What They Don’t Tell You About Providing Nil-Commission Risk Advice

Charging fees for life insurance services and advice is something which is slowly taking place in the wider advice community, according to Elixir Consulting’s Sue Viskovic.
While it may be too early to call it a trend, research conducted by Elixir shows advisers are warming to the idea, and some are making fee models work.
According to Sue, this shift is still in its infancy and risk-only advisers have yet to fully engage in this trend as they continue to work through which model will suit them best over the long term.

Readers of Riskinfo will be familiar with our work at Elixir Consulting, as we have shared lots of suggestions on lifting your efficiencies and improving your service offer…and of course, suggestions on how to prepare your business for the LIF. Our stance has been to encourage advisers to familiarise themselves with their options of remuneration for risk advice and make their choice as to what option they pursue.

We doubt that the pure commission-only model will sustain businesses post-LIF unless they can cope with the four to seven-year reduction in upfront income, before the lift in ongoing commissions overcomes this. We have seen lots of businesses successfully introduce an advice fee, with commission as payment for implementation, and we have also seen businesses provide risk-only advice on a pure fee basis.

We still believe every adviser should select the right business model to suit their business, however, having just completed our latest research into Adviser Pricing Models  we are adding a warning to risk advisers.

The myth that clients won’t pay fees for insurance advice is busted – but only by half… our research found 35.2% of participants charge a fee of some description when they provide insurance-only advice, and a further 12% ‘sometimes charge a fee’.

Whilst we found more advisers than in previous editions who have removed commissions altogether, we have discovered a very disturbing trend when providing insurance advice as a standalone service without commission.

There were 19 financial advice businesses who always provide insurance-only advice on nil commission, that is they charge a fee for the advice and provide their clients with discounted premiums…and yet only one of these have clients who pay a recurring (or retainer) fee for their ongoing services. One business is about to commence charging for their ongoing service on risk, and the two risk specialist advisers who give their clients the choice of fee-only or fee plus commissions included an ongoing fee as part of the proposition, but have only had clients on this model for less than twelve months. As such, they have no long-term data as to whether they will continue to pay an ongoing service fee (as a retainer) for their insurance advice.

The adviser who charges a retainer for their ongoing risk advice service looks after mostly SME clients. They stated: “We have both comprehensive and single sector clients to which we provide services and charge accordingly. Our single sector insurance only clients are charged $1,440 per annum plus GST, which provides them with a comprehensive review of their current situation and any potential opportunities that may now exist for the client.”

The adviser who is about to commence charging an ongoing fee for risk services stated: “We have and are strengthening this as part of our ongoing service to ensure that we are committed to ensuring clients always have the most appropriate coverage…Our ongoing fees will be circa $1,000 p.a.”

Other advisers explained that while their clients were happy to pay for the initial advice, they provide their ongoing review services and claims support services on a user-pays basis. A few examples of comments include:

“We do not charge ongoing service fee, if a review is required we charge for the time this takes and any adjustments that need to be put in place.”

“In relation to insurance, our initial fee is in the order of $2,000 to $3,000 but there is no ongoing fee.”

“The ongoing fee for service is charged on an hourly fee rate or fixed service rate. As most of our clients also have investment portfolios this has not been an issue. Insurance is not our core business.”

“By way of background, the business was started 3 years ago from scratch – without any client base.  As a result, we have no legacy issues and meet the definition of independence under the corporations law.  This has resulted in a constant flow of new clients and business has been very good.  However, to continue to meet the independence test we cannot accept $1 of commission, including insurance.  We understand that we are under-pricing our insurance advice, particularly given the fact we don’t receive ongoing commission, which in turn impacts the value of the business.  However, the ability to use the expression “independent” has more than made up for this in terms of clients seeking other advice, eg superannuation, investment advice etc.  We are certainly looking for a better insurance solution / pricing structure but we need to do it without compromising our independence, which is the challenge.”

Whilst removing all commissions on risk can work for an adviser who is building their business on comprehensive advice (and providing insurance-only advice in a limited number of circumstances), our research suggests that it will have dire consequences for the risk specialist adviser who relies on their long-term clients for their recurring income and the asset value of their business.

It’s all very well being a pioneer but we don’t want to go broke in the process

This quote from a risk specialist adviser who gives his clients the choice of how to pay, sums it up well. He has found only a limited number have taken him up on the fee-only option so far, but charges all clients an advice fee (ie: only the implementation component is optional between fee and commission).

“It’s all very well being a pioneer but we don’t want to go broke in the process. If we can’t get our risk and estate planning clients to pay an ongoing retainer fee, we won’t generate recurring revenue to support our services. That’s why I give my clients the choice, and if they choose the fee option, that includes an ongoing fee.”

This finding suggests that risk specialist advisers would be better placed subsidising their hybrid or level commissions with an advice fee, potentially even dialling down the upfront component to zero if they wish to provide the initial services on a fee-only basis and reduce their exposure to clawbacks; but retaining the ongoing component of the hybrid commission in order to fund their ongoing review and administrative services for their clients, and to fund their claims support service.

We strongly encourage advisers to review their business model and determine if they can sustainably grow on the reduced commissions post LIF. Otherwise, look to introduce a fee for your advice that will subsidise commissions, but steer away from replacing commissions completely, until such time as you can determine an ongoing service offer that clients see sufficient value in to pay for in addition their premiums. If you offer exclusively risk advice services, it seems the odds are stacked against you in this regard.

The Adviser Pricing Models Research Report fourth edition includes in-depth data from 320 advice practices on how they charge for their services. Of the 310 advisers who provided personal risk advice, only 14 identified themselves as risk specialists. There were 269 advisers who provide insurance advice both as a standalone service, and included in their broader financial advice, and the remaining 27 participants were financial advisers who provide advice on risk insurance, but only when it is included in a comprehensive plan. In total, 250 participants provided specific financial data on the way they charge for their insurance-only advice (ie not part of a greater financial plan).

For advisers wanting to view the pricing models that are working in more detail, the research is available in a variety of formats, including a Risk Advice Insights Summary Edition. Further detail can be found at www.elixirconsulting.com.au/pricing-research.

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In Practice Management, Elixir Consulting shares strategies for building better advice businesses.

Sue Viskovic is the Managing Director of Elixir Consulting and author of ‘Worth Paying For’.

This article is an excerpt from Sue’s new, soon to be launched, ‘Worth Paying For.’.

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