There’s a lot of discussion happening at the moment about insurance commissions, and their place in the advice industry. Setting aside the reactions that advisers will go out of business, and we’ll worsen the underinsurance problem in Australia, when we get right down to the heart of the matter, the question evolves from …
- will clients pay for risk advice?, to
- should clients pay for risk advice, to
- why would clients pay for risk advice?
If you’ve ever questioned the value proposition when providing advice on insurance, read on…
Financial Planning magazine published an article I wrote a year ago, about the value of obtaining ADVICE when seeking to protect yourself and your family should the unthinkable occur. I’ve updated that article, and provided it here for your reading pleasure.
I wrote the original article after finishing a roadshow where we got to speak with about 300 risk insurance advisers around Australia; and we discovered some very interesting things. These advisers are in the top echelon of insurance writers in the country, and many of them were keen to share ideas and explore new ways of generating business, including exploring new business models and value propositions.
One of the topics we discussed was the increasing prominence of direct insurance providers, who place insurance online and over the phone for the general public. The advisers we spoke to were very clear on the fact that while consumers with very limited needs and simple personal situations may be well-served by direct insurance, there is still undoubtedly a need for quality advice.
You can’t turn on the TV nowadays without seeing an advertisement from a direct insurer. But this plethora of television advertising may actually help advisers–we keep hearing that ‘insurance needs to be sold’, and we know that our population is underinsured, so if their advertising dollars motivate people to think about the unthinkable and take action to protect their family, then that’s fantastic.
As the advice community, it is then our responsibility to further educate people about the need to seek quality advice to ensure they are actually paying for the right insurance, and that it will be there for them if they need it.
(* Side note – I’m being interviewed for the Business program on the ABC this week where I’ll be discussing the need for people to seek advice when insuring their family. After much discussion, I’m cautiously confident that my comments won’t be taken out of context…stay tuned….)
We heard some very interesting stories that were shared about clients seeking insurance from direct providers. We heard a heart-breaking story of a mother of three young children who lost her husband to suicide, and couldn’t understand why the insurer was making her jump through hoops to get the
life insurance claim paid. There was a 13-month exclusion on suicide, but the policy had been in-force for over four years. The insurer was asking for five years of medical history, looking for evidence that her husband had been treated for depression in the year prior to taking out the cover. At the time of discussion, the claim was still pending, but it is very possible that the young widow will be denied on the basis of a preexisting medical condition.
Had this family sought advice when obtaining their insurance cover, the adviser would have taken them through the underwriting process at the outset. The adviser may have found an insurer who would have provided cover, and if not, at least the family would have known what they were covered for.
The benefits of underwriting at the time of application rather than the time of claim cannot be downplayed. Most advisers will facilitate this process when lodging applications, effectively obtaining discounts for good health. The great advisers will set their clients’ expectations about what is likely to be an arduous process, and then they (or their staff) walk each client through that process of completing forms, booking medicals, chasing up medical reports, organising blood tests, liaising with underwriters and so forth.
In many cases, were it not for the adviser, the client would likely either not start the process, or give up part way through. It is well worth it in the end though…to obtain the reassurance that not only are they insured, but the money they are spending on premiums is money well spent; and if they ever need to make a claim, it would be unusual that they would be denied by the insurer.
The same cannot be said for those who answer a few questions and get their insurance cover from a direct provider. They will be shocked to learn that the underwriting process is done at the time of the claim, and the odds are much higher that they will have their claim knocked back – discovering too late, that all the money they have been paying on expensive insurance premiums for years has been a complete waste.
Of course, field underwriting is just one of the many valuable things that an adviser provides a client when they assist them with their insurance needs. Most clients also need help with:
- Knowing what types of cover are most important to them – life, TPD, trauma, income protection;
- Knowing what levels of cover to put in place;
- Knowing what they can reduce if their budget does not allow for the optimum levels of cover;
- Which insurers to select – not only choosing the cheapest options but also the right inclusions for their situation;
- How to structure the ownership of their policies so that they can minimise tax payable – both on the premiums they pay, and also on any payout that they may receive;
- Whether to select level or stepped premiums, agreed value or indemnity, Any or Own-occupation;
- Help them understand the pros and cons of holding insurance via superannuation, considering such things as the harsh conditions of release for TPD;
- Perhaps one of the most valuable things about having an adviser is the ability to call on them when something goes wrong. The adviser will know if the client should make a claim, and will handle the paperwork and liaison with the insurer; and
- When that claim is paid, a good adviser will help ensure the proceeds are received and utilised in the most tax effective way, that will achieve the best outcome for the remaining family. (think lump sum? reversionary pension? early release? and all the other options that confuse even the healthiest of people.)
And of course, most good insurance advisers will also take the opportunity to ensure that their clients’ estate planning needs are met; helping them maximise the time they’re spending thinking about the unthinkable, and getting wills, testamentary trusts, powers of attorney, health directives and guardianship squared away, so that their legacy is passed on the way they would prefer.
Some of these things can be researched and learned online if you had the time, but for many consumers the risk of getting it wrong is far too great, and so their adviser’s support is invaluable.
Most consumers don’t know what they don’t know about getting insurance cover, and that is our responsibility to educate them about. How can someone make an informed choice when they aren’t aware of all their options? When the value of insurance advice is articulated well, either directly by advisers or by their clients and referral partners, people are hard-pressed to argue that they would not benefit from being under the care of a financial planner with insurance experience.
At this point, we don’t know what will happen with insurance commissions. What we do know, is that advisers play a meaningful and incredibly valuable role in helping clients sort out their personal insurances. This role deserves to be rewarded, be that by commissions, or by clients paying a fee. Just like they pay for other things they value.
And therein lies the key…helping people understand the value of obtaining advice to ensure they are protected.
If you’re needing some help to refine your pricing model, or to articulate your value proposition, get in touch – we’d love to see if we can help. Call us on 1300 683 680, or send Jo an email at [email protected].
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.
Great article, Sue and thank you for putting in writing some of the benefits of advice when seeking insurance.
Insurance and fees and services are a rather crazy mix for an adviser. We have offered a fee based service for a long time now but a lot of clients would rather operate on a success-based commission fee – especially for insurance. From our point of view as advisers, we are unable to effectively cost, in advance, the provision of an insurance proposition and implementation. The proposition is relatively straight-forward but the implementation is anything but (poor grammar but apt). You cannot tell in advance what will come out of the underwriting process and quite often the outcome will trigger a complete rewrite of the recommendation. All of this makes for poorly costed advice, which a business must make up for by building in a ‘safety factor’ – in other words, higher costs.
Each adviser would have examples of extremely difficult underwriting, where adviser input has been essential to obtain positive outcomes for clients. While many insurance applications are relatively straight-forward, a good many are definitely not, and a good deal of the discussion on insurance commissions avoids this fact.
A good deal of the insurance commission “debate” (there hasn’t really been sufficient dialogue to call it a genuine debate yet) is simply anti-commission ideology. This brings about a superficial approach that glosses over the realities of the insurance industry. A full read of the ASIC report on insurance would find that the issue is more about the advice than the up-front commission. Although ASIC’s spokespeople focus on up-front commissions as a destabiliser in the industry, this glosses over the very low level of data correlated to this proposition.
i hope the interview goes well, and your comments are not taken too much out of context on the day (unfortunately, such things do happen).
Thanks Michael, you make some really good points that I can concur happen daily in other advice businesses around the country. The interview was filmed last week, and while the original plan was that I wouldn’t discuss the commission/fee debate – as he already had an adviser from each side of the fence – when pushed on it, I explained much of what you have said here – and explained that it’s not black and white.
I think that Andrew (the journo) was originally pushing hard to say that commissions should be banned for insurance advice – but hadn’t necessarily understood the vagaries around the advice role. I enlightened him – and he did say he learnt more from our interview. It was heartening to know that he’s not a journo that’s ill-informed about the advice profession – he has actually done the DFP and subscribes to Kaplan for ongoing CPD.
It is my hope that they put to air, my comments on the value of obtaining advice, and the story goes some way to encouraging more people to protect their families!
I’ll update the blog here when I know when the interview goes to air.
No doubt they will try and concentrate on commissions. If that be the case my answer would be that either the insurance company pays for the advice via commissions or the consumer pays for the advice via fees. Then get back to the value of advice. Loved one’s receiving an insurance payout never question commissions paid.
So right Peter. The real story we should all be talking about is the need to protect our families.
Great article Sue. Summed up the value of good advice to a T. Good luck on the telly. Let us know when you are on.
Thanks Matthew – will let you know when I know!
Great article ,I agree 100%. The issue is the role of the Adviser, which is first and foremost.How the Adviser and client want to work re compensation is up to them.
Cheers Michael.
Hi Sue,
Congratulations on your understanding of the very important role Advisers play in ensuring Australians are adequately and appropriately insured .
I am pleased that you are in the position to perhaps help educate the ABC media regarding the Advice roll and the enormous amount of expertise ,time and paperwork involved in this process.
It is very disappointing to me that the Advice industry is again unfairly vilified and demonised by many in the media who have absolutely no idea of the valuable work Advisers provide in this space.
In addition I would also add that under the many legislative changes having taken place in the last decade or so Advisers not only do what you have clearly articulated they also provide fully written advice to the client by way of Statements of Advice documenting the clients situation and how the advice is appropriate for their needs.
Advisers also fully disclose the amount of any upfront and ongoing commission they will receive for doing this valuable work for the client.
Commissions:
I have been working actively in the Life Insurance advice space since 1971 over 43 years.
When I commenced there were two options. Commission based Advisers or Salaried Advisers. The salaried Adviser roles rapidly disappeared as history would show that there was not enough incentive for salaried Advisers to do the enormous amount of canvasing/ prospecting etc to find prospective clients. Nor were salaried Advisers prepared to work the long hours often including many evenings visiting people in their own homes.
Many of the current commentators in this space have absolutely no understanding of the effort required by Advisers to engage people in the importance of Insurance in their lives.
Unlike people who need or are compelled see an Accountant for assistance with their tax, or Lawyers for assistance with home purchase conveyancing etc and pay associated fees for these services people do not generally feel any urgency to seek advice or in many cases do not even have the insurance issue on their radars.
Commission disclosure has been a feature of advice in insurance for around a decade now. In my experience so far we have not had any objection from clients that we are paid a commission or the amounts we are paid .
Consumers accept we need to be paid and understand that effectively the costs are recovered from their premium payments over time.
Affordability is a big issue and generally consumers do not feel that they should have to part with additional costs upfront in addition to the premiums they pay.
One survey I saw some years ago said the maximum amount consumers said they were prepared for insurance advice was $300.00
Rightly or wrongly the costs of providing advice have rocketed under the progressive FOFA style changes taken place and productivity has dropped dramatically.
Commentators and regulators should make no mistake that if commissions are banned or dramatically reduced Advisers will be compelled to either leave the industry or work in other areas of advice adding to the already massive underinsurance in the country.
Commissions in insurance have worked successfully in Australia for over 100 years. Why is it suddenly becoming such a bandwagon for again beating up on Advisers.
I suggest this issue is largely being driven by Insurance providers who have seen large increases in claims as the population ages. (largely thanks to the good work done by Advisers over past years), increases in cancellation mostly caused by Insurers rapidly increasing their premiums and decreasing affordability, policy switching to cheaper providers (FOFA driven).
There is much more I could say however good luck with your TV appearance and I hope you can provide some balance and rational thought into the debate as so far no one is defending the Adviser adequately.
Thanks Doug.
There are many challenges with the whole situation, you are right!
When the client understands just how important the role of the adviser is – and they are willing to engage and take responsibility for their affairs, they will often agree to a fee.
Over and above all of this, I think we also need to push back on the insurers to get rid of the advisers who churn. The upfront commission model does indeed reward those who churn (and there IS a difference between churning and upgrading clients policies appropriately). Getting rid of those who churn would also help protect the reputation of the thousands of advisers who always look after their clients’ interests first.
We keep getting rammed down our throats from the enlightened that advice is about strategy and not about product, but it’s worth expanding further on Sue’s comment: ◾’Which insurers to select – not only choosing the cheapest options but also the right inclusions for their situation.’
I believe that for the discerning adviser selection of product is strategy. Most of the enlightened have no idea about differences in insurance products nor reputation for paying claims. Their suggestion is that if you need a raft of insurance products that one is the same as another, so its a product flog; WRONG. Here are some examples:
which TPD policies better suites females who take more than 12 months off from work to have a baby and which should you avoid?
which income protection policies better suit partnerships and sharing profit while on claim?
which income protection policies do not have a capability clause in their partial disability definitions?
which insurers treat the rent for business real property paid to a trust or SMSF as a business expense while others call it income?
which trauma policies have the best definitions for both heart attack and cancer and which fail the test?
which trauma policies are biased towards females needs or male needs
Now, after reviewing a client’s needs, armed with the appropriate knowledge and recommending a particular policy, is that a product flog or is it strategy?
Some great points Thommo, thanks for adding to the discussion!
Congratulations Sue this a brilliant article on the value a good risk adviser provides to their clients.
This just reinforces the need to have a separate authority and regulatory framework for a risk advice specialist.
I will be including this article in my presentations to clients so they understand the value of what I do.
I hope more risk advisers will do the same.
Thanks Brian, although I can’t agree on a separate regulatory framework for risk advisers. Adequate training and education- absolutely! But I know many advisers who provide risk advice within the broader framework of financial advice and they do it very well – the last thing they need is a separate framework to work within. We want MORE great advisers, empowered to provide such an important service.
Hi folks, just heard from Andrew about when the story goes to air… Today! Let’s hope my commentary has been used in context and the outcome is raising the awareness of the need for advice AND insurance cover.
Details here:
“running the report you feature in today at 1.30pm and 5.30 pm (Perth Time) on ABC News 24. It will also feature on ABC 1 after Lateline at 11pm.
I have also prepared a report for ABC Radio’s Business PM, which will run at 6.50pm.
I will be using more of our interview in the next edition of the Finance Quarter, which goes to air on 4th April.”