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[The Wrap] The end of dealer groups as we know it

Well you have to hand it to Partners Life. While all the news this week has been about Covid 19, it has delivered a fatal blow to insurance dealer groups.

Friday, March 20th 2020, 6:03PM 11 Comments

by Philip Macalister

Yesterday the company announced sweeping changes to its commission structures which effectively kills off any insurance dealer group which bases its model on override commissions.

Instead the money will go to advisers and be paid to them based on good customer outcomes. 

Partners Life deserves plaudits for listening to the regulator and making changes to its business to address perceived issues around conflicts of interest.

The Financial Markets Authority is bound to be chipper that commission is being paid on customer outcomes.

How these will be measured and monitored is still a bit of a work in progress, but it's a step in the right direction.

A shake up to the dealer group market is a good thing. Many of the groups have been changing over the years and new models have evolved. We captured this in the most recent issue of ASSET Magazine (get your copy here).

However, the writing had been on the wall for business models that relied on override commissions. For some time now life insurers had complained the millions of dollars they paid to groups was not being spent as they wanted.

The last time something like this happened was way back when Tower still had a life insurance business. It's decision to get rid of overrides caused much gritting of teeth, especially at Kepa.

This latest decision is bound to have impact as Partners has such a strong position in new business sales.

Now Partners have decided to pay it to the financial advice providers (FAPs) actually giving the advice to customers which is the right thing to do. 

That way advisers can spend the money on their individual professional development and business needs. 

This is bound to lead to a change of thinking at Newpark which had been encouraging its members to establish their own FAPs. 

The advisers who have their own FAPs will be paid override commission rather than having to rely on dealer groups.

With these changes dealer groups will need to demonstrate they can provide services to members, which they are prepared to pay for.

Tags: Commission Dealer Groups insurance Life insurance Partners Life

« Advice businesses under pressure 'on two fronts'Mann on a mission to diversify financial advice »

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Comments from our readers

On 20 March 2020 at 6:18 pm Nicola Smee said:
Please don’t assume that all adviser groups are the same.

MySolutions has held the belief since inception, that the best adviser businesses are owned and run by advisers.

We have been assisting advisers for a year to become their own licence holders, as that is the best business model we believe in for independent advice for the future.

We staked our position very early, and have maintained the belief that the mySolutions group should not be a FAP – even with this announcement – and have been reinvesting over-ride into the actual practices in a large variety of ways for some time.

We would go so far as to say, that a dealer group which is itself a FAP and is receiving commissions from suppliers for production is heavily conflicted.

We wonder how a dealer group ‘FAP’ being reliant upon volume payments as a core part of its business model can also maintain genuine objectivity when it comes to upholding behavioural and practice standards.

If a group is ‘policing’ members as a FAP should. Then don’t they stand to cut out their own revenue when suspending or removing members?

That seems to be a rather large conflict to be resolved, and one which is entirely avoidable.

We believe it’s best for an adviser business to be its own FAP, and to work with a supportive group that helps foster their own brand, creates greater business value, and leaves them to make their own choices on which business lines they wish to operate in and which suppliers they wish to support.
On 20 March 2020 at 6:27 pm The Oracle said:
“Bump in road by arrogant company. We all saw it ten years ago...This will only make some groups stronger"
On 22 March 2020 at 1:59 pm DavesView said:

It seems Partnerslife did not even make the time to formally (or informally) meet with Dealer Groups to tell them they were pulling the plug on the overide. Some heard whispers but most discovered via the article on Good Returns.

It is an interesting way for Partners to deal with those they have had long term business relationships with and it is a little ironic given their name is "Partners'.

Sadly Dealer Groups have now wasted a huge amount of time, money and resources that could have been better spent. I suspect they have invested hundreds of thousands, if not millions between them in preparation for the new regulatory regime and have done so with the belief that Partnerslife would continue to pay them.

Do we say "tough luck dealer groups"?

Not really. They played an important role and it is not going to be filled by insurers or by individual advisers becoming FAPS.

I genuinely feel for the Dealer Groups and their staff because businesses the size of these need time to change their models and there is more at stake than simply the companies or their owners. Peoples lives are detrimentally affected and many staff will lose their jobs in what is already an uncertain time of employment. It's also been a huge waist of resources for the groups as considerable investment has been made by them these past 6-12 months to meet the changes they obviously believed were coming.

So to have the rug pulled out like this is not good and is maybe more a reflection of Partnerslife than it is regulatory pressures or requirements. Often it's not what we do, but how we do it.

Now what is really going on? Partners dumps the dealer groups and suddenly offers advisers an additional 30% to become their own FAP?

Interesting move, particularly when you consider that Partners doesn’t really believe advisers understand how tough the new requirements will be. I suspect Partnerslife thinks advisers will end up struggling badley as they sit their on their own as FAPs.

The view always expressed by their top brass was that advisers need the support and scale of dealer groups and bigger agencies & brokerages to survive. Given the low level of real API issued by most advisers an extra 30% isn’t going to go far towards the real needs and costs they will incur. CRMs, compliance requirements, reporting and staffing costs, plus the additional time taken to stay compliant takes us away from the task of getting in front of clients and making sales.

So whats the real plan? Try to kill the dealer groups, remove independent adviser support, offer a carrot to advisers to encourage them to be their own FAP, provide just enough tools and help to indoctrinate them into the new way of thinking then wait for advisers to fall on the compliance and regulatory sword. Then when they lose social and business connections without dealer group meetings, training, conferences and support, the advisers reliance on Partners grows.

So when it all gets too much and advisers need to be back under a bigger and more supported FAP model do we suddenly discover that the choices are now so limited that most advisers end up migrating under the Partnerslife FAP? Thant might be a great plan for them?

Will independent advisers become as rare as business integrity in our industry or will most fall trap to and end up under the FAP of an insurance company? I don't know. But I do know Partners has a plan to dominate the market and they wont have made their decision to dump dealer groups and pay advisers without carefully thinking through how it will benefit Partners in the long run.

And the future for Dealer Groups?

Well I guess some will fail and some will survive. The survivors will need to quickly develop new business models and hope they have the resources to survive until they can create a sustainable cash flow model. Fortunately for some Dealer groups they are already FAPs (or were planning to be FAPs) though they will still take a big hit financially.

But the consequences for individual advisers who become their own FAP and try to do it alone will be interesting to see unfold. Certainly they haven't survived or thrived in any numbers in Australia (even prior to recent commission drops) so we can only hold our breath and see.

On 22 March 2020 at 9:06 pm Tony Dench said:
Bravo Philip – a great analysis. Some will find it confronting.

SHARE relies on fees from its members to fund its operations – not over-ride commission at all - so no fatal blow for us here. SHARE is very much alive as an adviser group and I’m excited about our future.

SHARE has a philosophy of every adviser keeping what they earn and paying what they cost. Since we’ve always relied on fees, we’ve had to be really clear about our value proposition to our members – comprehensive support whilst retaining independence for advisers in the advice that they give, flexible ownership options for adviser businesses and an opportunity for advisers to own an equal stake in the SHARE business itself through our co-operative structure.

The changes to over-ride have been coming for some time and I welcome quality metrics replacing production volume in determining the level of support payment.

Partners Life have been really clear about what the money is for – helping advisers to meet regulatory requirements and helping them to grow their business. I expect that they’ll monitor that to make sure that it’s spent where it’s intended.

The terms “licence holder” and “FAP” aren’t interchangeable so we’ll have to wait for some more detail from Partners Life to see where this will land in practice. The intention seems to be to pay those taking responsibility for the advice provided to the customer – quite right too.

All change, no change, move on.
On 23 March 2020 at 9:33 am dcwhyte said:
100% Tony! Looking at the article in Asset Mag this month, I'm wondering which of the Groups will be going out of business due to the announcement from Partners?

All Groups do not deploy the same business model and I suspect the level of resilience is understated in DavesView's post.

I also don't believe that any of the Groups mentioned have been oblivious to the forecasts and warnings issued by many industry commentators that the days of DG over-rides were numbered.

Having developed a business model that served the founding shareholders very well thank you, I suspect the same commercial acumen has been applied to creating a strategy and structure that will see those Groups dependent on the over-ride morph into commercial entities that survive and thrive in the Brave New World.
On 23 March 2020 at 11:58 am Tash said:
Davesview's post is quite unfair in my view and as per David Milliband "you are entitled to your own view but not your own facts"

I for one hope the new code puts an end to advocacy, supposition, mischief making and rumour mongering parading as fact
On 23 March 2020 at 12:17 pm All hat no cattle said:
bit of an over-reaction in that lengthy comment above. I don't see how this change hurts Partners - unless affected dealer groups attempt to influence the placement of business to more 'suitable' suppliers. [cough that never happens cough]

Just like any business in a challenging environment, those that can adapt and adjust have a better chance of surviving.

In this case, dealer groups that rely on overrides to survive may lose access to commission-based revenues and have to switch to charging advisers directly. That will bring about some overdue scrutiny, transparencey, and force the justification of the value offering.

Yachts, Porches, and Fijian condos don't tick those kinds of boxes.

Never did.
On 23 March 2020 at 1:49 pm The Editor said:
Hey @davesview, you may like to contact me re your second comment - or 0274 377527.
On 23 March 2020 at 2:49 pm Elephant1 said:
The oldest of the Groups Planet,looked at the on going model and decided to call it a day in December.

They, as a team of experienced and successful directors, looked at the future and decided the present model does not work.

Their decision caused some discussion, but they may have been correct. And the question will be will Fidelity and Asteron follow Partners lead?
On 23 March 2020 at 3:46 pm Amused said:
Well said All hat no cattle

Let’s not forget bonus commission is supposed to have been outlawed now in the financial services industry. The FMA itself believes that it leads to bad customer outcomes. Afterall what else are the override payments to dealer groups but bonus commission based on the production of new business been written every month. When you break it down dealer groups are essentially a third party to a financial transaction between an adviser, customer and the provider been approached for cover. That a third party is in receipt of renumeration from this transaction when they are not part of the advice process itself is the issue. Especially when we are talking about 30% of the API as the amount in question been paid.

Anybody who thought that the above would be allowed to continue in respect to licensing of the advice been given to customers was deluding themselves. As others have mentioned some groups had seen the writing on the wall around override payments to dealer groups for some time. Partners Life are basically saying to the industry that the person (adviser) giving the advice to the customer should be the one receiving the renumeration. They will also have to demonstrate going forward that this override payment is deserved. In terms of disclosure of commission this is a much easier conversation to have with a customer than explaining why a dealer group whom the customer doesn’t meet or deal with directly is receiving additional renumeration to the adviser sitting in their living room. Especially when the dealer group in question might be overseas owned.

So watch the other insurers follow Partners Life’s lead now. If they don’t the FMA will force them to.
On 25 March 2020 at 7:41 am Backstage said:
I agree with Tony and David Whyte. If a DG did not foresee this based on overseas experience then they were stupid.

Some DG's have been in a form of denial and have leaders that pine for the old insurance is sold and deny that advice is now the product.

If a DG believes this is just a bump then brace for the crash.

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