future as the end of commissions looms - but who should pay?
There has been a significant and negative shift in public sentiment towards the value of financial advice in the aftermath of the Hayne Royal Commission. The revelations from Hayne’s witness box have led to scorching scrutiny on what consumers get for their money when they purchase financial products including insurance.
In the face of horror stories and runaway consumer distrust, banning all commissions may feel instinctively correct - and so it goes the life insurance industry now confronts a looming deadline.
By 2021 it has been suggested to reduce commissions for selling life insurance to zero unless the model is justified, which gives the industry and ASIC two years to review the effectiveness of the recently introduced Life Insurance Framework reforms.
Outright banning of commissions may appeal to some, but raises the obvious question - who will pay for the advice that consumers need when deciding the appropriate product and level of cover?
In 2018, two million Australians had their lives insured through an adviser. In total, the industry paid out $3.9 billion last year in claims made on advised insurance policies.
Mortgage brokers recently confronted this issue from the Hayne recommendations – but with the benefit of a looming Federal election and a strong case focused on who pays for the service, their potent campaign won a reprieve. The life insurance advice sector faces a similar predicament with the benefit of a little time to make a strong case about consumer benefits and who pays for the service.
But to do so the life insurance industry must articulate with crystal clarity - the best way for consumers to access high-quality, independent and affordable advice, while ensuring that advisers are fairly remunerated for the valuable service of arranging the right cover.
My position on conflicted remuneration has always been clear – it has to be worked out of our financial system – but must be replaced with something that works equally well for consumers as for the industry. It does not automatically follow that the answer to eliminating conflicted remuneration is to extinguish all commissions. The question to be answered is: what is the best and fairest funding model for the consumer and industry?
Most recent commentary would tell you that there is a disconnect between consumer outcomes and adviser remuneration. In reality both must work hand-in-hand for the future sustainability of independent life insurance advice. We therefore cannot blithely accept that all commissions are bad.
We have seen in overseas models, such as the UK, that a move from commissions to a fixed-fee service has resulted in the unintended consequence of consumers being unwilling or unable to access independent financial advice. This makes the system anti-competitive and delivers poor outcomes.
Thankfully, Australia is taking a different approach with ASIC to conduct a review of commissions in life insurance in 2021. This means the risk advice sector has a unique opportunity to look forward, ask itself the hard questions and make the case for a sustainable remuneration model.
Life insurance and other forms of risk protection aren’t headline grabbers, nor is the advice associated with getting the most appropriate product matched to the consumer. But no one can argue against the importance of having fit-for-purpose insurance that provides protection and peace of mind.
There are also many good advisers providing great advice, but it must be acknowledged that the industry has not always been its own best friend with many areas that need improvement.
I have been encouraged by the industry’s early initiative to lead the review of the current remuneration systems and consider new forms of remuneration, starting with industry-wide consultation to help design policies which can be presented to the future ASIC review.
This will take courage to get it right and to admit that consumers haven’t always come first. As such the sector can and must do better.
If the life insurance advice sector cannot develop a credible reform agenda it will face the inevitability of further regulation, a more complex marketplace and a direct threat to its sustainability. In this scenario everyone loses as choices diminish and costs increase.
The best outcome must be a sustainable remuneration model that is industry-led and consumer-focused, that supports the right outcomes for consumers, advisers and insurers.
Senior Investment Specialist | Retirement Specialist | Investment Consulting | Investment Committee
5 年The life industry needs to also educate. Most members see insurance as the problem rather than investments as they see them reducing their balance for something they either don’t understand or think they won’t be able to get when needed
Managing Director at IPROS Capital
5 年Consumers must come first. Getting appropriate advice to more not less people as they approach retirement is a more thoughtful way of ensuring consumers come first.
NED, Senior Advisor, Coach, Author | Global Pension and Retirement Leader
5 年Points well made Bernie. We have no problem paying at the doctor or architect. In my view the RC has shown two things: a) a set of incidents and poor behaviour of some leading to a populistic condemning of advice and fees; and b) pretty singular root cause analysis as many providers simply used regulatory uncertainty to their advantage. The former is done without the UK consequences you outlined. The latter in my view is worse: conflicts and conflicted REM are only two issues. I fear new regulations will simply move the goalposts without addressing root causes like unclear regulation. May be we should consider running pre-mortems to anticipate likely issues.