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Pipeline of new advisers could be stopped

A crackdown on high upfront insurance commissions could cut off the number of new advisers coming into financial services, it has been warned.

Friday, February 1st 2019, 6:00AM 7 Comments

Russell Hutchinson

The government has said it would get rid of incentive structures in insurance and banking that drove poor customer outcomes.

Upfront commissions and overseas trips are top of the list.

Insurance commentator Russell Hutchinson said many advisers would feel they had been "put through the wringer", with Financial Markets Authority research last year into churn and now its report, with the Reserve Bank, into the sector.

It was not long ago that officials had defended the commission model as the Financial Services Legislation Amendment Bill was being developed. "Now commission is back in focus again."

How much a change in commission affected businesses would depend how long people had been in the industry, he said.

Those who had been advisers for a long time, with broad-based businesses and a range of revenue streams, might only need to introduce fees for some of the services they currently offered for nothing, he said.

But it would seriously affect those who were new with little infrastructure in place. "Any change to commission will affect the provision of advice, similar to how the investment advice industry works right now. It's hard to enter investment advice very young. It's hard to enter with a clean sheet and start out with one client. You typically have to join a bigger business and maybe that's what would happen. There's no doubt it would knock recruitment down for a period."

Adviser Jon-Paul Hale, of Willowgrove Consulting, said the optics on commission incentives were not good.

But he said insurers that did not pay high upfront commission still had to pay about a quarter of their premium income on acquisition costs.

In other countries cited in the report, insurers paid less in commission but more in business support costs for their adviser force.

"In the most part they pay a commission so they don't have to own and manage the infrastructure, we do."

If commission was structured advisers would still need a level of income that allowed them to be profitable, or they would leave the business, he said.

An alternative could be to pay commission at the beginning of a policy and then when advisers helped a client make a successful claim, he said.

Adviser Ron Flood said he thought most advisers would remain if commission structures changed, but agreed newer advisers would find it hard to run a sustainable business.

Tags: Commission Jon-Paul Hale Kris Faafoi Russell Hutchinson

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Comments from our readers

On 1 February 2019 at 10:51 am Ron Flood said:
Now that the FMA and Reserve Bank have given their 2 cents worth, I look forward to receiving letters from my product providers that go something like this.

Dear Ron

You may remember that a number of years ago we stopped providing offices, staff support, stationary, discounted mortgage finance, vehicle allowances and elecommunication &computor support.

In recognition of this, we increased initial commission and bonus payments to reflect this.

Due to a change in the regulatory environment we wish to advise that from April 1st your initial commission and bonus payments will be rediced to 80% of the first year premium.

To compensate you for this change, and to ensure you can still afford to run a sustainable business, we will pay you an operating allowance equal to the inital commission payment.

We thank you for your continued support.

Insurers will be able to report back to the pen pushers that commissions are now 80%, down from the previous highs of up to 210%.
On 1 February 2019 at 12:28 pm Murray Weatherston said:
Nice try Ron.
But methinks an expectation that will remain unrequited - my guess is the regulators will see right through that - and send a note to the 16 - "don't try that!"
On 1 February 2019 at 1:56 pm MAX62 said:
Actually Ron I agree with you I feel Advisers / Insurers overrate the power the Regulators have and in the final outcome if a bill is ever passed pseudo fascism will not prevail and regulation of private sector remuneration in a free market democratic system will set a precedent Labour will pay for next election.
My advice is we should all be talking to our local MP .
Recently Orr talked about increased Capital requirements for Banks so Banks talked about withdrawing from NZ if this happened have we heard any further comment ?
On 1 February 2019 at 10:44 pm MillaQT said:
I have been reading articles on Good returns for years and this is the first time I have ever made a comment.

3 years ago I set out on my mission to create a pathway to encourage more woman and support the next generation of new advisers into the industry.

In 2018 I was recognised at a national level for my work in the community around financial education including thought leadership, innovation, service excellence and contribution to the industry.

I came from the same community (Porirua) Kris Faafoi represents and am especially passionate about empowering and providing financial education to our Maori and Pacific people.

One thing I know for certain is that the changes in upfront commission that are being proposed will cripple a business like mine.

We have an aging population of advisers and need to provide a pathway for the new generation. I can go back to being an adviser, as I have a decent book of existing clients I could service.

However, I am not in a financial position to pay my existing team of 12 advisers who have all been advisers for less than 3 years, plus my team of 6 support staff a salary.

I am struggling to come to terms with the fact that everything I have worked for over the last 3 years to create a positive impact in both the industry and for tens of thousands of New Zealanders, could all come to an end because of a few people who want to restrict our ability to earn a living and make a difference because they don't see the value in what we do.
On 2 February 2019 at 11:57 am JPHale said:
The claims comment was a flippant comment, which I followed up with paying 'comms' on claims would create an industry of ambulance chasers, so no probably wasn't the brightest of ideas.

Ron's comments are spot on, this is how reducing or removing commission plays out.

Though as Murray says, the regulator may say no to that but will struggle to enforce it, when those advisers are working out of an office paid for and branded with the insurers branding.

Which is the real issue here, QFE advisers have been found to be creating the most harm and this is from a mostly single product provider approach.

The RBNZ's comments, if adviser subsidisation as Ron put it isn't allowed, will drive tied agency advisers Mark II.

Which will bring both significant harm and loss of product diversity to the New Zealand consumer.

Add to that, as we have seen in other international markets, the consolidation of advisers into branch operations will increase costs, as the cost of that space increases when compared to the distributed rates the smaller adviser businesses pay presently.

The loss of that diversification across many office environments will hit and hurt commercial landlords as their present tenants disappear too. The run on impact on the NZ economy from our industry has the potential to be disruptive.

No to mention MillaQT's comments which are very real in the scheme of things.

Before we throw the baby out with the bath water, how about we get through the present proposed changes and see where we land?

There's a lot of what has been discussed already in the proposed legislation, let's do that first and not kill the industry?
On 2 February 2019 at 3:38 pm Tony Hall said:
I’m with MillaQT. We are a mortgage broker and deal a lot with first home buyers who include a lot of former refugees and recent migrants with limited understanding of the language and financial matters generally. Most are on minimum wage and can only afford a modest premium usually < $50 pm. Even at the current ‘exhorbitant’ Commissions we would rarely make $1000 on a sale.

I employ an experienced adviser to ensure we can provide quality advice notwithstanding this part of the business is not profitable now. What do we do if commissions reduce? My adviser will not be able to live on his share of commissions and I will not be able to afford his salary. We will no longer offer insurance.

Fortunately the clients can still get insurance through the bank we have placed their business with and will be expertly advised by the unqualified, hard-sell merchants at the local branch. Good luck to them.
On 4 February 2019 at 4:59 pm JPHale said:
Tony you outline the reality of many advisers who are dealing with middle to lower income NZ. Not every client has a million dollar mortgage and a 6 figure income to insure.

These examples of where advisers are working are needed and demonstrate that it's not all trips and champagne as is being dished out as our reality.

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