The structure of risk commissions in Australia is set to change. As it stands right now, commissions for risk advice are a legitimate form of remuneration for advisers (except in certain circumstances).
However, the writing is firmly on the wall that the commission model as we know it will change. The question is not if – but when. ASIC’s report on their surveillance of 202 risk advice files was scathing and pointed the finger firmly at the upfront commission model as a contributor to bad advice. While you can argue and shake your head at ASIC as long as you like, the evidence was compelling, and there’s no denying that commission structures are in the spotlight yet again.
So we should be happy that the FSC and the AFA have formed the Life Insurance and Advice Working Group (LIAWG) with an independent chairperson in John Trowbridge, and tasked them to provide a report in March this year with recommendations on how to improve life insurance outcomes. In the words of Brad Fox, “They (ASIC) made it very clear that if the industry doesn’t act to address their concerns, then a legislative or regulatory solution would need to be forced upon the industry.”
The working group released their interim report in December (you can see that here) and they asked for submissions to help them arrive at an appropriate, fair and practical solution.
We sent in a submission, contributing our knowledge on the average cost and time it takes to put an insurance policy into place. We also wanted to ensure that the working group was aware, and could quote to ASIC, the complexities of charging for risk advice, to ensure that whatever model they propose for the future, it rewarded great advice, encouraged more consumers to protect their futures, AND enabled advice businesses to deliver such a valuable service profitably and efficiently.
I have pulled out a sample of the submission below, and if you’d like to read the whole submission, you can see that here.
The Cost of delivering advice
There is a lot of difficulty in adequately pricing advice on insurance, as there is rarely a ‘common’ scenario. There is, however, a typical process that many advisers will follow, to implement advice for a client. I have made an attempt to summarize in the table below, the typical steps required to provide insurance advice for a client. This considers only the situations where insurance advice is provided as standalone advice, and not included as part of an overall financial plan. Please note that there are many variations on this process, depending on the advice business and the client type, but this provides a typical example (assuming a business that uses a paraplanner, whether in-house or external to the business; and an admin support staff member). I have noted the ‘average’ time for each staff member to conduct their part of the process:
|Process Stage||Adviser||Paraplanner||Admin support staff|
|Initial enquiry discussion and prep for first meeting||15 mins||10 mins|
|Conduct first meeting, understand the client, complete file notes||2 hours|
|Input client data to CRM software/set up client file/followup client for statements etc||1 hour|
|Research clients’ current holdings, and consider appropriate recommendations||1 hour||1 hour (send authorities & conduct research)|
|Obtain multiple quotes for suggested recommendations||30 – 45 minutes|
|Document recommendations in SOA||30 minutes (instruct then review)||2 – 4 hours|
|Present recommendations to clients, educate them on the variables chosen, complete file notes||2 hours|
|(Possibly) run new quotes on revised terms as requested by client||15 minutes|
|Complete application forms with clients||1 hour|
|Arrange for, and follow-up underwriting requirements until complete||45 minutes||3 hours|
|Total Time (average)||8 hours||3 hours||5 hours|
Using an average charge-out rate# of $299 for advisers, $171 for paraplanners and $105 for support staff, this means to put insurance cover in place for a client, the business will likely need to recover at least $3,430. This does not account for significant challenges with underwriting and needing to discuss revised terms, loadings, exclusions etc.
(Note, among the possible variations to this suggested process is where some advisers will use the tele-underwriting services of the insurer; thereby removing approximately $315 worth of cost to the business, based on the above example)
(#Source for chargeout rates: Adviser Pricing Models Research Report Third Edition)
There are a whole host of challenges when it comes to pricing insurance advice, and I have included in this submission, a chapter of my book, Pricing Advice, where I reveal these challenges and provide suggested solutions, for advisers wishing to shift to a fee-based model.
I also attached a chapter from my book, Pricing Advice, which covers off on the challenges of pricing advice in insurance. You can read that chapter here, and if you don’t have a copy of the book, you can obtain it here in either hard copy or digital format.
There’s no doubt about it, there will be more change to come in the structure of risk commissions…the big question is…are you ready?
You’ll be able to handle these changes if you’re on top of what it costs you to deliver advice, and you’ve structured a robust service delivery model and pricing model that you’re comfortable with.
If this leaves you feeling anxious, know that you don’t have to be at the mercy of legislators and product providers…business owners who have reviewed their business model, know what it takes them to deliver advice and have a structured plan in place, will handle any future changes with less stress and risk to cashflow than those who keep doing what they’ve always done, without stopping to consider if it’s the best way to run their business.
Which one are you?
Of course, if you’d like help to keep improving and evolving your business, we’re only a phone call away!
Our expert coaches can work with you to determine your strategy and how to implement it, and we’ve scheduled another round of dates for our business planning boot camps, so if you just want the motivation and opportunity to get your team to stop for a day and plan where you’re taking the business this year, that’s a really cost effective alternative.
Sue Viskovic CFP is the Founder of Elixir Consulting; a sought-after speaker; a business coach; and author of a number of books and programs designed for advisers.
With over 15 years’ experience in financial services, with roles spanning banking, funds management, advice and licensee services, Sue has built her career and her business on helping financial advisers, accountants and risk specialists to improve the way that they run their businesses and deliver advice.