Lifetime of commission for one bit of advice

There is no such thing as a free lunch…

especially in finance… and especially when you’re being told that it’s provided “… at no cost to you.” This is just a lie. 

Luckily for consumers, the industry is changing for the better. Standards and expectations are improving. The minimum qualification required for authorised representatives have increased to degree qualification by Jan 1, 2026. Compliance protocols are being mandated, as is an industry code of ethics, to ensure that a client’s needs are being made a priority. And how advisers charge their clients for advice is becoming less lucrative as commission rates are wound back, signaling to advisers with less integrity, its time to move on. This is shifting the focus from selling risk products, to creating wealth strategies.

This has happened before. In 2011 under the introduction of ‘Conflict Remuneration Legislation’, the government barred commissions on investment products recommended to clients. These industry-wide changes will eventually fracture the profession. Advisers who genuinely want to make a positive impact on the lives of their clients will be left to restore the reputation of an industry that can make a positive impact on clients lives. Others, who are not as enthusiastic, will take little persuasion to find an alternative career.

edit 15/11/2020;

Recent data on the industry, post-Royal Commission, shows that of the approximate 27,000 advisers in Australia at the beginning of March 2019, has dropped to close to 21,000. Of those, 50% have not completed the required exam that needs to be completed by the end of 2021.

Here is an article from 2011 that helps articulate what has been an industry standard for far too long. Surf Coast Wealth Management will always be a fee-for-service advisory firm. We are more than satisfied with our decision to have dropped the industry status quo in favour of being focused on the results for our clients. It’s what our clients would expect

Lifetime of commission for one bit of advice

Annette Sampson of the Sydney Morning Herald. 

Like the plumber with the dripping tap, finance journalists are often guilty of letting their own finances slide. Somewhere out there a life insurance salesman is still collecting a tidy annual commission on a policy I bought more than 10 years ago.

The commission is supposed to be a reward for giving me ”Advice” but what advice?

At the time of purchase, I knew how much insurance I wanted and was quite clear I didn’t want to be sold a host of other products; his role was simply to save me the time of shopping around for an appropriate, competitively priced policy. Insurance bought, that was the end of our contact. For all I know, he has since sold his business and someone else who I’ve never even heard of is getting a kickback from my annual insurance premium.

Welcome to the world of easy money where inertia on the part of people like me generates a valuable passive income for salespeople that can continue indefinitely. Many of these salespeople call themselves financial planners or advisers and they’re up in arms at the suggestion I should be asked whether I want them to keep being paid on my behalf. Apparently, it will cost them about $100 to contact me and ask whether I want to keep paying them (is Australia Post up to some rort I’ve yet to hear about?) but you suspect their protests have more to do with knowing what my answer would be.

Most consumers don’t realise it but commissions on life insurance can comprise a significant part of the cost of policies.

The chairwoman of Choice, Jenni Mack, recently said about 130 per cent of your first year’s premium, then 10 per cent to 30 per cent each year after that, was typical. So if I’m paying about $1000 a year for my insurance, between $100 and $300 of that money is being wasted on commissions.

For all the industry’s hand-wringing about Australians being underinsured, knocking that cost off the policy would be a productive step towards making insurance more attractive and affordable.

Yet it remains unclear whether the government will include life insurance commissions when it bans kickbacks on investment products in 2012.

It decided to ban commissions on group life insurance offered under the proposed MySuper products as part of its Stronger Super reforms but is consulting the industry on the treatment of commissions on insurance bought by individuals. A final decision may not be made until the middle of the year.

From all reports, the lobbying for the government to leave commissions on insurance is intense, with much of the argument revolving around underinsurance and the prospect of the problem getting worse if consumers are asked to pay a fee for insurance-related advice.

But as one adviser, who doesn’t take commissions on insurance, points out, advisers with big life insurance legacy books (that’s people like me who continue to generate an income even though we’re not active clients) have a strong personal interest in keeping things as they are.

The managing director of Sentinel Wealth, Justin Hooper, calculates the value of many of these advisers’ businesses is already going down, just on the basis that commissions may be banned or curtailed. He says such income streams used to be valued at four times the annual income they generated but would be worthless now.

”If you think about why they were valued more highly [than other parts of the business], the answer is obvious,” he says. ”They require less work, that’s why.”

Under the current rules, I can always stop the commission by switching my policy to an adviser who charges fees and rebates insurance commissions (assuming I want advice), or to a discount broker who will rebate the bulk of the commissions for nothing. Note to self: stop faffing around and do that.

But should that be necessary?

Surely there should be some protections in place to ensure the problem never arises.

Insurance in super can also be a thorny issue. While investors are generally encouraged to hold their life insurance through their super fund because it is more tax-effective than paying the bill yourself and can often be cheaper, that isn’t always the case. The Herald’s Wednesday Money section received a complaint this week from a reader upset at her super fund forcing her to pay for compulsory insurance that she didn’t want or need. The premiums are coming straight out of her retirement savings.

Hopefully, she will get some reprieve from the Stronger Super reforms, which propose an opt-out provision on insurance offered through MySuper products – assuming, of course, that her fund becomes a MySuper product.

Younger, healthier fund members who bother to check are also often disgruntled to find they can buy insurance more cheaply themselves than through their fund as they are effectively subsidising older, less healthy members through their fund’s group insurance.

It all comes back to a the need to put control of insurance costs back in the hands of the people who pay for it. It shouldn’t be that hard, or that contentious.

Here is the link where you can find the original article.

Daniel Twentyman B.Bus.(Eco) Dip.F.S.(FP) Financial Planner – Authorised Representative