The Financial Planning Industry is Lucrative… or at Least it Was!
A lot goes on at your Initial meeting with a Financial Adviser. In essence, they will work with you to identify both your short and long-term objectives, then assess if these objectives are realistic, or lack potential. Based on that information, and other key personal details, an Adviser will formalise a strategy that aims to bring those goals to fruition over a given period.
These conversations generally revolve around three Plans.
Plan A clarifies what steps you are currently taking to meet you goals. Those goals can be anything from, starting your own business, returning to studying, or perhaps, trying to get a deposit together for your first home.
Plan B revolves around what happens if, like most Australians, you need rely on your Superannuation to fund your retirement. What strategies are you currently using within super, to capitalise on both the investment and regulatory opportunities to maximise your retirement savings?
And Plan C, is Personal Insurance. How do you mitigate the financial stress, or loss, if you are forced out of the workforce, even for a short period, without jeopardising either Plan A or B?
Generally speaking, Plan C is fundamental to a well-rounded financial plan and more often than not, becomes the centre piece of your initial meeting with an Adviser. On review of the clients current situation, Plan C is often found to be either non existent, or terribly inadequate.
To give a clearer picture about insurance…
There are substantial differences between Group and retail insurance. Group insurance is commonly found in industry or employer sponsored Superannuation Plans. These are contracts between the insurance company and the super fund of which you are a member.
Personal Retail Insurance is an individual contract between you and a financial institution. It more often than not, provides more certainty around your cover… and it’s also why the industry can be so lucrative.
During an initial meeting, a commissioned based Financial Adviser will generally disclose that they will be paid commission through the insurance company where they establish your cover. Those commissions come from the premiums you pay, and you are generally told that the advice is provided at “no additional cost to you.”
This is likely to be as far as the conversation about remuneration goes, but it is not because you don’t want to know more. It is just a case of having so many other considerably more important issues on your mind. You know, like the reasons you arranged the appointment in the first place. The areas people require help, are likely to be unfamiliar in addition to being complex and confusing. Mostly people are happy to be getting these things off their plate and that is where they focus their attention. So when they hear that the advice is at “No additional cost to you,” its a win/win.
But is it true? Is it a win/win? If you had the ability to go back and ask questions, what would those questions even be? Where would you start?
Well how about we start here…
How does paying commission affect the premiums I pay for my insurance?
It increases the cost of your cover dramatically. In some cases, by as much as 50%. That’s money that could have stayed in your Superannuation to boost your retirement savings, or in your pocket to offset against your mortgage. This obviously adds up over the lifetime of the policy, but in order for the insurance companies to pay such hefty commission structures, there has to be a healthy margin factored into the cost of your cover from the outset.
How much commission do Advisers receive?
There are varying commission structures, but generally speaking, up to 88%, plus an extra 20% year on year. That is 88% of your first years premium then an additional 20% trail commission each year that the policy is renewed. That’s regardless of if you see the adviser or not! *
Can insurance be written without commissions?
Yes, but at the moment, it is extremely rare to find a firm, like Surf Coast Wealth Management, that will do it.
Why are Adviser commissions supported by the industry and governing bodies?
To be fair, there are a number of reasons. Historically, it was an effective way of building a long term relationship with a client who may not have otherwise sought the services of a Financial Adviser. It’s been the norm in the industry for a very long time, and up to this point, demand for wealth and superannuation advice, has not been as strong as it could have been. But as community awareness of the importance of super increases, so too does the interest in the services offered.
What does it actually cost me and my financial goals?
Over the life-time of your policy, it could literally cost you tens of thousands of dollars. Although widely accepted within the industry, establishing a Plan C incorporating Adviser commission, comes at an incredible cost to both Plan A and B. This is because money which could have been used to create wealth in an alternate strategy, is funnelled away and redirected to help fund the excessive insurance premiums and your Advisers commission.
For Surf Coast Wealth Management, it has raised a lot of important questions about the industry. Questions around, how we define a clients best interest, marketing strategies employed to better engage clients at the first meeting, industry wide practices like churning, and importantly, who the industry has recognised as an authorised representative and the standard of advice they have given.
I am happy to tell you that Surf Coast Wealth Management is a fee-for-service financial practice. We do not collect commissions from insurance companies for writing new insurance policies. We work exclusively for our clients and because the premiums do not incorporate any remuneration, the costs are generally substantially lower. This leaves more money to allocate towards your other financial goals.
We can review your circumstances and devise plans where one objective is not traded off against the other. If you are up for it, we will show you how you can be better off by choosing a fee-for-service Financial Adviser and working with Surf Coast Wealth Management.
There’s no obligation and you will only pay for the services you want, and the advice you need. It’s a great deal. Get in touch!
* Well that is how it was. There are proposed changes in the industry for commission maximum rates of 66% and 20% year on year, but it’s still not a fantastic deal for clients. Even when the commission rates drop to 30% each year, the premiums you pay are not markedly different from where they are today.