John Trowbridge (middle) and ASIC’s Karen Chester (bottom right).
The architect of this 2015 Retail Life Insurance Advice Review, John Trowbridge, has criticised the government for not following his recommendation to incorporate an advice fee at the Life Insurance Framework, stating the omission has contributed to “something of crisis” in the business now.
Talking as a panellist on the Financial Services Council’s Life Insurance Summit webcast this afternoon, Trowbridge said the government has neglected to adequately remunerate insurance advisors for servicing this lower end of the marketplace.
“The issue here is that advisers today do not get paid enough to advice the smaller clients,” Trowbridge said.
He considers that the failure of the authorities to execute an ‘advice fee’ to cancel the decrease of commissions has forced the supply of information to lower-paying customers commercially untenable.
“What we recommended in the review of 2015 was that commissions come down but that there be an advice fee,” Trowbridge said. “What they did is simply halve the front-end commissions and increase the renewal commissions. That is not what we recommended.”
Though the report’s other recommendations including staggered commission caps, capped route commissions, clawbacks and the banning of volume-based obligations were embraced as a member of their Life Insurance Framework reforms, Trowbridge fees the information commission was crucial to flattening out information remuneration throughout the low scale scale so low insurance information remained viable.
An actuary by commerce, Trowbridge supplied a graph showing the gap between danger info remuneration pre- and post- the LIF reforms, in addition to the way an information fee could enhance the delta (see below).
“We recommended what we showed on the chart, which was basically an initial advice payment together with a smaller commission to try and cater to the middle market as well as the affluent market,” he explained. “The outcome of the government going halfway as it were on these commission reforms has created a big part of the problem in advice.”
While the first recommendation was to get a level information fee of $1,200, Trowbridge claims that “a higher number would be appropriate” today.
The actuary’s assertion that the authorities obtained the LIF reforms incorrect echoes ideas expressed by information business establishment heads on Monday, who said the reforms failed to look at the wider problems facing the business.
Short change from ASIC
The “big question”, Trowbridge reckons, is if authorities and authorities will consent to restructure the remuneration arrangement for hazard advisers. The issue itself was directed directly at ASIC deputy seat Karen Chester, that was also on the board.
“Firstly, it’s important to remember 75 per cent of insurance for the punter is through superannuation, so the financial adviser isn’t typically the intermediary; it’s the super trustee working with the insurer,” Chester reacted, before noting that 24 percent of these insured within super aren’t even conscious of it.
Chester added that the incoming Layout and Distribution duties would make it easier for consultants by strengthening product marketplace determinations, in addition to helping with “less need for advisers” overall.
With regards to frameworks and incentives, Chester said, that will have to wait until the scheduled 2021 LIF review.
“We’ll be looking at how the industry has responded to the changes and whether there is a better alignment of interests such that the government can make a decision on whether any further reforms are required with respect to the arrangements,” she explained.
Advisers key to distribution
Central to the importance of the remuneration issue is the role of advisers in life insurance distribution, Trowbridge argued. Without proper compensation there are no advisers, he said, and without advice the insurance sector will struggle to meet the market.
In other services such as telecommunications or even general insurance direct distribution works because you’re providing commoditised products, he explained, so consumers can “readily work out what they need and buy it from a supplier”.
“But in life insurance that doesn’t work,” he said, adding that the Hayne royal commission had made the direct distribution of retail life insurance “even more difficult”.
“The problem is that life insurance needs to be accessed properly by consumers and does need advice,” he said.
“Distribution in financial services is key to success both for the consumers and the suppliers, but what we’ve seen is a large decrease in the numbers of advisers in life insurance in the last couple of years,” he continued. “And this means there is a lot less access to life insurance advice than there was.”