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'Not all advisers churning'

New Zealand’s financial advice sector has welcomed the Financial Markets Authority’s long-awaited report into life insurance churn – but said its findings shouldn’t be taken as representative of the industry as a whole.

Friday, March 23rd 2018, 6:00AM 13 Comments

by Susan Edmunds

It was revealed yesterday that the regulator had taken action against 11 advisers in its investigation into life insurance replacement business.

But it highlighted concerns about the behaviour of the advisers it investigated, who were identified in 2016 as having high levels of replacement business.

The FMA found that half the 24 advisers it dealt with either were not aware of their obligation to exercise care, diligence and skill or were in breach of it. Many did not recognise that incentives such as overseas trips and upfront commission could create conflicts of interest with their clients.

PAA chief executive Rod Severn said it was positive that the report had been issued.

“I don’t think there’s any surprises in there at all. You can assume that overall the industry is okay. There are some bad apples in there that they are weeding out, which I commend. If it tightens up the profession, I’m all for that.”

He said it was surprising that any advisers would not understand the potential for conflicts around soft-dollar incentives. “I think most advisers should understand that and if they don’t they will very shortly. This shouldn’t be read out of content. [Poor behaviour] is not endemic. It’s not a problem across the whole sector. I’m encouraged that this aligns with Financial Advice NZ and what we are trying to do.”

Adviser law reforms would probably put an end to soft dollar commissions, he said.

FMA director of regulation Liam Mason called for insurers to consider reforming their commission structures, and said more work would be done by the regulator in this area.

But Richard Klipin, chief executive of the Financial Services Council, which represents insurers, said the industry was constantly in a state of improvement and there was already work under way to help stamp this sort of behaviour out.

“This report is an important reminder of the need for this work to remain a priority.”

He said the FSC code of conduct in July would be a significant step forward in lifting standards.

“It’s important to note though that the fundamentals of the industry are sound, and that the small sample of advisers that this report is based on may not be indicative of the thousands of financial advisers who every day do great work for their clients improving their financial outcomes.”

Tags: Churn Life insurance PAA

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Comments from our readers

On 23 March 2018 at 11:08 am Mike Naylor said:
If insurers don't move from an upfront commission model to an increased trail commission model then the FMA will do it for them, and probably muck it up by banning commissions. Isn't it about time the industry took control of this, as I have been saying for several years?
On 23 March 2018 at 1:10 pm Dirty Harry said:
Since the CWG webinar has stopped working I'm looking for something to do.
Mike many have been quite proactive in supporting and encouraging less-upfront-more-trail models.
High upfront is still available but your comment is a little off base in suggesting that it is not happening. It can be inferred though, that those who both favour higher up fronts, and have lower persistency should perhaps be given a little more 'attention'.
On 23 March 2018 at 1:24 pm Tony Walker said:
I would also be interested in opinions of others as to whether it is appropriate for the renewal commission for a policy to remain with the originating adviser in the event that another adviser takes it over on request of the client.
On 23 March 2018 at 1:35 pm Backstage said:
It would be respectful if when the FMA are being interviewed that they would talk about only 24 advisers, then only 11 out of a population of 7,000+ advisers.

Mike, as much as I appreciate you have never worked for commission and you constantly make mostly anecdotal assumptions on All advisers behaviour, it is illogical to imagine an outright ban on commissions.

Very few advisers would continue and it would not serve NZ very well as anecdotally most Kiwis will not pay fees for insurance advice. The commission is funded via premium and most Kiwis are ok with this. Mike, even the MJW paper which was rubbish used terms like “we assume” … they struggled to get any statistical evidence to support their stolen ideas.
On 23 March 2018 at 4:50 pm Adviser1 said:
Ah here we go again - churn, high commissions, you bad horrible people how dare you be advisers! It's so easy for salaried employees to attack commission only sales roles and advisers. What isn't often appreciated is we are at commission claw back risk for quite some time - both insurances and mortgages. There is also a lot of unpaid work done in the background helping clients with claims etc. A good percentage of proposals never actually get issued due to underwriting etc so we don't get paid for those. It's now proven that very few advisers blatantly churn. Looking at it from a different perspective do impartial advisers also have a duty of care to present to their clients a new and improved policy if the market has changed and those existing insurers have not improved their benefits?
On 24 March 2018 at 9:44 am Denis said:
Great point, Tony Walker. This stuff is not widely known and I was amazed when I first found out. No other industry would tolerate this.

Adviser1 - these arguments don't wash. The FMA are after the QFEs as well, so I would get used to the idea that things are going to change. Suggest positive approaches, rather than sniping over the fence at the QFEs next door. To the outsider, this looks like rats and mice arguing about which one of them is the nicest. The guy form Rentokil is going to deal with both, let's face it.

An adviser with a large book does indeed have a lovely guaranteed salary, seemingly not linked to performance or being regularly available for work.

The sense of entitlement that most people seem to pin on millenials is far worse, in my experience, with older advisers. I really sense a change coming but it's taken a long time.


On 24 March 2018 at 9:15 pm Ron Flood said:
Tony and Dennis.
The problem with changing the payment of renewals to another adviser, in most situations, would be a breach of the Agency Agreement the existing adviser has with the product provider.These agreements state that a renewal commission will be paid to them on receipt of a premium payment.
With many advisors now choosing to take larger renewal commissions and lower upfront, it is now more important that they retain the renewals indefinitely.
Many Advisers sell their ongoing renewals to a new adviser when it becomes apparent they will no longer be looking after that client. Unfortunately a lot of new Advisers are reluctant to pay and want something for nothing.

The problem I see on a regular basis, is Advisers getting clients to sign authorities to change adviser, when in fact all the client wished to authorize was for the new adviser to get access to policy information.

Regarding high upfront commissions, one of the arguments that I have supported over the years is for a reduction in the upfront commissions paid on replacement premiums. If a client is currently paying $1,200 per year and this is replaced with premiums of $1,500,then an adviser could, if they wish to, take full upfront commission on the increased portion, and renewal (say 20-30%) on the original premium.
Another restriction would be that only the increased portion would be counted towards any 'soft dollar' incentives.
A situation could also occur where the new premium is lower and therefore the renewal option would be the only one on offer.

From what I understand Mike, the Government has no appetite to reduce or restrict commissions at this time. However, advisors need to understand that the FMA will be looking very closely at their actions and behavior in future.


On 25 March 2018 at 5:35 pm BayBroker said:
Ron - that is a terrible argument. If ‘you’ don’t service your client well enough by and they decide to move their servicing to another advises, why should ‘you’ continue to receive remuneration?

One contributor to so called churn is the fact an adviser who takes over a client isn’t going to be paid for looking after them. It works in general insurance, and general insurance businesses are still able to sell their book, so why wouldn’t it work in risk?
On 25 March 2018 at 5:49 pm Denis said:
Thanks Ron. These agency agreements seem adviser-focussed rather than client-focussed. The adviser makes a sale and it's income for life, with no downside. Even if your client goes with someone else - the new adviser will compensate you for the "lost" future commission!

If you have a thousand such policies, some of which you may have "bought" from another adviser, that's adding up to a fair number..

Ultimately these cosy little arrangements are funded by the customer through their premiums.
I'm OK with upfront commissions - it is a lot of work to get a new policy on risk. But after two years, say, the client should be able to appoint a new adviser freely and without needing a back office deal between the advisers and the insurer.

A book of clients should not be a commodity to trade with other advisers. It's wrong.

On 26 March 2018 at 10:21 am smitty said:
I ask the question, "why is an Adviser paid a renewal stream?" To support the product that was sold. The company recognises that the Adviser is the first port of call, and therefore recognises this by paying a renewal commission to them for retention of the policy. Nothing wrong with this, but having worked in the industry for a long time, I simply do not agree that the renewal commission stays with the Adviser that sold the original policy. I dread to think how many Adviser books are out there where clients have been sold a policy, and that’s the last they see of the insurance Adviser (trust me, having worked for some firms, the new person always starts dealing with the existing clients, and the first thing they say is "I haven't heard from my adviser in years...".) So yes, I believe that the renewal commission should go to the Adviser that accepts looking after the client, and provides the service to them. Watch how quick Adviser books will be tended to then. The client will also become empowered to not accept tardy service. Whilst the agreement may state that the renewal commission is paid to the selling agent, I’m sure that the industry could stand up and gradually phase it out?
On 29 March 2018 at 12:17 pm First Time Caller said:
The problem with the "new" adviser taking over the renewal stream is they benefit from the good advise given by the existing adviser. For example Level Premiums sold 15 years ago, and a new adviser turns up with no value to add but "sign here" and this presents no guarentees that the service from the new adviser will be any better, in fact i think it would generate a very aggressive new adviser that doesn't need to give any advise but just goes around targeting renewals with his/her shiny shoes. I've been in the industry for a few years now so you could argue i'm conflicted, but if you are a good adviser and the client has a good contract that they should keep... do you really need to take over the renewals... how about you just tell them its a great policy and keep it and here are some other areas you don't have covered and would you like me or your existing adviser to address that.

In summary
- Why take high renewals if it can be taken away by someone with shiny shoes. And I dont think high upfronts are sustainable for the industry
- A breed of advisers would pop up that just target taking renewals
- Taking on or training a new adviser would present a much larger risk as they could systematically take renewals... yes restraints... but why take this risk
- Why should another adviser (or myself) with a swipe of pen be able to take renwals on a contract where the existing adviser has done a great job e.g. Got a pre-existing covered, given level premiums or Income Pro at a high level pre self emplyment etc

On 30 March 2018 at 2:33 pm Denis said:
I agree with much of what you say, First Time Caller but the current system is hard wired to protect the lazy adviser who can build up a huge lucrative book of clients and not do a damn thing. After all, the insurer will often keep the written communications going for you.

I would expect/hope my clients would send away a predatory, shiny shoed adviser. But if they don't, then that's my fault for not servicing them properly. Group insurance and F&G works like this - in other words, the real world.

In my experience, it's the advisers wearing crocs at a golf course near you that are holding the industry back.
On 7 April 2018 at 3:34 pm JohnThierry said:
Mike Naylor, the industry is not stupid. Virtually every company allows advisers the option to reduce the initial commission for an increased renewal commission. The challenge is that no single company can be the first to act to compel advisers to take the levelised commission structure without significantly compromising its new business flows. And the companies cannot collectively agree to amend commission structures, as this would violate competition rules.

More fundamentally, what evidence is there that a flat commission structure would address the supposed churn issue? Australian insurers pay significantly lower initial commissions and yet market lapse rates are materially higher.

The issues in our industry are subtle; there are no simple or obvious answers to “fix” the issue of poor advice. Instead, let’s take a deep breath, engage with the FAA amendment process, and focus on the fundamentals of delivering good customer outcomes.

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