Following my previous blog on the subject of the Government’s proposed financial planning reforms, I have been asked to identify who will be the winners and who will be the losers if the changes proceed.
In order to answer this, I should point out that the major contentious changes and their effects on the stakeholders are:
(1) the requirement to get approval from clients every two years to continue “servicing” them i.e. charging them fees.
This will clearly benefit clients in that they will not get charged for services when nothing is actually being done for them. It will also benefit clients in that they will be encouraged to re-examine their financial strategies and possibly seek to revise them.
There will be a cost to financial planners in administering the process. However, the truth is that it will be much less than they are claiming and will most likely simply lead to marginally higher financial planning fees. I would have thought that this cost could be reduced to almost nothing if each financial planner was to meet with their clients in person once every two years. I would not consider this to be unreasonable and of course could lead to new business opportunities.
(2) no commission on life insurance products in superannuation.
The theory is sound. Clients should be able to receive independent advice as to which life insurance product suits them, not based on which one pays the biggest commissions.
There is a substantial cost to financial planners in offering underwritten life insurance products. If they are not allowed to recover this cost as commission from the product manufacturers which is invisible to clients and a specific upfront fee has to be charged which will be resisted by clients. It is likely to lead to a reduction in the amount of insurance sold and it is also likely that life and disability insurance will just be excluded from the advice given to clients. ??It has been suggested that some financial planners will simply offer life insurance products outside of superannuation but I fail to see how anyone who does this can claim that they are operating in the client’s best interest which is another part of the Government’s proposals.
There is no easy solution to this but Dequity Partners is working with a client company to introduce a range of complete web-based underwritten life and disability insurance products. This will reduce the cost of this insurance by up to 40% and the system will be able to be white-labelled to enable many business to use it under their own brand. Other solutions will be developed over time.
(3) no volume bonuses and other manufacturer provided benefits??.
The theory is sound. Assuming that the industry complies with this requirement and does not find a way around it (which I suspect they will at the margin which they are already trying to do by locking in existing arrangements), it will clearly benefit clients.
The Government’s objective is to get financial advisers to act in their clients interest and not their own which is a specific requirement. I can understand the driver for product manufacturers and platform operators offering volume bonuses. However, they are not in the client’s best interests as financial planners have an incentive to offer any product that appears reasonably suitable not necessarily the best product for the client.
Product manufacturers and platform operators will need to focus more on providing the best products so that financial planners will recommend them rather than effectively bribing them to do so.
In summary, the Government’s proposed changes will be somewhat beneficial for clients and quite devastating for financial advisers.
However, there is a credible argument that in fact everyone who is honest loses. It is this honesty that is key. The majority of financial advisers fall into this category, trust is the thing that sets them apart from their competitors. Taking away their livelihood seems somewhat unfair. However, auditors can’t implement consulting services so why should financial advisers get commission on products?
For the majority of financial adisers, it could be argued that the changes are likely to lead to less life and disability insurance being sold, which any rational person can see would be a bad thing. Life and disability insurance are essential components of modern society.
However, new and innovative approaches such as Dequity Partners is proposing (independent online purchasing) may counteract this. We have already seen a number of other insurance products being sold through TV advertising, infomercials and on the internet. Life and disability could be sold this way if the checks and balances are maintained and the underwriters accept the risks.
If these reforms are adopted and implemented I see it as being adverse for financial planners who will be required to work harder (as they will not be able to collect substantial unearned commissions) and to higher standards (act in their client’s best interests and not receive simple sales bonuses).
It is also adverse for product manufacturers/platform operators who will need to change their approach to increasing sales volumes from simply paying bonuses, to doing it by offering better and more competitive products.
The biggest losers from these proposed changes are the financial planners who focus on risk products (life and disability insurance) as their business is likely to be substantially reduced as these products start being sold through different distribution channels. These advisers will need to adapt quickly and find new products and services to replace the lost earnings.
Tags: Commissions, Disability Insurance, Financial Advisers, Financial Planning Reforms, Life and Disability Insurance, Life Insurance, Losers, Product Manufacturers, Superannuation, Winners, Winners and Losers
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