CoFI: Is this the catalyst for changing service commissions?
The FMA has previously mentioned concern about how the incentives for policy servicing work.
Tuesday, May 6th 2025, 6:10AM
by Jon-Paul Hale
The FMA has previously mentioned concern about how the incentives for policy servicing work.
We've had plenty of discussion about what this is contractually, and I'm not going to cover that again; refer elsewhere here on Good Returns.
The FMA has also said they are fine with us getting paid via commission; we need to be paid.
The bit that's piqued my interest in the last week has been two things:
- CoFI and the insurer noise on agency changes relating to persistency commission incentives.
- The FMA's CEO comments that they are looking at financial incentives and remuneration with their work plans.
I'm going with this: We have had the FMA look at replacement, we have reporting on replacement, and servicing remains something where the financial incentives don't follow.
The present approach to the trail/servicing remaining with the originating adviser creates an incentive for the new adviser taking the client over (for whatever reason) to replace the cover rather than retain it because they don't get paid for the advice work.
The exceptions are Southern Cross and Accuro, which pay service commissions that follow the servicing adviser.
Most in the life space will say that on a case-by-case basis relative to new business commissions, this trail/servicing isn't significant either way. However, with 5-10% trail/renewals relative to how the F&G market works, this is significant.
It becomes a matter of perspective, and those in the life market aren't the ones making the decisions here.
This is where the industry needs to guide the resulting outcome rather than decide it. We're not the decision-makers on this one.
We all know our businesses are based on the value of the trail income, and clawbacks are a risk considered.
I don't know to what degree a change to the trail/servicing model would impact business values, but you can be sure whatever is inflicted on us won't be good.
There is an argument for remuneration for the continued value of the contract introduced to the insurer. At the same time, there is an argument for remuneration for the ongoing servicing of the client.
This is where nib has an ideal approach, which I have discussed before, that preserves business value while offering a servicing solution.
Sign off on the right documents for a change of servicing, and three years later, the servicing comes to the new adviser.
- The rub on this one is that the commission that moves is the servicing commission, not the full trail that may have been getting paid.
- 5% for servicing, and the rest for the original adviser drops off after 3 years.
I've argued that this doesn't follow the intent of the new business agreement, as the policy continues that the split should continue with both. The answer I've had from nib is that it's the incentive for the selling adviser to negotiate the sale of the client.
Wrinkles aside, adopting this as the approach for the industry has the least impact on our businesses.
It doesn't burden the new servicing adviser with finding the money to take on the client; that is at risk for whatever the multiple is. Also, there is no incentive for the existing adviser to sell a contract that is being retained and likely will continue to be paid, with increases, well into the future.
The existing adviser already has the risk, and they have the continued "income" for three years without the servicing responsibility. This means that if the policy does drop off, they have the ongoing income relative to the remaining life of the policy.
The new adviser only gets the ongoing revenue if the policy stays in place. The incentive here is to service in place, not replacement. This is especially important with medical insurance, which shouldn't be moved if pre-existing conditions are going to be excluded.
Does this add an administrative burden on the insurer? Sure, but it's less of a burden than the present S&P process and can be easily managed within the existing change of servicing processes.
Some will say this breaks contractual agreements; sure, it does. At the same time, the FMA issuing a dictate to the market is a change of rules, too.
Which do you prefer, one that preserves your business value with levers that allow you to preserve and retain clients or one that potentially destroys advice business values in ways we haven't considered?
There will be those who complain about this approach. At the same time, the best way to prevent clients from going elsewhere is to provide them with the service they need.
I've yet to find a client happy with their adviser who wants to move. More often, clients call other advisers when they aren't being looked after; this reflects that happening.
Personally, I think that the approach of changing servicing after three years means that new advisers have an easier ride establishing their client base, and there's less incentive for them to replace policies for the sake of getting paid.
One key challenge for new advisers is just paying the bills. Servicing that retains the bits that need retaining reduces the risk to clients.
Yes, the obvious issue is a new adviser usually doesn't have the product knowledge to tailor a review of cover structure across multiple providers. This is where good principal oversight and supervision in the FAP is important.
Another aspect relates to advisers who like doing new business and avoid service work. This opens up potential for joint ventures for new business advisers to hand off to servicing-focused advisers at, say, year two, making the whole process more client-focused and friendly with a 5-year remuneration window.
There's room for new ideas and approaches, which we need to consider before we find ourselves with an approach that doesn't work for us.
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