Over the years many of you have been referred to our firm by friends who will tell you that we are an independent firm.
One thing is for certain though, you will never hear any of us uttering the same words! This is because of specific legislation that defines independence in certain ways. Furthermore, new legislation from 1 July 2021 requires us to clearly state on our Financial Services Guide that we are not independent if we do not comply with the statutory definition of independence. In our specific case, because we choose to accept commission as one means of remuneration for insurance, we fail the definition.
We are privately owned. All shares are owned by our families. Our personal reputations are always on the line. In financial planning the only form of remuneration we receive is from you, our clients. We have no association or ownership by banks or other institutions. We choose to invest via these institutions as intermediaries solely to ensure your capital is wisely invested, not because we are obliged.
In the area of insurance though, we have determined that in most situations, commission is more appropriate than fees. That is our decision as professionals who have had many years of experience. The Government, with little to no understanding or experience, believes commission implies obligation or ownership. Somehow this equates to lack of independence. Therefore, we are treated the same as an insurance agent for a life company and must ensure we do not refer to ourselves as independent, impartial and the like. That is why you see us referred to as self-licenced or privately owned. They have not banned those phrases (yet).
This has impacted a great many advisers in recent times. Sadly, many have decided to simply abandon the provision of insurance to clients. This makes very good business sense, as the complexity, compliance and time involved have blown out while remuneration has been reduced. In addition, abandoning insurance allows many to reclaim the banner of being independent.
However, from a professional viewpoint, we have reservations about following suit.
Since our inception we have provided insurance advice. We believe it is central to any form of robust financial plan. Younger clients are understandably not that interested in superannuation, which maybe 30 or 40 years into the future! However, they are rightfully more concerned about their families in the event of tragedy. High levels of debt need to be paid off, children’s education must continue, and medical expenses must be paid. Time and again we have witnessed firsthand the life changing benefits of a sound insurance plan.
So, we could cease offering insurance. This would enable us to be independent as we qualify in all other respects. Our view though is that it is simply not possible to do an effective job as an adviser if you are unable to shore up a financial plan with insurance to guard against the unexpected. That is our professional responsibility.
Another possible solution would be to charge for insurance on a fee basis. Again though, we have reservations.
Fee for service only
Anyone who has endured the application and underwriting process knows how time consuming and complicated it can be to obtain even basic insurance. The television ads which promise easy insurance with no medical requirements do us no favours in this regard. Common sense would indicate though that you get what you pay for. A good adviser ensures that everything is disclosed upfront and then fights on your behalf to overcome or vary any health-related exclusions during the initial process. It is actually very rare to obtain cover without discussions and queries from the insurer.
Red tape introduced by this government has required even more detailed analysis of a client’s situation prior to making recommendations. In turn, this naturally increases the hours and resources required.
In a fee for service model this means that insurance advisers must charge in all situations. In other words, if an application is unsuccessful due to health issues, or if a potential client baulks at the cost of premiums, a bill must still be issued. After all, an enormous amount of work has taken place up to that time. Currently these clients can walk away at no cost to themselves.
How does this compare to a commission-based model?
Commission based advice
There is an assumption by lawmakers that remuneration by commission leads to mis-selling of products in order to achieve the highest commission. This is even though a number of years ago they legislated to artificially cap insurance commissions. In other words, no matter what company is used, remuneration to the advisor would be equal. Furthermore, there are ample numbers of scandals involving fee based accountants and lawyers. Our view is that there are always a small number in any field of endeavour who will do the wrong thing. The remuneration method is not the culprit.
Pooling of risk
Our view on commission is really based on looking at its overall purpose.
Insurance is a bet, a pooled risk. You are in a pool with thousands of other policy holders. Sadly, we know that some of them will suffer illness or death. In that case, it is your premium that helps to pay the benefit to the family. When you think about it, your own best outcome is to spend a lifetime paying premiums and never collect!
If we consider the process of obtaining insurance, under the commission system you approach an adviser who assesses your needs, examines existing levels of cover, makes recommendations, obtains health and financial data, approaches insurance companies and arranges a quote. At that stage you are still free to walk away if you deem the quote or advice unacceptable. Furthermore, during underwriting a serious medical condition may be identified, making insurance impossible. Again, you are free to walk away.
Commission then is only payable upon success! Logically though, the amount ultimately received should cover more than just the time spent on that application. For the adviser to remain in business it must also compensate for the unpaid hours spent on unsuccessful applications.
Similarly, and perhaps more importantly, any form of annual trail commission earned on policies will assist in providing help across the entire pool of clients being assisted by our firm. Not every client gets sick every year or wishes to vary cover, neglects to update payment details, has a change of work situation or a change of address. Over time however everyone benefits from that pooling of risks, which ensures policies are maintained and remain in force.
Where to from here?
At FB Wealth Management, we would have to say……who knows?
ASIC, the regulator, seems keen to eliminate commissions. If this occurs, we would probably have no choice but to wind up our insurance division. Tim is a fully qualified financial adviser but has chosen to concentrate his effort and skill in the risk area. That has been greatly to our benefit as a firm and to a great many clients. However, given that we already know fee-based insurance is too expensive for young families, we would not risk our business by swimming up a waterfall.
If commissions are allowed to remain, we would love to continue this important work, but there will be changes. In fact, there have already been some changes.
We will generally quote a nominal fee before engagement of new clients. It will ensure people are serious and it will offset the greatly increased costs of provision of advice. These will be quoted prior to any engagement and agreed upon before proceeding. It will not cover the full cost.
If a new client wishes to review an insurance portfolio, we will charge a plan fee. This is because there is unlikely to be any commission earned in conducting the review.
Business insurance such as arranging Buy and Sell agreements and implement Keyperson policies are complex matters and consulting rates are payable.
Claims can be very complex, frustrating and time consuming. We will assist all clients initially, but beyond that there will be fees payable on a time basis. Clients always have the option of dealing directly with the insurer if they wish to avoid our costs.
Changing levels of cover
Where clients wish to vary cover, there may be a fee payable if significant time or advice is involved.
We hope the comments above provide you with some background on such an important issue. We know how important insurance is to Australian families. Sadly, the Government does not. We have made persistent representations over many years, but of course it is an easy political win to talk about banning insurance commissions.