There’s Life After January 1, But Not As We Know It

Respected WA risk adviser, Mark Rando, challenges his peers to be more than just ‘salespeople’ if they want to survive and thrive in a new life insurance advice paradigm that commences from 1 January next year…

Thinking about life post January 1 2018 and its impact on the sector leads me to consider our own financial security, as advisers. Not unlike our clients, if an adviser has high personal debt under an old cash flow regime, will they be in a position to service that debt under a new regime?

On 1 January 2018 upfront commissions will be capped at 80%, reducing to 70% on 1 January 2019, before settling at 60% from 1 January 2020.

Rando and Associates moved to fee for service six years ago and as a direct result of that pre planning, even if we maintained our current pricing model, we would not be affected by that reduction until 2020.

Suffice it to say, our pricing model will not be static, as we simply cannot remain a viable, sustainable operation if we undercharge for our Statement of Advice (SoA) in this era of declining commissions.

I would imagine the cash flow of the majority of advisers in Australia is reliant on a mix of charging for an SoA and commission received from the sale of a product. What is troubling, considering declining commissions, is that advisers may unwittingly be using the SoA process as a loss leader, only relying on upfront revenue.

the days of ‘the ideal client’ are well and truly behind us

Quite quickly this is going to affect your practice’s cash flow, and if an adviser chooses to accept the 20% ongoing commission to counteract reduced up front commission, it will take time for the books to balance.

Not only does it take a lot of new business and a number of years to achieve that balance, but I’m sure I’m not the only person finding that new business is even harder to secure in an economic climate where potential future clients are not prepared to pay for the full cost of advice and insurance.

Moving forward, the message is simple: The cost of providing advice will not be able to be covered by the income generated from selling risk insurance.

So, what now?

Firstly, I believe that the days of ‘the ideal client’ are well and truly behind us. A practice requires a range of value propositions and perhaps an ideal client for each; not just one for the whole practice.

I’ve spoken previously about our claims service, marketing this to the wider community and using this to generate additional income. In the future we will be operating on a much more transactional basis overall – splitting up our services (eg aged care planning, estate planning, incidental advice) and charging for them more precisely, both to new and existing clients.

we need to be so much more than salespeople to survive in this new paradigm

Additionally, I have been considering how to address clients who don’t progress past the SoA process. I can see only two options. Either raise the cost of the SoA (by a smaller amount) for all potential new clients or raise the cost of the SoA (by a larger amount) for those who do not move past this stage.

We know that the complete removal of commissions all but decimated the advice industry in the Netherlands and threatened to do so in the UK before its regulator reversed its decision, and we need to be so much more than salespeople to survive in this new paradigm. We must be strategic and know exactly what it costs to deliver our service. Any adviser who isn’t actively considering the options discussed here may find that they won’t make it to the 2019 deadline, let alone beyond.

Mark Rando is the Senior Adviser and Managing Director of Rando and Associates (www.rando.com.au) 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 is a former State Chair of the MDRT. He was recognised at the 2017 M3 National Conference, where he won a practice award for Outstanding Performance. Mark currently mentors other advisers in Australia and overseas.

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  • I don’t have any problems switching to level commissions which in most cases is the better option when the first year payment drops below 80%.

    Is there any adviser who does risk insurance for mums and dads and works on a fee-for-service model and how do they do it, if they are ready to share?

    • Squeaky_1

      I very much doubt it Christoph. I’m risk-only and have only ever worked on brokerage (or commission as the legislators insist we call it). I have surveyed clients and modelled fee for service with clients many times over the years and I’m here right now to say it simply will not work for mums & dads & young people in Australia. Let me emphasise this as it is important – it does NOT work and it will NOT work. You have everyone from Chris Unwin to Mark Rando suggesting it will but I can assure you it will not. I’ve called for details on how the various gurus and ‘special industry consultants’ think it should be done but all I get is crickets. There is NO WAY to do it that works. I challenge anyone to show us in open forum exactly how ‘they’ do it. Nothing is ever as it seems. I’ve put much effort into it, tried it and it NEVER gets off the ground. $5K premiums to start a risk plan for a family . . . they simply will NOT cop a $2K or $3+ fee on top – just for insurance and associated advice. They expect it it is paid by commissions – because it always has been. Brokerage (oh, ok, commissions) works and works well. It truly ‘ain’t broke’ so it needs no fixing. Typical of politicians to try though – AND to break it while they try – AND to walk away and leave it broken. Look around . . . .
      .
      These self interested entities, life companies and politicians and misc special interest groups, WILL ruin our industry – it is well underway and no stopping it. Life companies want advisers OUT ASAP. Too expensive you see! I’ll be out by 2022 as I’m told by idiot academics I won’t know enough at that point to keep protecting my clients as I have for decades unless I spend $10K and much time away from family and clients learning new stuff.
      .
      Insurance hasn’t changed that much and won’t before then so it will be a complete waste of a risk adviser’s time – especially an older one like me (56). A uni degree is a laughable requirement just to continue to help people with income protection, trauma and death cover as I have for over 30 years! Well, it ‘would be laughable’ if it wasn’t so sad for our once great industry. There’ll be nothing and no one but robo-advice and order-takers by 2025 if this lunacy continues. All the experience risk advisers will be out (one way or another!) and the poor new risk recruits will never reach greatness as they’ll be able to afford only to take orders and tick boxes for advice and compliance. As always, the final and most important ones to suffer will be the clients. So much for life companies and legislators bleating about ‘client best interest. They wouldn’t have a clue what that means in the real world outside their executive offices and in the homes of ordinary Australians. They should all be grossly ashamed of themselves for creating this sick debacle.

      • Thank you for the update re your fee for service experience. Mine has been quite similar. I checked the Uni degree requirements and they may not be quite as bad as a full degree. If the FPA proposal gets up, an adviser with an advanced diploma and 7+ years of experience needs a graduate diploma in financial planning – that is still quite a lot, the equivalent of 6 months full-time work as it is two semesters and each semester lasts for three months but it is not a 3-year degree. BTW I am 58 and finished a Masters two years ago – it was work but I actually managed.

        • Squeaky_1

          Very interesting Christoph, I didn’t know that. Seems I will indeed be leaving sometime south of 2022. A shame really as I do enjoy dealing with my precious clients and making sure they are protected. You know, none of the industry gurus or legislators have yet explained why a simple risk adviser needs these time-wasting, money wasting superfluous qualifications just to help clients with IP, trauma and death cover. I wonder if anyone ever will? All the very best to you Christoph.