New business model needed: FSC
This year’s Financial Advisers Act review should consider how advice could be made commercially viable without the need for high upfront commissions, the Financial Services Council says.
Monday, March 30th 2015, 3:15PM 
1 Comment
by Susan Edmunds
Chief executive Peter Neilson said 60% of New Zealanders did not get enough financial advice because they could not afford to pay and adviser business models were not set up to cater for them.
“It’s one of the issues we haven’t got an answer for. There isn’t a business model for general advice that is not related to commission,” he said.
The insurance industry’s commission structure was out-of-date, he said. “[It is] a legacy of when most New Zealand life insurance policies were mainly whole-of-life, endowment policies. Most life policies sold today in New Zealand are single-year renewable contracts but the legacy of high upfront commission remains.”
In Australia, the Trowbridge Report, funded by the Australian Financial Services Council and the Australian Association of Financial Advisers, has proposed a cap on upfront insurance policy commissions and flat commission structures.
Neilson said it was likely that report would influence policy in this country.
“We do have higher upfront commission structures than virtually any other country in the world. There are always concerns. There are very good reasons why people change provider, it might be cheaper or the new provider might have a better credit rating. There are a whole lot of other good reasons. But there are suspicions that the commission structure plays a part in people not getting what they most need.”
FMA had been looking closely at advisers’ records, he said.
“I suspect they are paying attention to instances where there have been large transfers [of business] between firms, to check whether the adviser is acting in the best interest of the consumer.”
More time would need to be spent on finding a business model that would make advice work, he said.
“While New Zealanders are reluctant to pay for financial advice directly, it is likely that commissions will play a major role in what is sold. Finding a business model to extend access to financial advice should be a major topic for the review of the Financial Advisers Act during this year and next.”
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Of course, the insurers would like to revert to the vertically integrated system of the seventies and earlier. They would control everything, but at what cost.
They, or their spokesman, seems to overlook the fact that the majority of insurance advisers have rejected the "employee" status where they were paid by a scale, with no recognition of performance. The commission model allows an adviser who is prepared to work harder, or smarter, or both, to be appropriately rewarded. The imposition of a "sole agency" insurer-controlled system would see the flight from the industry of a sizable proportion of the current advisers, and in particular, the successful ones. I know that my motivation (in 1969, as a 20 year old) was the fact that my earning power was not constrained by an employer. If I worked harder, I had the potential to earn more. If I learned more and was able to apply that knowledge to the insurance needs of my clients and prospective clients, and do it well, I would earn more.
Mr Neilson seems, in his haste to find a viable alternative, to forget that the high commission rates were created by the insurers in their crazy pursuit of market share. For some years, it seemed that they all played a game of cranking up commission rates to beat their competition. Advisers didn't drive this - they simply benefited from the games played by the insurers.
Another benefit to insurers of reversion to a "sole agency" type system would be that advisers would be less aware of the product offerings of others, and therefore less inclined to replace in the client's best interests. This would however, NOT be in the clients' best interests.
If the real problem is "churn", i.e. the irresponsible rolling over of in-force business without any benefit to the insured, then I suggest that the insurers need to make some changes:
1: Identify the intermediaries who make a habit (business out) of rolling over in-force business and freeze them out - stop taking their business! Recognise that it is rolled over, and in all likelihood, will be rolled again in 2 - 3 years. The insurer manager looks great today with a big block of business coming in from a new big producer, but it all turns to custard in 2 - 3 years when it all falls off the books. Come on people, you know who they are! Stop the problem where the rot is. Don't blame the good guys and gals who don't churn.
2: Retrospectively apply improvements in product wordings to old products. The professional adviser has no choice but to recommend replacing an old Income Protection, Trauma or TPD policy when there are demonstrably better products now available. It is ironic to note that many (most?) mainstream insurers now give a guarantee to upgrade (with some conditions) in their current products, but they don't/won't apply the "pass-back" guarantee to older products. The guarantee to upgrade in current products does not obviate the obligation on advisers to look to replace older in-force products where they are sub-standard.
Over the years, insurers have "lionised" their successful advisers - and recognised their efforts in many ways. Do they really think for a moment, that the successful advisers will stick around long if there is no incentive for them to earn higher incomes. Someone very wise once said: "You can't expect them to be lions in the field, and pussycats in the office..."