If Einstein was here today, I think he would say we are all no longer sane. This week John Trowbridge, the independent chairman of Life Insurance Advice working Group, released a report.
The report has sent the financial planning world in to a storm. It is actually more like a hurricane with everyone battling down, protecting their businesses and speaking with fear in their eyes.
I have read many comments by other planners, industry professionals, association members, insurance providers and the general advice community with a sense of pure disappointment.
I feel that very few really get the bigger problem at large and all I see is people protecting their self-interest, not offering any decent solutions and in fact making the situation even more evident that change needs to happen.
I have had numerous discussions over the past few years where I have upset other planners because I am so passionate about conflict free advice. I hate commissions and I hate conflicts.
A commission is something that is paid to a seller for selling something. The more they sell of something, the bigger the commission they get. Therefore if I am paid a commission I am incentivised financially to sell as much as I can and as often as I can.
If you ask me; a commission is solely linked to a sales industry?
Apparently the financial advice industry wants to become a trusted profession and to no longer be a sales industry. It’s something I hear everyday by everyone.
Before we go further, my question is firstly how can we accept commissions that are made for sales industries when we want to become a profession that is paid a fair fee based on value, expertise, risk and administration?
I want to leave that part of my argument there. Plenty of planners will be saying BUT "we can because I am ethical and I will only recommend to my clients what is in their best interests. It does not affect my advice."
I will not list the last 20 years of controversies for the financial industry. I’m sure we all do not want to hear about forestry schemes, double gearing Storms, CBA, Macquarie, NAB. It is clearly evident those commissions had a huge part in all of these controversies and if not changed they will continue.
Every person in Australia knows we have a huge underinsurance problem. The reason why is because 95% of Australians are underinsured. I will not bore you with stats but the biggest reason for this is due to cost, trust in planners, complexity of the advice and general “she’ll be right” culture.
I will back this up with ASICs view stating that 3% of Insurance advice is good. Not my words- ASICs. So we have a problem – the advice is poor, conflicted and we do not have enough of it happening.
Not a great place to be? Or is it a wonderful opportunity I ask?
So lets all be clear that commissions create conflict. A commission creates an ethical issue and a decision for the adviser.
Do I make the recommendation solely based on the client’s best interest or do I help them to a “certain extent” while potentially structuring things to suit me?
Without becoming a whistle blower, I have seen and know of advisers who are over-recommending cover, not choosing the most cost efficient insurer because they are licensed through a certain organisation or cannot be bothered researching the market. They are replacing a current suitable policy to get paid a commission and some are sitting on huge ongoing commissions for 15 years and doing nothing for it.
Another huge issue I hate is that advisers decide how they want it to be paid. If they setup a $5,000/yr. insurance policy they can decide on how much they want upfront and how much ongoing. Do I want $6,500 upfront (Yum) & $500 a year, $4,500 upfront (Sounds good) & $1,000 a year, or just $1,500 every year?
This also gives an incentive to advisers to write on higher upfront commission initially and get it again in a few years time at another insurer – churning they call it.
I am not going to hammer this home any more but the commission creates all of these conflicts and problems.
What has annoyed me further is that a lot of the industry is bagging out the report and how silly the recommendations are without any other ideas on what could help to solve this problem. I have not had the time to read the report and in reality I am not worried because I charge a fixed fee for my insurance advice. It was my decision to do this because I believe it is better for the client. It is against the grain and it is hard. But I still choose to do it this way because it is better for the client, I believe in transparency and I hate conflicts. I would prefer to not have any at all and recommend what i think is best without it affecting me.
I know there are other ways. Lets be clear if no one believed there are better ways to do things then present we would all be getting to work on a horse and starting a fire every night. We look at better ways, we improve, we develop and we evolve. The industry must do this.
There are planners around the country who are doing what they can to do currently to get a better outcome for the client and there is constant battle with people not willing to consider other ways.
Here are some of my solutions to the under insurance problem in Australia. Like John, I have not spent months on thinking through everything but this is how I would potentially structure things in the industry to bring back confidence, create better pricing outcomes for clients and overall help advisers run more profitable/sustainable businesses.
To do this the current setup would have to be completely reassessed and everything reevaluated.
Could I please ask when you go through this to lose the negativity, fear of being challenge and think about one thing – pent up demand.
If confidence and trust came back to the industry, well we never really had it did we? But if it did and we supposedly have an under-insurance problem, would that mean there are a lot of people needing insurance?
How good would a world be when people came looking for insurance advice not you harassing them for it. They came because they trusted the advice would be in their best interests and not some slick sales slob.
I believe there should be standardised products across the industry for base line products. All insurers should have the same definitions and if anything should be run all through reinsurers who have limits on what they can increase the policy premiums by over time. By creating simple standard products, it will remove the complexity in the insurance industry and make it much simpler for clients to make a decision.
“Am I happy with the base line product or do I want all the bells and whistle?”
For the majority of Australians, the baseline may be enough. If the situation is more complex, the adviser can add value by giving additional advice on what the client should consider. In turn, this would reduce the time needed to research products, compare features and importantly create better comparisons in the market place with price leading the way.
I believe that insurance companies should focus their time, effort and money on improving the advice for advisers and the outcomes for clients. If Zurich wants my business for example they should offer great support to the advisers, build tools, be competitively priced and build add-ons that will suit certain types of clients. Maybe they specialise in Medical industry or pilots etc. This is where insurance companies can make their additional money.
For example, Macquarie has a product called Active that look at the amount of cover differently and overlaps.
I believe that all insurers should go through the same underwriting procedures and there should be a centralised hub. One application is done for all insurers. An independent company even to do it and on the back of this all insurers can make a decision on whether they would want to consider the new policy. This would remove having to go to many insurers and give a much clearer outcome to advisers to know who would look at their client most favourably. A win for all.
I believe clients should be rewarded for having one policy for all their insurance cover and through one insurer. Firstly, this benefits everyone. The insurers themselves when they need to battle over a claim as the policy holder only has to answer to one insurer. They pay one premium and the adviser only goes to one location to pay each year. By having a higher policy fee of say ($300 or $400) this will ensure that the client is incentivised to have one policy not three. A portion can be paid to the adviser to manage this policy and keep the administration. This is all an adviser needs in my eyes and that should be paid. A flat fee to make sure client keeps the policy in force.
I believe both the adviser and the client should receive a bonus every 5 years a policy stays in force this would likely be a flat fee. To do this the client must state they have had contact with the adviser and sign off on it. This is a win for both parties to ensure the policy stays in force.
I believe that a financial adviser should be paid a set fee from the insurer directly for helping clients lodge a claim. IE: $15,000. I believe this has two benefits – 1) They are paid when they do a significant amount of work to help their clients with not being paid and 2) encourage them to stay in contact because they want the client to call them when they need to claim.
I am not a fan of stepped premiums. I believe they are one the easiest ways insurance companies make money and I would ban these completely. Have one premium being level and no longer offer stepped premiums. This is the case in other countries. The benefit will be simplifying the decision for the client and making it affordable for them long term. We know that clients generally cancel their cover in their early 40s because it becomes too expensive and average claim is in their late 40s conveniently.
I would make all policy be able to have indexation fixed based on the initial premium price and if cover goes up 5% then the cost goes up 5%. This is currently not the case and sometimes clients get 5% more cover for the up to 14% of the current cost. Ridiculous!
Like Health Insurance, I would make it a fixed cost if you are under the age of 30 and at the age of 30 lift the cost, as the clients get older. This would incentivise clients to not put it off any longer and to make sure they have it in place before they have kids not 3 years after.
I believe that husband and wife should get a set reduction in their premiums if they do it together. It is very important that both parties have cover.
The importance of both having suitable cover is often overlooked due to one party thinking it is more important than the other.
Due to the standardised and simplification of products, I believe that ASIC should grant advisers more leniency on what is required for a risk advice plan. It should be very short and simple. This would cut down adviser time to implement and make it simpler for the client. It may even be as simple as picking the level of cover and doing a cost comparison for simple standard product advice.
I believe the adviser should be paid a set fee from the product provider for setting the policy up. This should be regardless of whether it is $3,000 to $10,000 per year. The adviser should know that by undergoing this work they should be paid a set fee. This fee may be $2,500 per individual for example. If an adviser, wants to charge more than can and they can charge this fee on top of this if they believe their clients has a more difficult situation and requires a more detailed analysis. This is up to the adviser proving their value and taking the time to truly understand the client’s needs. This fee needs to be large enough for a good business to make a profit comfortably and make it enticing for advisers to build efficient scalable businesses.
I believe that all clients undergo a short and standard pre-assessment through online underwriting software. This would assess if a client were going to get cover or have any loading. All clients will need to do this before they begin an advice process with an adviser. If the adviser does not ask for a client to complete this and they fail to get cover than it is the adviser’s fault for wasting that time.
Payment I believe that this needs to be simplified further and Life&TPD cover potentially to be tax deductible outside of super as well as in.
I will stop there, I’m sure you get the point of what I am trying to say. How we are paid as advisers is one problem but there are many others that we need to consider.
I would love to hear if I am insane, dreaming or if I am wrong completely?
I just see other ways to what we are currently doing and I would love to have a simple system so I could do what I love to do. Helping my clients make better decisions going forward. Not spending weeks chasing them and educating them on insurance.