Editor’s note: This article contains information only. It is not intended as general or personal advice. Your Money recommends seeking professional advice specific to your personal circumstances.
Following the release of the royal commission’s final report, I have received a number of messages from concerned financial advisers regarding the recommendation to reduce life insurance commissions to zero.
The question of whether commissions should continue is a question that warrants serious consideration.
As an industry, we must ask ourselves what the future of advised life insurance might look like without commissions. Will clients be better off as a result?
From the outset, my view is that client interests have to come first. Given today’s trust deficit in Australian financial services, this is fundamental to any discussion on the future of remuneration models, including commissions.
But the current system – laid out in the Life Insurance Framework (LIF) – strikes a reasonable balance between addressing the client risks of conflicted remuneration, while keeping life insurance advice affordable and accessible for all Australians, especially those on middle and fixed incomes.
What will happen if commissions are reduced to zero?
Quality, lifelong financial advice is very important and more Australians would benefit from receiving it.
Research from the Association of Financial Advisers shows that nearly 80 per cent of Australians who receive advice feel greater peace of mind as a result.
Further, 50 per cent of people who have received advice believe they could survive financially for more than six months if they were unable to work, whereas only 26 per cent of people who have not could say the same.
At the moment only 20 per cent of Australians receive advice, which means an alarming 80 per cent do not.
Without a robust alternative model, reducing commissions to zero has the potential to make advised life insurance unsustainable.
Perversely, this could actually increase the risk of Australians relying on insurance arrangements that are not optimised for their circumstances.
Moreover, because it is likely only those Australians who are prepared to pay some kind of fee that will receive life insurance advice, those with lesser economic means will be most affected.
The real costs and value of advice
According to research from the Financial Planning Association, it takes an adviser around 26 hours to help their client obtain life insurance cover.
Advisers must assist and educate them to understand their own situation and needs, produce a formal statement of advice, obtain quotes and, ultimately, implement their cover.
If a client were to pay by the hour, it could end up costing somewhere between $3,000 to $6,000.
How likely is a new client prepared to pay such a fee?
In addition, insurance terms are only provided once the application is assessed. How many clients would be prepared to pay a fee for advice if they don’t receive satisfactory terms?
And this cost covers just the up-front advice. Good advice doesn’t stop once a client gets cover. Often absent from the commissions debate is the important, ongoing support advisers provide to their clients. This work goes to the heart of what represents good advice.
Good advisers regularly review their clients’ insurance needs. They liaise with insurers on their behalf to adapt and administer their policy.
Critically, they support the client when making a claim, advocating on their behalf to the insurer as well as helping them obtain and provide accurate information and supporting documentation.
Put the client in control and offer choice
Where a client wants to have the cost of their upfront advice offset by commissions, and to keep commissions in place to ensure ongoing support from their adviser over the life of their policy, they should be able to do so.
However, if clients are comfortable to pay a fee, product manufacturers should provide a reduction in premiums that reflects the lower cost to them when commissions are removed. This reduction should be both upfront and ongoing.
In this way, education, transparency and ongoing service become more important to ensure clients make an informed decision before deciding how they pay for insurance and related advice.
Australians are better off with access to good, ongoing financial advice, and we support a sustainable advice sector in which commissions currently play an important role.