New Regime, New Thinking
One of the challenges we are all going to face is retiring. The recent regulation changes have put some focus on this for many and have resulted in accelerated retirement as a result.
Tuesday, May 16th 2023, 9:06AM 
18 Comments
by Jon-Paul Hale
The usual approach to this has been, "I have a book of clients, and I'll sell it for X times the annual renewals", and for many, that works just fine.
However, for those that haven't managed to establish a large client base with significant renewals, the reality of X times the annual renewal just doesn't go very far in terms of retirement.
Ideally, these advisers will have had other wealth strategies along the way, but not all.
I'm talking about those that face client base sale values in the $200-400,000 range.
Where I'm coming from here is just because that's how we have always done it doesn't mean that's how we should always do it.
And this is where our licensing rules now give us a different perspective.
- Who says the base has to be sold?
- Could that base be 'leased' as such?
The reality is the base has to be located under an operating FAP and looked after by qualified and registered advisers with the new rules.
However, that doesn't preclude the owner of a client base from contracting a FAP to look after and manage those clients.
This is an interesting perspective when you dig into the various contracts and agency agreements.
- The reality of agency agreements is you don't "own" the client as such.
- Sure, you own the rights to talk to that client and receive remuneration from the insurer for them, but you don't own them.
- The insurer "owns" the client; they are the ones that hold the contract with the client, and the insurer is the one that receives money from the client and pays claims for the client.
- This means that the contract through the agency agreement mainly defines the adviser responsible for looking after those clients unless the client signs off to have another adviser look after them.
And that's ignoring the client's view that no one owns them!
Where am I going with this?
The primary concern of the FMA is clients are looked after.
- By a qualified, registered financial adviser operating under a Financial Advice Provider License.
This doesn't preclude various ownership structures for client bases in the background between the FAP and the original retiring adviser or even an active adviser looking for servicing support in their business.
Which then raises an interesting approach. We know that client base purchases are capital intensive, and older average age bases have a run-off risk higher than a middle-aged base would, resulting in retiring adviser bases having some downward pressure on values because of the more significant drop-off risk.
The existing adviser also has overhead and operating costs, expenses they bare just turning up, and more for doing the work themselves.
This raises the question if you could contract an advice firm (FAP) to service your base for a fee from the remuneration it generates, and that residual remuneration is still a reasonable ongoing income stream, Why would you sell for X times vs having that income stream potentially come in for 15, 20, 25 years into the future?
We have an interesting storm converging on client bases at the moment, and it is likely to remain for many years.
- The economic climate to access funding is challenging;
- The increasing number of bases coming up for sale with Boomers retiring;
- Without the younger ones coming in as quickly as the Boomers are leaving to replace them.
Being that the funding issue is not helped by the younger ones struggling to get on the property ladder in the first place, their opportunity to purchase client bases will also be delayed.
If retiring advisers are to continue to receive the value of their life spent building their client base as they expect, we need to start considering alternative ways of doing this.
Ways that don't result in crashing the value of client bases or diminishing the value of a significant asset in advisers' lives.
I've been turning this over for some time, and I'm interested in discussing some of these approaches with advisers to better support those that have paved the way for us to continue in this profession.
We stand on the shoulders of giants, and we need to look after adviser well-being, not just while they are working but consider it for retirement too.
I also believe that continued consolidation of client bases with large corporatised FAPs isn't good for those of us who want to operate a more targeted or boutique advisory business.
It may make life easier for the FMA to manage things, but it doesn't help consumers or competition in the industry.
Food for thought at a time of change for many.
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Comments from our readers
On 17 May 2023 at 11:43 am Backstage said:
Yes, I share your thoughts and consider that the need for insurers to have nominated rep's will grow as time unfolds and bases can not be sold for the imagined value of some advisers. To add to this it is very likely the rules around vesting of renewals will be or probably should be reviewed. This will also create much commotion and outrage however my feeling it is really hard to justify being paid for a service that is not provided. That is where an adviser is the servicing adviser but not the originator of the policy. I have some originating advisers get nasty and unreasonable when attempting to negotiate an amicable renewal purchase. In one instance I have tried several attempts over 10 years of servicing. In this case the client is 61 almost terminal now and the adviser is hanging out for 4 X renewal. The client has screamed at the adviser and let them know they have had no service during their time of illness and claims. Despite that the adviser holds fast. On 18 May 2023 at 9:28 am w k said:
@backstage: it's back to the future. i predicted several years ago, the industry is likely to go back to the tied-agency system where consumers do their own shopping rather than having a broker shop for them ... maybe that's better for customer outcome?
there will still be brokers, but lesser advisers will going down this route.
time will tell.
On 18 May 2023 at 9:29 am Barry Read said:
Backstage - There is an assumption in your comments on vesting. Back in the 90s when vesting came in as part of IFA agreements the payment wasn't linked to servicing. It was a payment for writing the new business and if it stayed in force you got paid. Servicing was implied but not contractual to the payment. Which is why companies recognise Serviceing Adviser separately from Renewal Adviser. Now the world has moved on and companies have started adding a servicing requirement. The regulator also made the assumption that the renewal was payment for servicing. But this is probably why some advisers are touchy on the subject. Their cheese keeps moving. On 18 May 2023 at 3:20 pm Aggressively_passive said:
Barry and Backstage both miss the point when it comes to pendulum/spread commission.
If you have sacrificed about half the usual upfront to get onto a 20% or more trail, then nobody will ever convince me that it is "servicing" commission. Because it isn't. And I will never accept it being at risk to some cad about town with nothing more to offer than promises of service and an adviser appointment letter.
The Stout Street pointyheads might think that trail commission brings a responsibility to provide ongoing care to the clients but they are wrong - it doesn't. And if the client signs off on a scope of service that doesn't promise any form of ongoing "servicing" then that will be OK too (I'm not saying that is what advisers/clients will agree to, but that the nature and scope agreement is where that "servicing" responsibility is determined.
On 19 May 2023 at 8:31 am Backstage said:
@wk Yes could be. It was probably the wrong time for banks to retreat and get out.@Barry Read, when we first started and I started as an untied adviser, there was no vesting then. Groups such as the Life Brokers Association later in the piece arc'd up and convinced some insurers this vesting be a great idea. Well, it certainly gave us some asset value. Arguments rose over this illusion of client ownership. I think now we really do need to consider value differently and build real business value, this on top of everything else we need to do to survive and scratch out a living. Very difficult now to start from scratch and I really wonder just how attractive the industry is to young ones now. It is certainly an inflection point. On 19 May 2023 at 9:01 am JPHale said:
@Backstage, yup, that's very much part of the challenge. And the rule changes mean that what was historically contracted is no a different regulatory expectation On 19 May 2023 at 9:06 am JPHale said:
@W K, ahuh, I was talking about Tied Agency 2.0 back in 2018/2019... With this issue not well addressed, this is only going to get worse.
I've seen a base passed to PL's internal team for servicing; not sure what the situation was other than clients have come to me asking me to take over. I expect this is only going to grow over time.
Fidelity and Asteron don't have that ability, so time will tell what they end up doing; with Chubb and AIA having QFEs, there's likely internal capacity there presently too.
The direct providers with large books historically sending a letter saying call us if you want to chat, is likely to be pulled up by the FMA as not enough for servicing purposes. Given that we're being told this is not good enough on the FA adviser side of things.
We're yet to see the full extent of what the FMA thinks around the area of servicing, and I'm guessing we're going to have a few surprised operators when they do.
On 19 May 2023 at 9:06 am JPHale said:
@ Barry, exactly. And that's a big part of the issue, the expectation that what was past is allowed to continue. Yet, the world has changed, and the cheese keeps moving. On 22 May 2023 at 5:44 pm w k said:
@backstage: thanks for your comment. personally, i think banks should not get involved in the insurance business, life or general. the level of service, knowledge and rapport with clients & understanding their needs are very different from a tied agent or broker.
@jphale: i believe all the life insurers have the ability to set up their own QFEs. those without QFEs now will have no choice once their market share start dropping and/or they have more orphan policy holders than they can handle.
i'm expecting things will get more complicated/confusing. this will happens when people with zilch experience or knowledge dictate and micromanage.
On 22 May 2023 at 9:05 pm w k said:
and, as to who owns the clients, it has always been the insurers. advisers broke the deal and are paid a commission under the providers' terms, not the advisers' terms. besides, the insurance contract is between the insurer and the insured who is the client. On 23 May 2023 at 9:37 am Backstage said:
"@Aggressively-Passive... it doesn't matter what we both believe or consider fair.
As for the cheese, it has gotten smaller and more expensive, and has become a luxury that many are unable to afford. @A-P, again, whether we believe the hard-core Life Broker Association mantras about renewal versus service and are under some illusion that this will hold, it will be challenged!
We can place our left hand across our chests and can chant we are lifeys until we die.. or.. we can see this inflection and start considering VALUE... not just praying hard no one sees this or challenges why you are receiving remuneration/revenue for a service not performed.
We can get through this. If the client feels all is ok and they believe they get value from their relationship with you or your practice, then you are safe. Just as where you buy your fuel for your vehicle, if one day you felt they had a crap attitude, took you for granted, and a fuel station down the road gave you a better experience, you would be off. If the originating fuel station decided to argue that you are their client and started fighting with you and the new station... I don't think I need to go on."
On 23 May 2023 at 12:16 pm JPHale said:
@W K, agree. The reality is where there is a need, solutions follow. The question becomes, is that good for clients and the advice industry? Likely not, but we may have little say in the matter when it all boils down.
@AP true, the reality of the past contracts is not going to be the regulator's concern; they are looking at here now and the future. The reality is regardless of your view of what the historic trail payments were for, the current view is they represent a reward for a level of service, and that is going to be what is put under the microscope.
As someone said to me, it all comes back to needs and scope of service.
If the signed scope of service states that the client wants no ongoing service (in a disclosed and appropriately managed way), then that's what the client wants. The regulator checking on the basis of money received and service not delivered only needs to look at the documentation defining future service to have clarity on that client's situation.
However, I doubt those that are saying the payment for no service have this signed by the client and on file. I very much doubt clients will sign for no future service, as the basis of talking to an adviser is to get service, usually because they haven't or can't get it from the providers directly!
A bit meat in the sandwich here; the clients want the service, and the regulator expects that advisers should provide ongoing service, but the advisers in the middle don't? I can't see that argument flying well...
On 23 May 2023 at 4:02 pm Rob T said:
Just another way of looking at it. This talk of "why should you get paid without service" ignores the reality that as @wk commented it is the terms of the contract for originating the agreement. They agree to give us some of their margin to continue to operate our businesses and provide ongoing service when required. Somehow that has now evolved into FMA defining exactly how to provide that service and... etc. I personally have an issue that people get high and mighty over that when it is exactly what the insurance companies and the banks do It is my understanding that PL perhaps and others take a lump of cash from the reinsurers. And of course the monthly premiums. In the end of the day it's all about margins. Banks for instance are simply retailers of money. They buy the use of it and on-sell it for a profit. Give what service they have to when called on but take a big fat cut every month. And the insurance companies take a margin of premiums And the FMA is fine with that. Yet somehow we're bad if we get a margin when client doesn't need a service this month? Just saying On 24 May 2023 at 11:21 am w k said:
thanks rob, agree with you.
i, and i believe this includes all the professional advisers out there, want regulation to guide us in our practice, and most importantly, weed out the cowboys.
i repeat "regulation to guide", that is, advisers (including financial institutions) have to practice within a certain guidelines. NOT to tell us how we should run our business, how much we should make, how we should service our clients, etc. it's consumers that make those decisions / choices - which adviser's method / style of practice suits them best, how much they are willing to pay for their service, etc - that's NOT for the regulations to dictate. micromanaging can may boost some egos, but it'll hurt the industry.
On 25 May 2023 at 8:32 am JPHale said:
Thanks Rob T & W K; we haven't had enough dialogue on what this looks like from advisers in the submissions I have seen.
Which leaves us vulnerable to others sticking their oar in and deciding for us.
As I have said before, it's been an issue of those looking in not understanding the life industry, but once someone comes and learns to take it back, they're often considered to have been brainwashed because what's said doesn't fit their worldview (Sue Chetwin).
So there is an ongoing tension between Advisers doing the job they know and love and the outside looking in going, "That's backwards".
When we know the way life insurance works is backward to most other financial services products, we supply money in a crisis, and almost every other product is money now, not later, on a promise.
We also know life clients don't have means, which is the very point of insurance need, whereas other financial services products exist for people with means.
Making the idea of a fee for service with life insurance the opposite of the typical client situation, they can afford an ongoing premium, but they can't afford to pay for upfront advice fees.
On 25 May 2023 at 5:54 pm w k said:
thanks jphale for your contributions. i've resigned to the fact that advisers can shout all we want, nobody is listening. we just got to live with it.
quotes i learnt 40 years ago:
"life insurance is not bought, but sold"
"life insurance is sold not because someone must die, but because others need to live".
On 26 May 2023 at 5:32 pm Aggressively_passive said:
@backtage
@barry
@w k
no, I believe the actual adviser agreement (contracts) that I have signed. Not a belief, resignation or something the companies have "started to change"...
In black and white they talk about renewal commission. They talk about trail.
Nobody calls it "servicing commission". Nobody ties it to ongoing service or responsibility to clients.
Except Accuro. The only provider I deal with that vests trails. They do talk (page 10, section 9.3) about "Renewal commission will be paid in accordance with the rates specified in this Commission Schedule from 13 months onwards in accordance with the Commission Schedule. Renewal commission is paid as remuneration for the Servicing of Clients."
And if you are appointed by the clients to service their policy, they will transfer the trails to you.
Everyone else makes no direct link to trail/renewal being tied to providing an ongoing service to the policy from which that trail is derived.
In fact, to further prove the point they will allow you to become the appointed servicing adviser without the trail, or have the servicing access removed without the loss of the trail.
I have said this so many times, and I will say it again. The scope of service is the key. It is directly referenced in FSLAA section 431J and in the Code standard 3. Commission is NOTHING TO DO WITH IT.
If you are going to take the trail or a fee (or nothing) and provide the client with anything from full service, claims support and reviews, or if you are going to ignore them completely, either way, you will need to show the client UNDERSTANDS that that is the NATURE AND SCOPE they have agreed to.
On 29 May 2023 at 8:42 am Backstage said:
@A-P Loved the we are lifeys anthem... I am afraid it matters not what we may believe. If we believe that Insurers will not change agreements as a result of COFI or some other pressure then we are probably not prepared.
Sure Scope, what about it... is this some eternal agreement that magically trumps all other cards and will stand up if renewal vesting gets challenged.. by the way AMP (with the exception of the NM/AXA agreements) never ever had vesting, SX still doesn't.
I am just saying, STAND BY! (I have said it so many times and I will say it again)! I am also a little lost as to why you refer to that section of the code and link it to the right to enteral renewals?
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