Life Insurance Advice Working Group Submission
30th January, 2015Enva
Life Insurance – inside and out.
About me:
My name is Michael Baragwanath and I put forward this submission on behalf of Enva, jointly owned by Darren Farley and myself.
I offer a unique perspective having been involved in the industry as a
paraplanner, generalist practitioner, specialist risk adviser and having spent 6 years working inside a life insurance company as a BDM and then Distribution Development Manager. I was a stakeholder in product development,
product marketing, distribution strategy, operations and key account management.
I was Money Management’s 2013 BDM of the year, have an MBA with a specialisation in marketing and an Advanced Diploma in financial services. Prior to working in financial services I worked in IT and Logistics. Over the past 6 years I have sat in many hundreds of financial planning firms around the country and have a good understanding of the many different approaches in our industry.
About our practice:
Enva is a small and new practice with approximately 300 clients but has been designed to grow and to grow quickly.
We have a strong vision and clear values that guide our business. Our values:
Professional - we are trusted experts and completely focused on our clients well being
Efficient - we consider our footprint and work to reduce waste Effective - we deliver for our stakeholders: profit for shareholders,
peace of mind for our clients, leadership for our industry, a future for our children
Think - we consider the implications, impact and ethics of our actions
Human - we respect each other, work together and strive for improvement
Our remuneration model: We charge a fixed fee for service for initial advice and a modular billing system for ongoing advice. Initial advice fees are determined by an estimate of the time required to research, recommend and implement advice with the potential to reduce the fee.
We collect upfront insurance commissions and use these to offset the initial costs of advice. We use a formula based on hours spent to determine the amount of commission that will be used to offset our fee.
Our ongoing service model is a modular billing system where we build a tailored fee package based on the complexity and time required to provide ongoing advice.
Ongoing trail commission offsets our ongoing fee with 100% of commission used to provide ongoing services. Where a business client holds significant insurance cover and has no investment fee work to offset, we offer non-advice services including marketing strategy, business coaching and
consulting services. Our fee schedule and corporate brochure is attached. We believe in offering a service for all Australians and offering a clear, transparent and accessible solution.
Submission:
Speed humps. Speed humps are a solution for poor behaviour. They slow down all drivers and punish drivers who go too fast by potentially damaging their cars. Speed humps are a low cost, simple solution that save lives.
Yet they kill. It’s been estimated that for every 1 life saved by improved driver behaviour 85 people die because emergency services vehicles take longer to attend emergency calls.
The point of my submission can be summarised by the above fact. Changes viewed through a simple frame may create severe unintended
consequences and in the broader context utterly fail to achieve the core objective.
Having worked as an adviser and in product for an insurer I believe that adviser behaviours are the effect, not the cause. The framework as it exists today has driven poor behaviour.
My submission is to addresses the core of the issue and suggests large scale, industry shifting changes which I believe will achieve the aims of this
Summary:
1. Improve quality by simplifying compliance requirements on advisers that do not accept a commission. Retain commission structures for those that choose to continue with the current compliance process. See RG51.
2. Mandatory professional body membership with AFSL compliance and oversight responsibilities to be handed to these professional bodies. 3. Upfront commission is the most effective way to pay for insurance
advice in the current environment.
4. Alternative remuneration structures pay higher levels of passive
income, which assists larger established practices at the cost of smaller ones and do not align with client objectives.
5. A convertible upfront commission provides a solution within the current framework.
6. Insurers cause many problems and the focus on product innovation and stealing market share has damaged their profitability. Insurers should address this through a code of conduct and a focus on new client acquisition through effective marketing that promotes the benefit of appropriate insurance.
7. Standardise as many advice process documents as possible. SOA’s and form documents do not provide a competitive advantage for any advice firm. Neither do insurer personal statements. The variations among insurers cause basic errors.
8. Recommend that companies accept and implement existing legislation with respect to electronic signatures.
9. Insurers should prepare for the fact that an environment with a lower level of remuneration for advice implementation will drive advisers to use simpler products.
Points of submission:
Quality of advice
Training does not address the fundamental conflict of insurance advice. Advisers are paid via the product. So long as this is true the adviser will always favour replacement or alteration of an existing product to get a payment. The time required to adhere to compliance requirements makes it harder to provide quality advice not easier and additional checklists etc. are counter-productive. The harder it is to provide comprehensive advice the less people will do it.
There is a healthy conflict with insurance product paying for the adviser’s time. The adviser is incentivised to ensure the client purchases the maximum amount of cover and this is countered by the client’s budget. I do hold concerns for cover that is recommended inside of super where the clients propensity to manage their cash flow is weakened and believe that
insurance commissions on superannuation insurance should be capped at a specific fixed fee amount paid per policy.
I therefore recommend that advisers who choose to charge a fee for their advice and not accept commissions be made exempt from the requirement for an SOA justifying their advice. If the client directly pays for their
recommendation the removal of the conflict removes the need to justify the advice.
Similar to accounting and legal advice a conflict free recommendation can be trusted. Those that continue to accept commissions would need to
continue with the current system while they transition.
Raising education standards and professional membership doesn’t address the core conflict. Remove the conflicts and then the expense of compliance and the market will quickly move to a new price point for advice.
This new lower price point will drive advisers away from high cost/high compliance conflicted models to low cost/low compliance model that will naturally result in conflict free, higher quality advice.
The requirement for a degree for financial planners is simply overkill. Insurance advice in particular is simply not that complicated. Neither is the vast majority of investment and retirement planning advice. The position is primarily a relationship manager using the resources and research of dedicated
specialists. A similar comparison would be requiring that stock brokers have a masters in finance and that loan brokers have a bachelor in commerce, or real estate agents having a degree in property construction and valuation. Advisers don’t need to know all the answers, they just need to know where to find them.
There is an unhealthy conflict caused by the licencing system. AFSL holders have a financial incentive to cover up poor advice and provide support to advisers who struggle with compliance. The best way to improve quality of advice is to start by requiring advisers hold a membership with a professional body and if they are exited from that professional body or suspended from it, they should not be able to practice.
This should be the first step along a path that shifts the license status away from product manufactures to professional bodies – one the FPA and another the AFA.
These professional bodies should then take over compliance and oversight capabilities.
Dealer groups should still exist, and it needs to be recognised that vertical integration provides great benefits from a system and technology
perspective. Our practice for example would still be happy to pay a fee to AMP for access to their advice technology and tools.
With professional bodies in charge of the licencing of advisers you would eliminate the “phoenix problem” of low quality advisers shifting dealer groups to avoid prosecution.
Summary:
1. Improve quality by simplifying compliance requirements on those that do not accept a commission. Retain commission structures for those that choose to continue with the current compliance process. See RG51.
2. Mandatory professional body membership with AFSL compliance and oversight responsibilities to be handed to these professional bodies.
R
EMUNERATION AND OTHER ADVISER INCENTIVESThe current remuneration structures do suit the current compliance
framework and constant debate over them distracts from the poor behaviour of insurers in incentivising advisers to churn business and then publicly
decrying that behaviour.
We use upfront commissions to offset initial costs of advice, which are
principally in the time required to generate a quality advice document not so much in the underwriting process. The underwriting process can be effectively controlled by efficient process. Without these costs we would prefer to move to a fixed fee for service offer for insurance and remove commission
altogether.
Upfront commissions can be seen as an incentive to move clients from one insurer to the next but the bigger incentive is insurer behaviour. This is covered in point 3.
The removal of upfront commissions without the corresponding compliance concessions outlined in point one would cripple the ability of younger advisers to enter the industry and result in a dramatic reduction in insurance sales which is ultimately bad for consumers. The reality is that significantly less work is required to maintain a policy than to set one up. The current model is in line with the allocation of time spent. Hybrid and other models are effective at building an advisers business value and providing a higher passive income stream but this is at odds with client objectives.
My recommendation is for an alternative remuneration model that addresses churn concerns while still paying for an adviser’s time:
Convertible upfront contract:
Year 1: Pay upfront commission (110-121% of base premium) Premium is 100% of cost with 30% being used to fund upfront commission.
Year 2-5: Trail commission of 10%. Premium is 100% with 30% used to fund initial upfront and pay trail.
Year 6: trail commission of 10% with premium converting to 80%. Cost is now 20% below market rate for replacement.
Insurers make significant profit on policies with a duration beyond 7 years. Yet many policies lapse naturally between the 7th and 11th year of ownership. My analysis of a large number of policies suggests that clients cancel their policy when the premium reaches 213% of the original cost. Insurance premiums often increase significantly above CPI. As an example they may shift from 4-6% of gross income to 12-15% of gross income at which point the cover is
often cancelled. By providing a significant loyalty discount at a crucial point, 2 things happen.
1) The client is further away from a trigger point that will cause them to cancel their cover.
2) Their premium is now significantly below the cost of comparable market solutions reducing the incentive to move to another product. Summary:
1. Upfront commission is the most effective way to pay for insurance advice in the current environment.
2. Alternative remuneration structures pay higher levels of passive
income, which assists larger established practices at the cost of smaller ones and does not align with client objectives.
3. A convertible upfront commission provides a solution within the current framework.
Insurer practices and product offerings
Insurers have consistently played games by closing books of business and retaining clients on inferior products at higher price points. Level only
commission for example would be a significant disservice to clients as advisers would have little incentive to review or alter a client’s cover. The client loses while the adviser continues to take as much as 30% of the premium in passive income. This model is exactly the conflict in investment advice that lead to the banning of commissions on investment products.
A code of conduct for Insurers would need to agree to the following to address churn.
1) The removal of volume-based payments or any profit share arrangement between licensees and insurers.
2) Licensee payments to be restricted to the reimbursement of legitimate training expenses or software for advisers.
3) The removal of any non-standard commission payment overrides based on volume.
4) The removal of “take over terms” which encourage the churn of policies less than 5 years old between insurers.
5) A commitment to provide a legitimate upgrade path for clients to current policy series or backdating of definitions for conditions a client is already covered for.
6) The banning of any commercial churns arrangements where insurers agree to reduce underwriting standards to encourage an adviser to move a large book of business in a bulk fashion.
7) The removal of any “life time adviser” arrangements where trail commission can not be taken over by another adviser therefore ensuring that the only way an adviser can receive a trail is to cancel and replace the policy.
Summary:
1) Insurers cause many problems and the focus on product innovation and stealing market share has damaged their profitability. Insures should address this through a code of conduct and a focus on new client acquisition through effective marketing that promotions of the benefit of appropriate insurance.
Industry productivity
Industry productivity as it stands today is bloated, duplicated and slow. The cost to provide the most basic of insurance advice is unnecessarily complex and increases the cost.
There are three sections that create the largest opportunity for innovation: 1) The SOA document.
2) Product research and information releases from Insurers. 3) The insurance application
The easiest way to create efficiencies in all three points is for the report to recommend a standardisation of tools and forms across the sector. Similar to consumer credit schedules in lending the SOA should be standardised and reduce the pages of text. In our office we generate a PowerPoint
presentation to explain our advice which complements the SOA. Our PowerPoint is often less than 10 slides sitting next to a 134 page document. Therefore a client profile document and SOA should be standardised with industry bodies also providing example file note structures.
Here is an example of an efficient SOA structure:
1) The advice – take out this, buy this and sell that. Instructions only. 2) The reason – why this strategy or product
3) Replacement detail– features gained or lost as a result and why this is in best interest.
4) Payment and ongoing advice. 5) Authority to proceed or alter advice.
I’ve created a short example at the end of this submission.
Product research: Product research can be streamlined by the FSC and ISN complying with the 1999 Electronic transactions act and accepting electronic signatures for the purpose of information releases. It is costly and time
consuming to conduct research on many products and this is hampered by time wasting delays where product providers request signed ID or 4 points of ID. Where no transaction is being undertaken a simple email authority from a client should be sufficient to uncover the details of a client’s existing policy or product.
Broadly speaking electronic signatures should be accepted for all
transactions and the FSC should push for all financial services companies to accept electronic signatures.
The insurance application process:
This is difficult to make changes to without reducing the quality of the product. Ultimately though it must be admitted that a fee for service insurance offer without commission would drive advisers to use simpler products.
If for example we offered 3 price points for insurance advice many clients would chose the middle option which might be a group style product. While we might prefer to recommend and implement a more comprehensive solution it will come down to what the client is willing to pay. It’s likely that the product/advice dynamic would result in a higher cost/lower quality product with a lower advice fee (general advice/general advice product) vs an individually underwritten contract with a higher quality/lower cost product but a higher cost advice fee.
Summary:
1) Standardise as many advice process documents as possible. SOA’s and form documents do not provide a competitive advantage for any advice firm. Neither do insurer personal statements. The variations among insurers cause basic errors.
2) Recommend that companies accept and implement existing legislation with respect to electronic signatures.
3) Insurers should prepare for the fact that an environment with a lower level of remuneration for advice implementation will drive advisers to use simpler products.
The advice:
Bob, this document outlines insurance advice only. It has excluded your potential cashflow, superannuation, investment, lending and estate planning needs.
Action: Company Amount
Purchase Life Co Life: $500,000
TPD: $300,000 Trauma: $100,000 IP: $5,000 per month 30 day wait, paid to age 65
• Ownership Linked benefits: Your superannuation should be used to fund Life/TPD and some Income protection premiums with the remainder paid from your cash flow monthly. See the product provider quote for structure detail.
• Options We have recommended Trauma reinstatement and the “Plus” option for income protection. These features are described on page 96 of the product disclosure statement.
Cancel Once the new cover is in place you should cancel your existing “Other Co” Cover.
The reason
Bob, we have used a needs analysis tool and conversation with you to determine the correct amount of cover.
We have selected Life Co because they offer a competitive premium and good quality cover. We looked to upgrade you with your current provider but they required the same application process as the rest of the market. For this reason we considered all options and found a more suitable solution.
A copy of our analysis and diary notes that formed the research for this advice are available should you wish to review them.
Features lost and gained by this advice:
Features lost You have a loyalty benefit which will discount your premium in 3 years’ time by 20% This advice will reset your loyalty discount period.
Features gained Your new contract offers cover for a variety of partial payments that your current cover does not offer and bundles child illness into your income protection which means that injury to your children is considered a total disability event. As you have young children we’ve decided that it is in your best interest to pay a higher premium for this cover. As we charge a fee for your advice your premium is discounted by 30% which exceeds the amount you would save from the normal loyalty benefit on your existing policy.
Initial costs for your advice
Year one insurance
premium $1,400 per annum paid annually. $1800 per annum paid monthly. $150 per month.
Fee for our advice: $700 inc GST. Paid initially or $80 per month for 12 months.
Should you elect to pay monthly your insurance premium will increase by $80 and the insurer will remit this payment to us.
Ongoing service
Your insurance provider will send a renewal statement to you each year. You can opt for our ongoing service which is added to your insurance premium. The cost of this ongoing service is $200 per year this can be added to your insurance premium. For this $200 we will contact you annually to check on your personal situation and offer to review your advice should your
circumstances change.
Acceptance of Recommendation:
Client: Sign: _________________________________________ Date ______________
Adviser: Sign: _________________________________________ Date ______________
Variations to advice:
Payment method – select below:
Direct debit/Cash/Bitcoin transfer/Paypal Pay fee upfront: ⌂
Pay fee with insurance premium: ⌂ Pay ongoing fee upfront:⌂
Pay ongoing fee with insurance premium: ⌂
