Hybrid to be the New Upfront?
I cannot see how a level commission model can sustain any more than a handful of risk focused advice practices, given the present structure of the Australian financial advice sector.
This opinion has been shaped by the many advisers and other industry stakeholders I have spent time with during the last 12 months.
Talking to advisers about their businesses constantly reinforces the fact that they are all different. They each possess their own unique DNA. Amongst other factors, an advice practice is a function of the adviser’s knowledge, background, technical, business and communication skills, age, experience, heritage, location, passion, licensee preference, advice proposition and client base.
Feedback from these unique businesses tells me that most would become unsustainable under a level commission-only model. While it would be extremely difficult for existing advisers, I’m told it would be virtually impossible for new industry entrants to commence a risk focused advice practice if they only had access to level commission remuneration. And fee-based risk advice is still collectively seen as mostly a bridge too far.
We now turn to Recommendation 24 in the final report released by the Financial System Inquiry, which would legislate that ‘upfront commission for life insurance advice should not be greater than ongoing commissions’. [By the way, that language is just ‘word-smithing’. This recommendation is saying ‘ban upfront commissions’ without using the word ‘ban’.]
The FSI notes the outcome of the joint FSC/AFA working group response to the recent ASIC Review of Retail Life Insurance Advice: ‘… should also be considered during the development and implementation phases.’
I envisage a scenario where the FSC/AFA working group may emerge with a solution that includes a recommendation that a hybrid commission structure should become the new norm for future life insurance advice remuneration. This represents a solution that will go some way towards addressing the issues raised in the ASIC Review of Retail Life Insurance Advice and echoed in Recommendation 24 of the FSI final report, but which will also ensure that retail life insurance advice businesses remain, for the most part, viable.
This possible outcome would be seen by the majority in the industry as a reasoned, sensible response to the issues raised in the ASIC Review and reflected in FSI Recommendation 24. It’s an evolutionary approach, rather than a revolutionary one. But it won’t ease the frustration felt by many advisers who believe the current system is fair and should not be changed. They will see themselves as victims of a policy change brought about by the actions of a few advisers who have not acted in their clients’ best interests, and they will also argue that a switch to hybrid commissions won’t solve the perceived churning problem.
The FSC/AFA working group may also develop other recommendations that may link adviser remuneration with the ‘quality’ of the adviser’s risk business, eg: the adviser’s annual persistency or lapse rate. It may also single out replacement business for special attention in terms of remuneration options.
So, we’re not saying there is an easy or obvious solution to addressing the ASIC and FSI reviews and recommendations. If the debate was simply a call to ban upfront commission in favour of a hybrid structure, there would be more push back from advisers on moving to hybrid. But if the debate, at least in part, is one that positions hybrid commissions as a mostly plausible alternative to the more radical call to do away with all options other than level commission, then many advisers may see the hybrid option as a victory for common sense, rather than as a defeat.
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