The term ‘churning’, which has now become accepted into industry vernacular to describe what is a legitimate practice, defames advisers while whitewashing the role of life companies, according to leading boutique licensee, Synchron.
“It is highly contentious at best, and a blanket defamation of financial advisers at worst, to label as ‘churning’ the legitimate process of moving a client from one life company or life insurance product to another, after discovering a better alternative for them, ” said Synchron Director, Don Trapnell. “If a client’s best financial interests are served in moving them from one company or product to another then advisers are acting in accordance with both the letter and the spirit of the current and proposed legislation.”
Mr Trapnell said that it is particularly abhorrent to see organisations such as the Financial Services Council (FSC), which counts the major life insurance companies as members, jumping on the anti-adviser bandwagon.
“It is abhorrent because the legitimate process of moving clients from one product to a better product is actually product provider predicated,” he said. “Life insurance companies are continuously working to improve products, as they should be. If companies were not in the business of continuously improving products, consumers would still be stuck with whole of life policies and driving around in FJ Holdens.
“When companies develop better products, they expect it to result in substantial new business – that is the very reason they do it.”
Mr Trapnell said that life companies actually facilitate the process of moving business from existing products to their new products by offering advisers solutions that make it simpler to move the business – such as, for example, short declarations of health.
“Life companies are very happy to see and actively encourage business moving to them from their competitors, but cry foul and label the practice ‘churning’ when it moves in the opposite direction,” he said.
Mr Trapnell also said he believes the FSC is attempting to camouflage the essential role life insurance companies play in the process by encouraging the use of the term ‘churning’ and laying the blame for it on advisers.
“This has resulted in more backlash against advisers who are, once again, being unfairly labelled the blackguards of the entire industry,” he said.
Mr Trapnell said advisers are also being unfairly held accountable for unsustainable lapse rates. Life companies have indicated that a one per cent increase in a company’s lapse rate represents about a $5 million drop in profits.
“Rather than blaming advisers for this, the industry should consider the over-generous, unrealistic and unsustainable lapse rate assumptions made by actuaries when setting premium rates,” Mr Trapnell said. “Life companies have admitted to us that all discontinuances are included in lapse rate calculations, irrespective of how long the business has been on the books. This means, for example, that a term life policy that is 20 years old, that has achieved its intended purpose and which therefore discontinues, is included in a lapse rate calculation. This unfairly skews the figures.”
Mr Trapnell said the industry should also consider the impact of the global economic crisis, fluctuating interest rates and a downturn in the retail sector when evaluating lapse rates. “Life insurance is often one of the first items on a household budget to be shed when expenditure needs to be tightened,” he said. “This is not a reflection on advisers but a fact of life.”
Mr Trapnell said that the stated objective of the Future of Financial Advice (FoFA) reforms was to address the problems of the industry as highlighted by the collapses of Westpoint, Opes Prime and Storm Financial.
“To date, we have seen nothing which convinces us that any of the measures proposed by the Government or by the FSC will stop disasters like these from happening again,” Mr Trapnell said. “All we have seen is a licence to defame advisers.”