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Should you stay, or should you go?

There still seems to be a delay in some advisers getting their transitional licence – insurance adviser Jon-Paul Hale with a follow-up to his article Tied Agency 2.0.

Tuesday, September 8th 2020, 6:00AM 6 Comments

Jon-Paul Hale

Following on from my blunt comments in my last article about licensing, it seems my idea on the licensing gap was reasonably close, given the lack of hard data to go by.

From that article, it would appear around 7,500 advisers are still to sort licensing, so 1,500-2,500 under my guesstimate.

With around half of those licences being single-adviser businesses, there is the gap I talked about with the smaller advice firms still to sort themselves out. (We have a large number of individual advice firms relative to the number of managing agencies and VIOs.)

Why is this?

One of the reasons I hear clearly is the lack of hard data and decisions by the larger players in the industry.

Before spending $1,500 on a transitional licence, they want to see what the "Join a FAP" option looks like.

Except there isn't any real meat published by the dealer groups and FAP providers on what they will be providing – and what being part of their FAP entails – with the requirements and costs.

If you dig a bit further, there is a distinct lack of certainty for the dealer groups with the present funding model not having a future demonstrated conclusively.

Quite the opposite of secure; the insurers to date have stated commission models have security until March 2021, was June 29, 2020, and haven't said boo about what follows after that.

If anything Partners Life's move to have the FAP override, which was the dealer group override, paid to the FAP holder has muddied the water even more.

Sure it's pushed some money-orientated advisers down the FAP route, and they have sorted their licence as a result or tried to, so they can get the extra bump in commissions.

There were 400 transitional licences hung up in the system where the adviser needs to do something.

If you have applied and the FMA hasn't sent you a confirmation of your licence, you need to check on where you're at. (See the John Botica article from Friday August 7.)

However, this action, while looking justified in its approach, has just made things worse not better for the average adviser.

It created even more uncertainty for the dealer groups on what they can do, what they will do, and how it is all going to be paid for.

Now I know there are a significant number of advisers out there that question the relevance of dealer groups, and there's more that comment here in that camp than not from my observations.

However, there are a significant number of advisers that rely heavily on dealer groups for help and support; different strokes for different folks.

Not every adviser is both a good adviser and a good business person either.

Some are great advisers but are hopeless at running a business and will be even worse at managing the complexity that comes with a FAP.

And those suggesting it's easy really are suffering a case of Dunning Kruger.

While I have long held the view that all advisers need to get their transitional licence, it's not because I think they all should be FAPs, more it is a primary function of risk management.

And the very situation I have anticipated driving my comments is coming true; what if the FAP option you had your heart set on doesn't materialise?

If you're in insurance, you should at least understand the basics of risk management – if you don't then get out and find something that you do understand.

For the rest of us, basic risk management is having a transitional licence in the back pocket.

It's an insurance policy that gives you time to figure out what next and where you will go if the "Someone else's FAP" option doesn't fly.

More the point; why won't a dealer group FAP work, and why this is a bad thing for the industry?

The cost and uncertainty. There is a substantial difference in the expectations of a Class A licence and a Class C licence.

Yes, there will be increased costs associated with a Class A licence; at the same time, the requirements for a Class C licence will be more. So how does this get paid for?

Presently the dealer group and managing agency overrides pay for this, but there is no certainty that these will remain or be paid after March 2021.

Which creates two issues:

1. How does the FAP get funded?
2. How does the adviser pay for their share?

This means that the adviser is potentially splitting their commission cheque to make it work. But then if they run their own operation, they are going to have to pay out of pocket for that too.

And this is where there is a gap and lack of understanding.

Also, as I have said before; insurance advisers need to get their heads around not having everything bought and paid for them.

The rest of the industry got over this one a long time ago, time to let it go.

In my time I haven't seen a bigger bunch of whingers than the insurance industry when it comes to paying for something – be it a beer or a trip or even marketing so they can make sales and money!

Insults aside, the real challenge isn't advisers getting their transitional licence, it is the loss of dealer groups and the work they have done to get us where we are.

Many will say they haven't done anything, which is profoundly misunderstanding what support looks like.

Most of the dealer groups have provided services in the form of PI schemes, CRM software, training, development days, and other conference offerings.

Many advisers either haven't engaged in this or have completely overlooked them with the expectation of having it provided to them for turning up.

For one the average adviser in a PI scheme is paying about 1/5 of what a direct individual policy would generally cost, that's 3-5k saved depending on what you have and how it's structured, per year!

The other aspect that doesn't have a monetary value assigned but is just as important – mixing with your peers.

This aspect is just as crucial for the industry as organised training.

1. It helps keep advisers sane. Compassion fatigue is a common issue cited, at the same time catching up with friends for a beer is cathartic, especially when you can share work stories and others understand them.
2. It helps grow and develop people; training is one thing – learning by experience and sharing ideas less formally is often more effective than the training.

The real risk with the present situation is we will lose dealer groups, we already have, and others are talking mergers.

And the insurers don't provide for the social context for advisers anymore either; the trips are long gone.

While this may not seem like a big deal right now, it will become a big deal in the future, about when your transitional licence comes to an end, and you have to get through full licensing.

One of my key concerns with the new regime is the loss of independent advice.

While my comments in my earlier article discussed the two issues of advisers cut loose with no licences and insurers being forced to buy client bases creating a perfect storm for tied agencies to return.

The third driver of tied agencies is the lack of support for those smaller independent advice businesses if we don't have dealer groups around.

We're in for a complex few years of adjustment, some of it will be straightforward, and some of it won't. Some of it will be a complete surprise that no one has thought of or considered.

So before consigning dealer groups to the ditch as something you don't need, consider for a moment what if you do and it is the difference between you being independent or you working for one insurer?

We also need better clarity on the intentions for remuneration from government, regulators and insurers.

We, the people doing the work need to have some certainty that what we are doing and building will have the value we anticipate in the future for us to continue doing what we do.

And before the comment gets posted, "They haven't said it's changing after March 2021", true, but they haven't said it is not either. And the statements from providers that they are only working to March 2021 raises the question and spectre of uncertainty.

Businesses need to have some idea what the next 5-10 years looks like before committing large sums of shareholder cash to projects, especially when it comes to potentially regulating incomes.

It would be different if it were all fees – everyone could set what they liked.

You don't get to do that with a commission, and commission is the most appropriate remuneration for insurance.

Tags: Insurance Advisers Jon-Paul Hale Opinion

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Comments from our readers

On 9 September 2020 at 2:04 pm valkyrie6 said:
I agree with JP , the value add of dealer groups can no longer just be “’ if you don’t belong to a group and pay the fees ( whatever the group decides to charge ) you can’t submit deals to lenders and produce providers period”” this for some groups has been nothing more than a stiff arm tactic where some dealer group fees cover nothing more than them being glorified commission admin for banks and insurers, surely that wasn’t the original intention of dealer groups when they first started out.
Dealer groups that treat members like they are incarcerated and can never leave because the group own all your client data on their cloud based overseas owned CRM’s that they force you to use and these CRMs’ haven’t to date actually improved the quality of applications ( as the banks confirm ) will no doubt under a FAP license will be able to charge what ever they want with no ceiling of cap on membership fees, training and compliance costs etc etc etc and I challenger anyone that thinks dealer some dealer groups wont be making margins on these costs for themselves.
However not all dealer groups are like this and some are looking to really provide some good old value add to members but for overseas owned larger groups it will same old same old , making out they are helping members but really for these types of groups its all about profit “how can we make a margin off members and how can we make a margin of product providers by forcing our members to do what we say, with these profits going overseas.
Hail Partners life for recognizing that the adviser is the one that sits face to face with the clients and the adviser is the one who gives advice, the adviser has the relationship with the client, not the dealer group, how can a dealer group actually be an FAP anyway ? the group is not giving advice to the customers, I would go as far as to say that most clients would not even know what a dealer group is let alone what dealer groups get paid when a client takes out a policy or product.
Customers in New Zealand wouldn’t even know that there personal banking and heath information is being loaded onto these overseas based CRM’s which under current privacy laws in NZ seems nuts to me that customers are not even being told where their very person information is going and whom has it.
I have to also agree with JP on the fact that not all advisers can be good business owners and will need a group to guide them, I hope the more unprofessional types don’t hide behind a group facade but I guess they do that now.
My biggest fear is that dealer groups merge and get bought out to the point where there are only a few left and the ones that are left are owned by overseas real estate agents, if that happened the adviser industry may as well be run direct from Australia then the FMA could deal direct with Melbourne .
On 10 September 2020 at 11:39 am Amused said:
A well written article from JP as usual. Not sure though how PI insurers would be able to justify higher premiums if an adviser elects to have their own FAP licence as opposed to working under a dealer group’s. If an adviser meets all the compliance requirements set by the FMA to become a Financial Advice Provider from a “risk” standpoint they are no different to a 100+ member FAP. Statistically a one adviser FAP has a much lower potential also of a claim been triggered. Let’s not forget that all advisers must belong to a dispute resolution provider which makes the likelihood of a PI claim eventuating much less likely nowadays. PI premiums should actually be reducing not increasing. Having raised this subject with a few senior insurers there appears to be a bit of scaremongering going on currently by groups.

Anybody who thinks that the override payments are going to continue indefinitely doesn’t understand the direction that the financial services industry is now heading. Advisers electing to operate under a dealer group FAP licence need to think long and hard then about what will happen when the override remuneration that their group currently enjoys ceases. If dealer groups aren’t able to function without override payments from insurers then their business model is not going to be sustainable in a licensed industry moving forward. No prize for guessing what groups will do to their members in order to survive. Advisers could very quickly find themselves then operating under a franchise model for all intents and purposes.

Some of the groups seem to think that advisers can’t do without them. In realty it’s the complete opposite. I see Newpark Home Loans recently signed up its 200th mortgage adviser. No wonder, they seem to be about the only mortgage aggregator genuinely putting their members own interests first by encouraging them all to hold their own FAP licence. Let’s not forget also that Newpark Home loans fully communicated to its members ANZ bank’s stance on licensing last year. ANZ announced then that they would hold direct agreements with mortgage advisers who attained a FAP licence themselves. Chances are if you belong to a mortgage aggregator outside of Newpark Home Loans you will be completely unaware of this news.

A great comment from valkyrie6. Suffice to say those advisers currently using a dealer group owned CRM are required by law to disclose to their clients all of the third parties who are in receipt of their personal and financial information. This includes the overseas real estate company who may happen to own the dealer group the adviser works under.
On 10 September 2020 at 12:32 pm Tash said:
i think the biggest issue is that to be successful and comply with all the various obligations, advisers are now expected to be at least three things
- expert and professional in their recommendations and service,
- excellent at sales
- and good at running a business.

These all take very different skills, training and competence.

Advisers may soon realise that trying to be all these things is simply impossible. I'm not saying dealer groups is the answer, but adviser businesses that combine people with different talents; the seller to find the client and 'make the proverbial sale'; the technically astute product expert who does the research and draft up the recommendation/plan; with maybe another who runs the business, must surely result in efficiency, more 'sales' and less compliance risk.

Let the sellers go do what they love and leave the report writing recommendations to those more so enclined, who probably don't like 'selling' anyway.
On 10 September 2020 at 2:22 pm Matron said:
Being somewhat long in the tooth affords me a degree of cynicism.

Just one look at the full FAP licence requirements should be ringing alarm bells for single shingle Adviser businesses. Meeting the new requirements and trying to make a living at the same time will not be possible without some outside help.

The move by PL to pay an override to the one that gives the advice seems appealing, but it comes with fish hooks and there are no guarantees it will continue. If Advisers can only 'survive' 250%, what happens when it drops to a more realistic 160% - 180%? Try complying with everything then.

I inferred I was a cynic, which I will disclose I am. I can't help but think that the PL FAPO is a very calculated move to create a dependence by Advisers on PL for help with compliance help, knowing full well that after the 12 month grandfather period they will not be paying anywhere near 256%.

Right now Advisers cannot afford to have their independence or integrity questioned by taking the highest commission rate. Right now I'll be extracting whatever I can from my dealer group to protect my position as a FAP. After all, who else is going to do that for me?
On 10 September 2020 at 3:55 pm JPHale said:
Thanks for the great comments.

There is a need for dealer groups, though the term needs to change, as they really are going to become adviser groups.

And there will be a range of flavours to suit everyone that needs them.

What they will look like is anyone's guess, as they need to be published, road-tested and understood.

It is an area of the industry I am looking at with interest as they will be a significant indicator of a wider picture.

Some have a headstart and others have been a wait and see, and a range in between.

@Tash you hit it on the head, it is going to become a very interesting time for the industry.

Reminds me of the book E-Myth, and there is a specific financial services version that all self-propelled advisers need to get hold of and read. It may well be the manual for the operation of the future.

@Matron, I think a degree of cynicism is necessary, as things are moving and changing on an almost daily basis. Being to rigid or complacent is unhelpful at this point in the process of change.
On 2 October 2020 at 10:33 am JPHale said:
Since I wrote this article it appears that things have picked up and moved down the track some. Though the area I have had concerns about, the small adviser businesses, still seem to be dragging the chain.

With 2-3,000 FSP holders not accounted for under transistional licenses time is running out for theses operators.

Thanks for the update Russell! https://www.chatswood.co.nz/moneyblog/2020/09/fma-reveal-latest-transitional-licenses-figures-and-more-daily-news.html

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