Banning life insurance commissions is not as sensible as it sounds
By Mark Copsey, Director of Allworths Wealth Management
TL;DR Banning life insurance commissions may leave consumers and especially young people worse off.
The Royal Commission proposal in question
One of the proposals in the final report of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry suggests that grandfathered commissions on all financial products should be scrapped and that commissions relating to life insurance, which are not currently included in the ban on conflicted remuneration, be reduced and eventually eliminated in 2022.
“Unless there is a clear justification for retaining those commissions, the cap should ultimately be reduced to zero,” the Commissioner said. I personally have concerns with this proposal, in a similar vein to those being raised in the Mortgage Broking industry.
The upside of insurance commissions
Currently, the advice we deliver to clients in relation to life insurance is covered by the commissions we receive from insurers. I think it’s unlikely that future clients will take kindly to paying a fee-for-service when others haven’t had to in the past. Insurance commissions have enabled us to essentially deliver that advice to clients for free! Anyone who knows me knows my views on the critical importance of life insurance. It’s an often-neglected part of personal financial planning and one that’s not always well understood, particularly by young people.
If this recommendation is implemented, I think fewer people (especially the young) will be able to access quality financial advice on this product, meaning they won’t be protected effectively.
Comparison to investment management
We do understand where the recommendation is coming from and we do recognise the importance of fixed fees e.g. when it comes to managing clients’ investment portfolios. In that area, we currently agree on fixed fees upfront and do not receive any extra benefit when investments perform well. OK, on the flipside, this means we continue to receive the same fees if any investments underperform. However, it’s not common industry practice for advisors to be penalised when investments underperform – most investment managers actually charge a percentage of funds under management! Past a certain point, that costs clients much, much more than we ever will.
I’m honestly constantly bewildered by the amount some people pay in fees to investment managers. Past a certain point, they just don’t reflect the amount of work involved. So, we do think a fee-for-service model is much fairer when it comes to managing investments.
Back to the point – and the real problems with commissions
I am just unconvinced that this recommendation will lead to positive results for consumers as intended. When advisors only receive commissions from insurers, they win by not paying additional fees for the advice and work involved. Sure, there are certainly problems with having insurance commissions. The real issue is more likely to be around advisors pushing clients into cover they don’t need, bumping up their premiums in return for larger commissions. Or, a separate issue is around commission churn, where an advisor may suggest changing a client’s policy every few years in return for more regular commissions.
In my view, the focus should be on whether the advice is appropriate as well as having heavier penalties for inappropriate behaviour.
Bottom line
Under the current model, some clients may be affected by over-insurance and policy switching – poor behaviour on the part of advisors, which should be addressed – but, under the proposal, everyone is affected by the elimination of commissions. New fees for advice will make everything more expensive and lock out some people altogether. I feel many younger clients in particular will be reluctant to pay both the advice fees and the premiums. This will mean many will simply not be insured, which is a terrible outcome.
It wouldn’t surprise me if insurance companies in the future offered insurance directly to retail clients. I’m not sure how that can be in the best interests of clients who have no idea of what choices are available at any given time. Many of the recommendations from the final report made a lot of sense – this one? Not so much. Just my opinion.
Allworths Wealth Management is a financial advisory and investment management firm based in Sydney. It forms part of the Allworths group, which traces its origins back to 1897 rural NSW.
Disclaimer
The content of this post is general in nature. Any general advice has been prepared by Allworths Wealth Management Pty Limited AFSL 457 155 without reference to your objectives, financial situation or needs. You should consider the advice in light of these matters and, if applicable, the relevant product disclosure statement before making any decision to invest.
