I was concerned that I would not have anything more to worry about other than focus on my clients, helping them to navigate the post-GFC economy, convince them that the government really doesn’t see them as bourgeoisie simply because they save for the future, and protect them from unforeseen risks through insurance.

Ah, that last part, mundane risk insurance.  For well over 120 years, Australians have relied on financial planners and before that good old fashioned insurance salesman, to be the party-poopers that reminded them that, no, they won’t live for ever and even if they do, they might just get sick along the way.  You, dear reader, may not appreciate that these types of events can have a deleterious effect on one’s prosperity planning.

Despite this obvious risk and the fact that, generally, people do care about providing for their family if the unforeseen should happen, most people don’t have enough of the stuff. I’m told in the olden days, General Stores would have shelves full of insurance policies available for purchase.  They were priced at cost, plus a simple retail mark-up for the shop owner.

Sadly, most remained unsold.  Only a few customers that had just been to their doctor and received an unfortunate diagnosis were buying – everyone else was happy to wait and delude themselves that it would happen to somebody else or they’d get to it another day.

Now, this wasn’t a good outcome, especially for those insurance companies that wanted to profit from making the insurance.  Their only customers were ones that they didn’t want to insure in the first place.

But why wouldn’t people want buy the insurance? Well mainly because it wasn’t fun.  First up, you had to dwell on the nasty things that could happen, as well as contemplate your own demise.  But even after that, you had to fill in lots of forms, and ‘fess up to all the horrible diseases and ailments you had already suffered.  As if that weren’t enough, you then get to have a stranger show up with some needles to take blood, or perhaps strap machinery to your person and run on a treadmill while a physician does his best to provoke a heart attack.

Finally, after these indignities, you get a call from the underwriter (aka a faceless stranger) to advise you that those anal fissures actually could result in colon cancer so your premium will be 25% more than you thought and didn’t your doctor tell you about these?

So, perhaps it is unsurprising that the insurance companies realised that there needed to be an incentive involved, so they built in a commission system as a way of remunerating their agents.  In fact, they’ve even increased it over the years – upfront commissions have more than doubled since this author was first involved in the 1980s.

This commission system turned out to be the worst way to structure risk insurance distribution that was ever invented, apart from all the other ways (with apologies to Churchill).  Customers loved it, because if they changed their mind or got loaded or rejected, it didn’t cost them a cent if they didn’t go ahead.  Insurance companies loved it, because it gave them an incentivised distribution channel and allowed them to arbitrage accounting standards and tax law to increase profits.  And planners loved it, because if they worked hard they could earn a good living.

Commission is an appropriate remuneration method, beyond the obvious reasons of the marketplace.  It’s a reason that most of the schmexperts seem to forget.

It’s what I call ‘completion riskc – an economic risk which all parties expect is borne by the adviser.  And, until consumer behaviour changes, it’s why upfront commissions are entirely appropriate for discretionary risk insurance purchases.

You see, unlike investments, there is an independent third party to every insurance contract who decides whether it completes or not.  No matter how much the customer and the adviser want the cover to proceed, unless the underwriter agrees as well, it will not.  Hence, this means a certain proportion of proposals are not completed.

Who pays the adviser for their professional advice when this happens?  Answer: nobody.

Alternative answer (with extra points for thinking it through): all the other people who have insurance, indirectly through cross-subsidisation.

Now, more schmexperts have decided that, despite the unpleasant process of gaining insurance, despite the completion risk being borne, despite every other damn else thing  we have to do, there is a problem.  Financial planners are churning customers insurance just to keep getting upfront commissions for the sake of getting upfront commissions.

This is a serious problem that threatens the viability of our largest insurers.  They’ve swung their massive international resources behind getting this hitherto unknown issue onto the national agenda.  It’s so serious that they are relying totally on anecdotal evidence to make their case.

Apparently, there are some advisers out there that have a bunch of customers that don’t mind undergoing invasive medical investigations every couple of years just to help said adviser make some more commish. These nefarious planners threaten to bring the entire insurance industry to its knees by refusing to leave their customers with uncompetitive insurance rates.

I have to admit, I don’t know any of these personally.  I think I met one of these guys once, Fred someone-or-other but that was in the mid ‘90s at a conference and I don’t think he stayed past FSRA reform but then again I could be wrong. But I am assured that they are out there.

I have an alternative solution.  Let the insurance companies reduce premiums by the exact amount of the upfront commission they pay to advisers at the moment.  Let the clients pay a fee for my expertise in obtaining the cover, regardless of whether they are able to get any insurance or not.

If everyone did this, would our society be better served? Answer: No

Alternative answer (yes more extra points): No, because the marketplace is not ready for that concept yet.  Yes, it’s a beautiful Field of Dreams, but build that sucker and no-one will come, at least for the next ten years or so.

To read the first article in this series, ‘Experts schmexperts’ click here.

The post Insurance Schmexperts appeared first on AdviserVoice.

After meeting with key independent politicians in Canberra this week, the Association of Financial Advisers (AFA) can confirm that the concerns of financial advisers in relation to the Future of Financial Advice (FOFA) reforms are being heard.

An AFA delegation returned from the national capital this week, after visiting independent Members of Parliament, Tony Crook, Rob Oakeshott, Tony Windsor, and Andrew Wilkie, as well as the Greens, the Minister for Financial Services and Superannuation, Bill Shorten’s key adviser and Treasury.

“We had great access to politicians and are very pleased to report that they have met with many of their local constituent advisers often,” Mr Klipin said. “This tells us that our grass roots campaign to move the policy debate to political engagement is working.”x

Mr Klipin said it is very encouraging that the politicians the AFA visited had heard and understood the very real concerns advisers have about the profound and potentially damaging effect some aspects of the FOFA reform will, if carried forward into legislation, have on advisers, their businesses and the clients they serve.
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“The message we took to Canberra was that the AFA is actually really supportive of the intent of FOFA – everybody, including financial advisers, would like to see legislation that results in better outcomes for consumers and better access to advice,” he said. “We would love to publicly support the legislation when it comes out in draft form, but we can’t support components which we believe are clearly not in the national interest.”
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The AFA has consistently argued that some aspects of the FOFA reform package announced by the Government in April will impose higher costs on consumers, impede their access to advice, tie them up in red tape and create even greater confusion.
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Mr Klipin reiterated that while the AFA believes the original intent of FOFA was commendable, the execution is not. “As they currently stand, the FOFA reforms mean even fewer people will have access to affordable advice which could ultimately mean fewer will have adequate levels of insurance and fewer will have enough in retirement savings. The impact of that is crystal clear – more people lining up for Centrelink benefits.”
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Mr Klipin quoted from the AFA’s Back to Basics research which identified that while only two in 10 Australians currently get advice, good advice gives people choices and leads to higher levels of savings, more appropriate levels of insurance and greater control of their future.
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Mr Klipin also said that while the AFA’s grass roots campaign is gaining traction, now is not the time for complacency.
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“In fact, advisers should be upping the ante,” he said. “Our endeavours to have some of the FOFA proposals amended so that we actually see an improvement in outcomes for advisers and their clients have only just begun. We encourage all advisers who have not yet visited their Member of Parliament to make an appointment today.”
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The Minister for Financial Services and Superannuation, Bill Shorten will address 400 AFA members at the AFA lunch on Monday 27 June.
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“If you have questions you want to put to the Minister, Monday is your opportunity,” Mr Klipin said.

The post AFA campaign gains traction; meeting with Independents appeared first on AdviserVoice.