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Govt told to keep out of adviser pay

Significant change is coming for insurance advisers, but one says it’s unfair that the Government is meddling in what private businesspeople are paid, at all.

Thursday, May 2nd 2019, 6:00AM 3 Comments

The Government has released an options paper as part of its consultation on plans to revamp the financial services sector.

It comes in response to the Financial Markets Authority and Reserve Bank’s reports into life insurers and banks, and the Australian Royal Commission of Inquiry.

One of the preferred options is to require insurers to design remuneration structures, including for advisers, in a way that was likely to promote good customers outcomes.

Commerce Minister Kris Faafoi has indicated he would like to see a move away from high upfront commissions, in favour of bigger trails, to encourage ongoing client servicing.

The Government has released an options paper as part of its consultation on plans to revamp the financial services sector.

It comes in response to the Financial Markets Authority and Reserve Bank’s reports into life insurers and banks, and the Australian Royal Commission of Inquiry.

One of the preferred options is to require insurers to design remuneration structures, including for advisers, in a way that was likely to promote good customers outcomes.

Commerce Minister Kris Faafoi has indicated he would like to see a move away from high upfront commissions, in favour of bigger trails, to encourage ongoing client servicing.

Adviser Graeme Lindsay said, provided client interests were being served, pricing was a matter for the industry to deal with.

“We should be thumping the tub – all advisers should be talking to their MPs about this intrusion into private business.”

He said, as long as New Zealand premiums were in line with international benchmarks, there did not seem to be an issue to address.

In a competitive marketplace, insurers would not put products or pricing in the market that was out of kilter with what others offered, he said.

"It's just woke socialist politicians piling into private enterprise they hate."

Some insurers, such as Asteron Life and Fidelity Life, are already offering a lower-upfront, higher-trail model.

Fidelity chief executive Nadine Tereora said she expected there to be significant industry-wide change ahead.

"Areas such as adviser oversight, incentives and remuneration, life insurers are being asked to reconsider the effectiveness of their current operating models in delivering good customer outcomes. As for how Fidelity Life will be affected, we’re working through these details.

"Fidelity Life is committed to a model where customers’ interests come first and we know there’s always more that can be done."

But Partners Life managing director Naomi Ballantyne said any industry-mandated increase in trails at the expense of upfronts would create problems for some advisers because it would only apply to new business.

“It will immediately reduce advisers’ income on the basis that in time they will earn more.”

Insurers would not put up renewal commission for existing policies because they had already paid for those with upfronts, she said.

Advisers might respond by trying to sell more policies to earn the same amount of upfront commission to compensate, she said.

“Whatever we change can have unintended consequences.”

She said her firm relied on advisers to provide clients with ongoing advice over the life of their policy.

"“For a client to understand what changes in their lives could and should prompt a review of their existing coverages, would require a great deal of insight on their part about a subject they are unlikely to have a close interest in or knowledge of. Even if a client had an awareness that their coverages require reviewing as their lives change, it is very unlikely that they would understand on their own, what changes could or should be made to their inforce benefits.

"Without an expert adviser working with a client over the lifetime of their policy, it would be probable that the coverage bought at application date, would be inadequate or incorrect for their circumstances after a relatively short number of years."

She said sometimes changes made to the policies by an adviser could result in reduced client premiums, and lower renewal commission for the adviser, even though they might require significant work.

“There has been a lot of commentary in the market over recent times of the potential for advisers to receive renewal commissions for ‘doing nothing’. There has been virtually no commentary about the nature of the work many advisers do on behalf of their clients, and for which renewal commissions on their own provide minimal compensation.”

 

Tags: Kris Faafoi Naomi Ballantyne Partners Life

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Comments from our readers

On 2 May 2019 at 11:31 am dcwhyte said:
GL - understand your frustration but the conversation around commission structures was in play long before the current Government took office. Regulators, MBIE officials, and various Ministers in the National Government were making noises about conflicted remuneration long before Minister Faafoi came along.

There has been a long-held view among officials that upfront commissions are too high and whether they're right or wrong, or whether commissions are too high, just right, or too low, I have no idea and, like you, I'd rather the market set the structures.

However, I suspect that will not eventuate and advisers best be prepared to adjust their business models accordingly.
On 7 May 2019 at 9:23 am Backstage said:
I agree David and I am amazed at the MBIE submission set up documents that are very leading. I believe they reaching too far here and are not aware of all the consequences.
On 8 May 2019 at 8:47 am JPHale said:
As I said to Susan Edmonds yesterday, commission is the most effective model for life insurance advice for New Zealand, yes it has issues but it has less issues than any other alternative.

It has the incentives for advisers to get it right for the client and it has penalties for getting it wrong.

Life insurance sales requires a lot of energy, resilience and tenacity, without the incentives to get out there, we would have a significantly worse insurance situation than we have.

And this has been proven with the various attempts at flat rate and salary based advice in the past. Naomi has a story on this after her own direct experience, so is well positioned to understand this as one of the few CEO’s who has been on the coal face with us.

As to high trail models, these have been around since I started in the industry and companies have encouraged them to little effect.

For the typical adviser there is a risk and cashflow hump to get over. The risk is clients cancelling, if they cancel between 2 and 5 years the adviser is better off to have the upfront. If they get past 5 years then yes, it starts working as it should, but you are talking a 5-10 year establishment phase to get advisers there, and they need to pay the bills in the interim too...

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