2014 AFA Adviser Conference Round Table – Facing Up to ASIC’s Review of Retail Life Insurance Advice

While the entire discussion focused on issues stemming from ASIC’s Review of Retail Life Insurance Advice, the panel still addressed most of the other topics that had been set down to discuss, including:

• The debate over future minimum education requirements for financial advisers
• Reputational issues for advisers and what can and/or should be done to address this concern
• The lack of soft (selling) skills training for the new generation of financial advisers

Accepting the damning conclusion of ASIC’s review

While the panel possessed the combined capacity to pick apart the methodology used by ASIC in determining the outcome of its Review, there was general acceptance that the outcome represented a realistic and stinging criticism of the quality of life insurance advice in Australia.

Queensland adviser, PJ Byrne, a grand finalist in the 2014 AFA Adviser of the Year Award, agreed the case studies outlined in the ASIC Review that failed its quality test were damning examples. “Those that failed the test should have failed. No doubt about that,” said PJ.

However, PJ also pointed out the Review reported that 64% of the cases ASIC examined were provided with good advice, “… so there were that many people who were better off for having received life insurance advice.”

Commenting on the causes of high lapse rates, PJ referred to product manufacturers speaking at the AFA Conference about having to chase each other by taking on the ‘premium fight’ to win more business: “… with more competitive pricing and improving features and benefits, the adviser has a duty to ensure their client has the best, most appropriate policy for their circumstances. So from the adviser perspective [when it comes to increasing lapse rates], you’re damned if you do and you’re damned if you don’t.”

“I do think the manufacturers and the industry as a whole have to deliver better long term solutions in terms of affordability – this means ‘true’ level premium product options. Because it’s better for advisers to give long-term solutions to clients,” noted PJ, whose own client lapse rate is consistently well beneath industry averages.

Zurich’s Richard Dunkerley agreed that there was little point trying to argue about the semantics of the report, even if some of its methodologies and assumptions could be questioned. “The PR battle has already moved on, and we need to be playing a different game altogether,” he said. He supported PJ’s point by agreeing that the continual cycle of product enhancements – if not supported by automatic upgrades – could place advisers in a position where they needed to constantly consider moving their clients’ policies to the more improved version (better pricing and/or features), and also be seen to do so by the client and by the regulator.

Richard warned that regardless of whether or not the current lapse rate numbers were contributing to straining the sustainability of the sector, that perception had become reality in the eyes of the industry and the regulators.

We’ve got to get rid of those providing bad advice by setting higher education standards and ensuring licensees properly monitor their advisers’ compliance

Outgoing AFA President, Michael Nowak, urged all stakeholders involved in providing life insurance advice to be responsible in the conduct of their affairs – product manufacturers, licensees and advisers. He also urged all sectors to work together to resolve this issue – a call that Michael pointed out was also made by ASIC in its Review.

Incoming AFA President, Deborah Kent, echoed Michael’s sentiments about the need for a joint, unified approach to finding a solution. She likened the ASIC call for everyone to work together to address lapse rate and quality of life insurance advice issues to the broader FoFA debate, in which there have been, and remain, strong calls for all parties to come together to resolve the future direction and quality of financial advice.

Deborah: “At the end of the day, this is an issue that impacts the consumer. It’s all about the consumer and getting the right outcomes… we can all sit around and think we’re doing the right thing, but [the ASIC Review] is here; it’s got to be addressed, and we’ve got to get the right outcomes for everybody.”

Commissions, culture and education

On the finding by ASIC of a correlation between high lapse rates and advisers opting to be remunerated by upfront commissions, the panel debated the extent to whether standardising all commissions and restricting commission options on replacement business would address this issue.

Looking to the possibility of ASIC restricting remuneration on replacement business to, say, level commission only, highly-regarded former life insurance adviser and now a sought-after mentor, Russell Collins, said, “… surely the regulator can’t dictate to the industry how I am remunerated?” Russell’s point was that the nature of remuneration for few, if any, other occupations was subject to this level of scrutiny.

PJ agreed with Russell, although pointed to areas other than adviser remuneration that should be addressed. He repeated the case studies highlighted in the ASIC Review represented poor advice and deserved to be regarded as ‘fail’. “We’ve got to get rid of those providing bad advice by setting higher education standards and ensuring licensees properly monitor their advisers’ compliance with appropriate service levels,” he said.

While the panel agreed there existed room for improvement within the sector to lift the standard of life insurance advice, Deborah pointed out that the ASIC Review was not able to identify the extent of the existing problem: “We know that we need to do something about advisers who are out there doing the wrong thing. Is it a significant problem across the industry? I don’t know whether this report gives us enough data to know that.”

Michael called on all advisers to “use the ASIC Review as an opportunity to be pro-active to lift the standards of advice we give and to build trust.”

Synchron Director, and outspoken supporter for life insurance advice, Don Trapnell, commented that if the ASIC Review is indicative of the entire industry, “… then I agree with PJ – it’s an absolute disgrace. We can’t sit back and say 63% were good – when it also says 37% were bad. It’s disastrous,” said Don.

But looking at education as a solution, Don commented: “Does that mean that if everyone goes out and gets a university degree that that will fix the problem? Clearly not, because a university education or qualification wouldn’t have fixed the Storm Financial controversy, or Westpoint, or Timbercorp. University degrees don’t solve the problem. Education comes from licensees and product providers to advisers.” According to Don, ‘targeted education’, based on the scope of the advice provided by the adviser, is the answer, not formal qualifications.

Michael related to the panel a comment made by a senior life industry adviser at the AFA Conference, that experienced advisers in the twilight of their career had a huge opportunity to pass on their wisdom and knowledge to younger advisers and the industry’s new entrants, using Russell Collins as a prime example of the value this delivers.

Russell responded that the culture surrounding the retention of life insurance business must also be addressed as a part of finding the solution to increasing lapse rates and poor standards of advice. “When I started, you took pride in the preservation of the business,” said Russell, relating that at conferences his extremely high persistency rate (98%) was publicly acknowledged. “It was a badge of pride,” he said, “but culture seems to have changed. Who is training the new generation of advisers about the culture of persistency? You can’t have people come into the industry ‘ready-made’. Qualifications mean nothing because values and morals can’t be learned through a curriculum. Bad behaviour is bad behaviour. So, who is teaching these people to do that (ie: deliver bad advice)?

“There’s a saying in our business that every successful small business is the lengthened shadow of one person. And that person casts his or her values, integrity and ethics over the rest of the organisation,” said Russell.

‘targeted education’, based on the scope of the advice provided by the adviser, is the answer; not formal qualifications

Questioning whether his attitude was too naïve in this day and age, Russell added: “I think that saying still applies to both practice owners and dealer groups; that the person at the top should cast their shadow and demonstrate ‘this is what we do’ and have that culture cascade down to the rest of the organisation.”

PJ appreciated how Russell positioned his argument, pointing to his own pride in his practice’s low lapse rates compared with industry averages. “It’s difficult, because affordability continues to be difficult. But I’m prepared to pick up the phone and have a conversation [with my clients] and say ‘you still need to have this cover, or at least some of this cover’”. PJ reiterated his simple mantra that he would only move business if it was in the best interest of his client. But at the same time, he also told the panel that he doesn’t perform simple ‘like for like’ comparisons “… because there’s more to it than that.”

Continuing on the theory of preservation of business from lapsing and on long-term persistency ratios, Russell also queried the culture of advice brought to life insurance conversations by those advisers who predominantly work in the investment and superannuation/retirement incomes area; those who also deliver life insurance advice, especially since the onset of the Global Financial Crisis, without having a depth of knowledge or experience in providing life insurance advice.

Adding some weight to the argument that relates to the need for better quality education and mentoring, rather than focusing simply on formal qualifications, PJ observed, and the panel agreed, that a lot of the poor advice case studies in the ASIC Review showed advisers weren’t asking the questions they should have been, in order to establish the extent of the client’s circumstances and exactly what the client’s true needs were.

Put another way, Russell suggested the culture of today, despite and because of, the focus on compliance and training, seems to have evolved into one of selling a policy, rather than developing the relationship.

Continuing the debate on what ‘education’ was actually required, Deborah said: “… we all agree that formal degrees don’t necessarily stop poor advice from happening, but the problem you have is when these reports come out, we know that starts to create issues with consumers, similar to other recent reports. It then creates problems of confidence and sometimes it’s not the question of whether a degree will stop poor advice from happening – it won’t – but the public perception may be that that’s the case. And that issue of perception then becomes the issue that we have to deal with.”

“I also have an issue regarding the education of the consumer – our client,” continued Deborah, “and this comes back to addressing financial literacy, so that the consumer also understands more about financial and insurance issues. The more that we, as advisers and licensees and product providers, can educate the consumer about life insurance and when it will help them, the better the industry will be.”

PJ pointed out that the ASIC Review had some good tips for the consumer to assist them with accessing and understanding good life insurance advice. He also referred to the SmartMoney public website, saying the Government was trying to address financial literacy, but more needed to be done by everyone.

Deborah emphasised the AFA has taken on financial literacy as one of its major programs and that it must encompass all sectors of the industry and cover all financial advice – investment, superannuation, income streams and insurance.

The panel agreed, as with previous panels, that education is the answer to so many financial literacy and advice issues, if it can be achieved. But PJ also echoed Russell’s point about training culture and behaviour from the top down. “So it’s education, but it’s also learning appropriate behaviours and culture,” said PJ, who also supports the AFA approach to not just helping its members, but also trying to help educate the broader community.

“To me, it’s not education as such, but rather an industry-wide problem about behaviour and setting an example for others to follow,” he said.

First mover problems and standardisation

The panel touched on the ‘first mover’ issue in relation to the possibility of one life company deciding unilaterally to reduce and cap its maximum available upfront commission, particularly on replacement business. Called the ‘first mover’ problem because if only one company moved the others would take advantage of being in a more competitive market position, Richard commented: “I can’t think of any other industry where they would talk about standardising pricing at both ends [commissions and premiums]. And that doesn’t even address the issue. Standardising upfront commissions is not going to solve the problem that it is intended to do,” he said, arguing that if upfront commission is standardised across the industry, this still wouldn’t stop the incentive for advisers to move business.

sometimes it’s not the question of whether a degree will stop poor advice from happening – it won’t – but the public perception may be that that’s the case

Don Trapnell then weighed in on the suggestion that level premium policies are more sustainable over time, observing that even though level premium contracts may be more sustainable, this doesn’t take into account the greater affordability issue at commencement, due to higher premiums in the early years of the policy. “How many Australians are going to be uninsured because they can’t afford the premiums if the push is made towards level premiums?” asked Don.

Russell strongly suggested the regulators should not be interfering in whether premiums should be level or stepped. “It’s a personal decision for the client, based on their individual circumstances,” he said.

And commenting on the elephant in the room, Don observed that if there is an attempt by product manufacturers to try to standardise life insurance commissions, “… there’s this thing called ‘price-fixing’, which is illegal in this country”.

Richard also made a solid point about cost structures within businesses and the extent to which they are reflected in pricing advantages. “Regardless of the industry, standardising the remuneration a manufacturer can give to a retailer can reduce the incentives for that manufacturer to be more efficient and innovative. Quelling normal market forces ultimately drives poorer consumer outcomes,” he said.

Commissions in the real world

Notwithstanding the public’s, and possibly the regulator’s, perception of ‘greedy’ advisers, Don said that in reality, most advisers don’t know what level of upfront commission applies to a product before they come to document it in their SoA.

“At our PD days, there are often notes from BDMs about the latest pricing and commission offers. We invariably find that our advisers really don’t care, as long as the outcome is fair and reasonable.

“They don’t look for the biggest available commission,” continued Don. “If that was the case, one insurer would take all the business.” He said the reality amongst advisers is that the actual amount of commission isn’t their primary concern, as long as they are fairly remunerated.

The panel generally agreed that, from their own perspective (adviser, licensee, representative association and life company), the provider that offers the highest commission package does not receive additional business as a result.

[Editor’s Note: However, the issue for consumers and politicians remains the few advisers who do focus on the highest commissions available and churning policies only for monetary gain, rather than acting in their clients’ best interests – the few bad apples.]

Notwithstanding the arguments against standardising commissions, PJ supports the notion, because he told the panel it would make his job more comfortable if all insurers paid the same remuneration. “But I also think choice of the type of remuneration [fees or commissions] is also very important between the client and the adviser,” he added.

We put the panel ‘on the spot’ and asked a hypothetical question: If upfront commissions were standardised and capped, what should be the maximum amount? The answer (and we did push the panel to try to arrive at a consensus) was 100%.

If upfront commissions were standardised in the future, PJ stressed that it must be at a level at which new and emerging advisers could survive and build their business. He also added that the commission model allows the opportunity for many Australians to implement life insurance cover, who would otherwise not have done so because they would not have been prepared to pay a fee for the advice.

Recommendations

Asked about one of the recommendations to life companies made by ASIC in its Review (to address the issue of misaligned incentives), Richard noted Zurich was in a good position, with retention rates among the best in the industry. He added: “We’re not loss leading, we don’t believe in one price for existing clients and a different price for new clients, and we offer guaranteed upgrades for all clients. So we believe we’re behaving in a responsible and sustainable way. We believe there are legitimate reasons for life insurance policies to be replaced and we back our judgement to single out the small number of individual advisers replacing policies inappropriately. We believe that’s better than a ‘one size fits all’ broad policy approach to remuneration which may have unintended consequences.”

Switching back to the issue of education, Richard warned that life company sustainability issues are almost secondary because of the PR battle currently being waged on the quality of advice. “No, having a degree won’t magically fix everything but the perception is that it will position all advisers in a more positive light. It’s a powerful symbol that the public demand,” commented Richard.

From the licensee point of view, where ASIC is asking them to ensure that remuneration structures support good-quality advice that prioritises the needs of the client, Don remarked that he believes ASIC is looking for the industry to move away from upfront commissions.

“I believe that ASIC does want to see a move away from upfront commission … but if we do, I agree with PJ that we will not get new entrants into our industry because we will have difficulty funding the service model that is demanded of us, especially under best interests duties.”

Don said there was no denying the ASIC Review was a very damning report on the quality of life insurance advice, “… but maybe something we should acknowledge is being grateful an organisation such as ASIC exists so that these issues can be investigated and revealed. This may not be what a lot of people may be thinking at the moment, but if ASIC doesn’t ask these questions of the industry, who will?”

we back our judgement to single out the small number of individual advisers replacing policies inappropriately

Re-visiting his earlier comment about adviser education, Don observed that “adviser education is a key priority for many licensees”, but he strongly advocated the critical importance, in his view, of targeting education levels appropriate to the advice that is being given. Illustrating his point, he shared the example of a passionate NSW adviser whose clients go to her children’s play groups and mothers clubs, who has no formal qualifications but is providing valued, relevant, appropriate life insurance advice within this circle of contacts – but only advice which she is qualified to deliver. “She provides life insurance advice to the wives of husbands who empty coins from parking meters or drive trucks or fill the ditches – everyday, working class people who still need life insurance – the people who often ‘slip under the radar’ and only ever hold insufficient default levels of cover via their industry super funds,” he said. “She has a year 10 high school education and couldn’t get a degree if her life depended on it. But she is doing fantastic work serving people who benefit from her advice under circumstances that are entirely in their best interests.”

Don asked: “Would a degree-qualified financial adviser be prepared to serve those clients who may deliver say, $250 to $500 commission income? I suspect the answer is probably ‘no’.” He said this adviser would not survive in an industry that required her to have tertiary level qualifications. If that happens, “… that means a whole sector of the Australian community will not be serviced by advisers such as her. It doesn’t mean we shouldn’t review minimum education standards, but it does mean that adviser education standards should be appropriate to the type and scale of advice being given.”

Looking to the apparent lack of soft skills learning experienced by today’s new advisers, Don held a very specific view: “The reality is that since the Financial Services Reform Act came into effect in 2004, we have bred an entire generation of advisers who seem to believe it’s appropriate to bludgeon their clients into submission with facts and figures, as opposed to looking at the true soft skills required.”

“I agree with the need to provide more soft skills education to advisers,” continued Deborah. “There’s just not enough of those ‘client intimacy’ skills being taught to the new generation of advisers who need those skills. I’ve been in business for 26 years and I know that when a client walks through my door there is a rapport that already exists. From an Association point of view, we have a code of conduct and we also need to recognise there needs to be a minimum level of education that is acceptable to consumers.”

Flowing from Don’s earlier point, Michael suggested that while there will be an increase to minimum education standards for advisers, perhaps there may be an opportunity to tailor those standards to specific specialisations. “The ASIC-led working group stemming from its Review is ongoing, but I believe consideration is warranted to increasing education standards and then tailoring those standards to specialisations within the advice sector. That way, the adviser can tailor the education required for their area of specialisation and the consumer will get the best outcome. And the adviser won’t be investing in education that’s not relevant to their area of specialisation,” added Michael.

Final comments

When it came to final comments, most panellists wanted to talk about education, for both advisers and consumers…

Russell Collins: “At the time of entering our industry, I don’t believe a 23 year-old out of university, who has been at school since they were five, has the communication skills to cope with the question: ‘What do you say after you say hello?’ That’s where it starts. What you say after you say hello depends on all the planning that’s been done before you even commence the meeting. And I don’t think there is any training in that area at all. On graduation, people with university degrees are obviously intelligent, and what that tells me is that they can study and do assignments. They can sit for exams and they can pass. But now they emerge into the real world and you can’t expect to start at the top.

“I’m all for education. I strongly believe that we all enter the workforce with a basic education designed to help us to start off earning a basic income, but everything we earn after that in most cases is a result of ‘self- education’. And this is where I believe the ‘real’ education factor comes in. It’s not all about product. It’s not all about technical and it’s not all about compliance. That just screws them up, in my opinion, because advisers are not being educated on how to develop personal relationships. The latter begins with asking questions, and without proper training these new advisers don’t know how to frame and introduce the necessary questions they should really be asking their prospects and clients.”

Don Trapnell: “Once upon a time an aspiring life insurance adviser would have gone to his sales manager and said, ‘I want to start in the life insurance industry’, and the sales manager would have said, ‘I’ll teach you how to sell, son…’

“At the same time they were learning how to sell, they were also learning the technical areas of life insurance and learning about satisfying needs. A lot of the skills we learned were not ‘book read’, but were from mentors. Education is extremely important, as long as it’s appropriate to the level of advice.”

Richard Dunkerley: “I think the education piece is very important for advisers but I think that it’s even more important for the consumer. The financial literacy of the community at large is very poor, and this is in no small way a driver of some of the problems we now face. It’s bigger than some one-off advertising campaign or social media campaign. It’s beyond that. It needs a big idea, a huge one. But like everyone else at the moment, I don’t know exactly what this is.

“It would be tragic if the mainstream media effectively drove a wedge between consumers and advisers, which is why it is so important to also address the public relations side of the industry’s quest for reform.”

PJ Byrne: “In 14 years of advising, no-one’s ever asked me about my educational qualifications. It’s a very simple business we’re in, as long as we ask the right questions. If we’re taught to ask the right questions – and they can be hard questions – then we can give great advice. So, it’s about having difficult conversations that people don’t always want to have.”

Michael Nowak: “There’s the issue of how new advisers gain experience. It’s something that’s really important and needs to be a part of the increasing minimum standards and potentially having a one-to-two year minimum experience requirement for new entrants, overseen by an experienced adviser, for all new authorised representatives.

“In terms of ASIC’s Review, the AFA is fully committed to working with the industry bodies on that and advisers must appreciate a process needs to be gone through before we can arrive at any agreed recommendations about future minimum education requirements.”

Deborah Kent supported Michael’s closing comments about getting the right solution for consumers: “The ASIC Review will certainly cause some concern and it’s likely the mainstream press will continue to take a negative view of the industry, which will have the effect of turning people away from the advice sector at a time when there exists such a high level of underinsurance. Again, I come back to what I said before – to get the right outcome for consumers we need to work together – the adviser associations, the FSC, the product providers and the regulators – in order to actually get the right outcome for everyone. And we also need to continue the AFA’s focus on improving financial literacy and education of the consumer.

Deborah concluded by noting that, whatever the outcome of the ASIC Review, “… one thing we know is that advisers are resilient in the face of adversity. We have the ability to adapt to change and continue to deliver great advice for more Australians.”