Risk specialist adviser, Mark Rando, talks to you in this article about how he intends to manage the two-year claw back provisions that will accompany the introduction of the Life Insurance Framework reforms…
Recently I wrote about ‘Living with LIF’ and in that article I said that one of the key issues I’d be preparing for in the coming 12 months would be the claw back provisions in the Life Insurance Framework Reforms, which come into effect from 1 January 2018.
I wanted to take the time to go into that in a little more detail, especially for those advisers wondering about their options, both in terms of internal processes as well as explaining the impact of these changes to existing and future clients.
Previously we’ve used an implementation contract that explains to our clients the process we’re about to embark on. As we charge an up-front fee for our Statement of Advice it’s particularly important that people understand the service they are receiving and their obligations.
In the face of the claw back provisions, we’ve adjusted this contract so that if, during the claw back period (through no fault of our own), we’re faced with a situation where we’re required to pay back the commission that was used to offset the cost of the implementation process, that cost will be passed on to the client.
For example, where a client has failed to disclose a pre-existing condition and at the underwriting stage this non-disclosure becomes evident, we will charge for the time it took to get that client to the underwriting stage.
In cases where a client pulls out of the policy within the two-year claw back period, and there has been insufficient commission paid to cover the cost of our services, the client will be required to bridge that gap. Conversely, if too much commission has been paid then we provide a rebate for the additional amount.
The benefit of the implementation contract is two-fold:
- It clearly states client obligations while protecting our income stream
- It deters people who aren’t serious about our advice from progressing further
With the implementation contract in place our clients are signing off on their commitment to our services from the very first step in our relationship.
There’s no science to this work and that’s why pre assessment is vitally important.
Often you don’t know how long how it’s going to take to get someone through what can sometimes be a long, drawn-out underwriting process. Carefully look over what you’ve picked up in data collection and don’t underestimate that ‘gut feeling’ about what providing a service to a particular client is going to cost the business, so that you don’t get stung later.
In those situations where people only need or want a small policy, there are a couple of options: carefully choose the staff member who manages the client or, if this is not an option because of the structure of your practice, the client may have to bridge the gap between the value of their policy and the cost to you to ensure they are adequately insured and that your business is adequately compensated.
Simply put, you need to really understand the cost to your business of getting your client through the underwriting and new business processes. You need this understanding for practice sustainability as a whole, and it’s also essential, if a commission claw back is triggered, that you have documentation in place which clearly and accurately details the value and cost of your services.
Mark Rando is the Senior Adviser and Managing Director of Rando and Associates based in Bunbury WA. He is a finalist of the AFA Adviser of the Year 2011, 2012 and 2013, a finalist in the 2016 Telstra Business Awards and State Chair of the MDRT. Mark currently mentors other advisers in Australia and overseas.