There are roughly three months to go before the final effects of the Life Insurance Framework remuneration reforms are felt and upfront commissions paid on insurance policies for new clients drop to 60%. While the suggestion made by Kenneth Hayne in his recommendations from the Banking Royal Commission struck fear and loathing into the hearts of most of us, the government thankfully responded by leaving the Life Insurance Framework to ‘run its course’ and gave us all a firm reminder that ASIC will conduct its review in 2021. Indeed, in the Government’s ‘Royal Commission Implementation Roadmap‘ released in August 2019, it confirmed that “ASIC will include the factors identified by the Royal Commission in undertaking its post implementation review of the 2017 life insurance reforms. ASIC’s review will take place in 2021.”
“It’s entirely possible that many of the insurance policies you implemented for your clients in 2019 have been done below cost if you’ve still opted to be paid only in commission”
As indicated in the table below, the government was very clear in its response to the Royal Commission findings: “If the review does not identify significant improvement in the quality of advice, the Government stated it would move to mandate level commissions, as was recommended by the Financial System Inquiry.” Thankfully we are seeing a unified voice from Insurers and our Associations, lobbying government to help them understand the role that insurance commissions play in the ecosystem of insurance advice.
Excerpt, page 15 of Government response to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry
While we can’t afford the negative energy that comes with stressing about what the future holds for insurance commissions, I have a serious word of advice for all advisers who provide risk insurance advice – whether that be in a specialist capacity or as part of a comprehensive financial plan.
It’s entirely possible that many of the insurance policies you implemented for your clients in 2019 have been done below cost if you’ve still opted to be paid only in commission. At 70% upfront commission, your clients’ insurance portfolios will have needed to exceed $5,000 in premiums if you were to break even. Research provided in our submission to the Life Insurance Working Group back in 2015 revealed that a firm would likely have to generate at least $3,430 to profitably deliver insurance advice services to a retail client – and that was 4 years ago, before recent cost increases, and back when you could get a client underwritten in less than six months.
Before you throw your hands in the air and even think about ceasing to provide such a valuable and incredibly important service, consider this: I have researched, written about, shared from stage, and my team have personally coached, hundreds of advisers on the fact that if the revenue you receive from insurance commissions is insufficient to cover your work and the value you provide, then you can supplement it with a fee.
Not so long ago I was confronted by an online comment from an adviser in this very publication, arguing that no-one will pay a fee for insurance advice, and slamming me for not listening to experienced advisers who pointed out the premise was wrong. My response is the same today as it was two months ago, so I’ll paste it directly here:
“Au contraire – experienced advisers who have never successfully charged a fee and couldn’t imagine a life without 120% upfront commissions are the very reason I wrote my book ‘Worth Paying For’. The premise of clients paying an advice fee for insurance advice has already been proven by experienced advisers – some holistic, some risk-only advisers… who have successfully supplemented insurance commissions with fees. We did find in our research, some advisers who provided risk-only advice without commissions and served their clients on a fee-only basis in some instances, but we pointed out clearly that we’d only seen one instance – with one single client – where they were able to charge an ongoing fee for their risk-only services.”
“Don’t fear the move to place a value on your advice that sits apart from the insurance policies provided by the insurer”
It might be a bridge too far for you in your business to do away with commissions and move entirely to fees. However, don’t fear the move to place a value on your advice that sits apart from the insurance policies provided by the insurer. How does it make sense to hold firm to a business model that does not evolve when all else is changing around you? A simple solution is to figure out how to articulate your value and charge a fee for your advice, even if you choose to receive commissions to fund the implementation, ongoing management and claims support that you provide to your clients. The number you put on the value of that advice will depend upon your client base, their complexity of advice needs and the costs of running your business.
What have others charged before you? When insurance advice has been provided as standalone advice, anything from $220 to $2,000 plus the hybrid commission has been charged. When provided as part of a comprehensive financial plan, the advice fees quoted as Average Engagement Fees (ie not Maximum) ranged between $800 and $15,000 plus the hybrid commission. This data is now two years old, and we expect when we gather data again for our 5th edition of the research (in October 2019), we’ll see a significant increase in the quantum of fees, to compensate for the lower upfront commission and the increase in costs to run advice businesses.
What’s the bottom line about your bottom line? If you find that you can’t provide your services at a profit when commissions drop to 60% upfront in January, you will indeed have to think seriously about your pricing model. Clients are prepared to pay for good advice and to have a trusted adviser in their corner when it comes to protecting their family.
This article was first published in RiskInfo magazine in October 2019.