MJW report deails: Cut soft commission, slash upfronts
[EXCLUSIVE] Life insurance advisers would have their commissions slashed under recommendations included in the controversial Melville Jessup Weaver report, Good Returns reveals.
Tuesday, November 17th 2015, 6:00AM 
18 Comments
by Susan Edmunds
The report, commissioned by the Financial Services Council (FSC), is already proving extremely divisive, although it is not due to be officially released until next Monday.
AIA and Partners have both handed in their FSC resignations over it.
Good Returns can now reveal some of the key points made by the review.
- It is suggested that advisers disclose their actual commission and make it clear to clients what the premium they pay would be if there was no commission involved.
- A full ban on volume and soft-dollar remuneration is proposed.
- The report suggests a restriction on upfront commission to 50%, on new business only. That compares to up to 200% at present.
- It proposes a full ban on upfront commission on replacement business, and an increase in renewal commission to 20%, but consumers can choose whether to direct that to the adviser or not.
Other changes include adding insurance to KiwiSaver and allowing KiwiSaver members to direct some of their contributions to pay for that.
That is a model that has previously been proposed to make insurance more affordable and tackle New Zealand’s underinsurance problem.
MJW also wants the FMA to become the market regulator for insurers and to encourage insurers to pass on advantageous product enhancements to their older products when they are introduced.
As previously reported on Good Returns, the report suggests an end to override commissions but instead proposes advisers give 5% of their 20% renewal commissions to the entity that would previously have received the override commission.
MJW has been meeting with key industry figures over the past days and is holding events in Auckland and Wellington to discuss the report further, ahead of its official release.
An industry source said insurance advisers should know what changes were being proposed for their industry.
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Comments from our readers
On 17 November 2015 at 10:11 am interested2 said:
I commend Partners & AIA for showing their support of IFA’s. I’m surprised the other companies that do not rely heavily on tied advisers have not done the same (esp. Fidelity & Asteron).
From the information at hand, one can gather this report relies heavily on a similar report form across the Tasman, and was overpriced. However, the larger issue is it seems misguided in either the brief or delivery and therefore should not be released.
On 17 November 2015 at 10:26 am Majella said:
No surprises here. This MJW clown is talking through an orifice that is at the opposite end to his mouth.
I was at a meeting of a broker group last week at which it was stated that it costs on average $2,000 to just get the advice process to the point of writing an application, which may or may not turn into revenue.That's sunk cost - an 'investment' by the adviser who deserves a return. The revenue generated by a successful completion goes to meeting the costs of those that didn't make it across the underwriting line.
This MJW clown is an accountant, right? I assume therefore that he knows that my business, like any business, has a whole load of fixed costs. If I'm required to disclose the gross commission I earn on any given case, I'll also disclose all my fixed overheads, compliance costs and tax, and show the actual INCOME that REVENUE is worth. That would put things in perspective.
On 17 November 2015 at 11:24 am John Milner said:
I really don't think insurance professionals have anything to fear with full disclosure of their commissions. Life will go on and clients will value your advice and guidance.
Soft dollars need to go. I watched the carnage created by shadow shares and the practices that earned that reward which was shameful. Shame on those aggregators, advises and the insurance provider. That's one event in history the FMA should take a close look at. For anyone that's interested, my previous business gave ours back, albeit with great difficulty caused by the provider.
I'm very proud to work with insurance professionals as they add considerable value to my clients and really do make a difference.
On 17 November 2015 at 11:40 am LPL said:
From this article there does seem to be a push away from insurers paying intermediates to place insurance to a more direct model (payment from KiwiSaver as an example - the biggest winner from something like this would be banks; not consumers).
The more funds someone has in KiwiSaver the less reliant they become on insurance so why you would change KiwiSaver to support such a backward step is beyond me.
One of the problems here is the many conflicts of interest among the players. Partners Life for example relies on what others consider churn to grow their book; just like any start up would. The banks rely on sly practices; such as the "unwitting" KiwiSaver transfer to grow their KiwiSaver numbers. FSC claims to be consumer focused when it is actually an organisation of commercial plays in the market - not consumers.
The only consumer centered comment I can see here is the desire for new insurance benefits to be passed back to old policy holders.
I personally don't believe under insurance has anything to do with the cost of insurance at all. I think commissions are irrelevant.
MJW's solution is to reduce distribution costs and find cheaper channels of distribution. A business solution to increase the bottom line perhaps but a solution to improve the wealth and insurance needs of consumers it is not.
On 17 November 2015 at 1:15 pm Tash said:
John Milner - I usually value your comments but must take issue with you linking shadow shares with soft dollars. Shadow shares are hard dollars - but nothing more than deferred commission. The real insidious soft dollars are all the unaccounted for trips to the tennis, the golf, RWC, etc etc. On 17 November 2015 at 1:48 pm MediCare said:
I have just spent the morning cold calling and picked up a number of good quality leads. Yes, door to door! I met a number of folks who are interested in engaging and hearing my proposition when they were approached.
My persistency rate exceeds 92% which I feel is OK.
In my opinion, the only way to solve the under insurance problem in our society is for more of us to talk to more people - its not about price, it is about salesmanship and seeing the people.
I am happy to compete against the Banks and the online people - if they want to eliminate their margins and feel that a lower price will grow their market share, good luck to them.
What I can't understand is why the "pointy heads" feel threatened by how I get paid. Let the public choose, I say.
On 17 November 2015 at 4:17 pm RiskAdviser said:
It looks like the writer of the report had at least two banks in their back pocket, where's the disclosure of conflicts?
What's proposed on the face of this article suggests the only winners will be the banks, with the public and adviser market getting thrashed. Smacks of big business losing sight of why they got into business.
With this the banks get to sell clients crappy products that have no balance or comparison, nor competition, and along the way kneecap the only reasonable financial vehicle for accumulating wealth we have for the public, by allowing insurance premiums to eat away at it.
Allowing insurance to be linked for premium payment to kiwisaver will only result in a false sense of security, the industry has been there done that with 80's and 90's linked savings products. The only people who made money then were the providers and the advisers and they eventually got run out of town. This suggests we rinse and repeat! What a load of crap.
Keep insurance and investment products separate, talking about incentives, linking them is a huge one to do clients a disservice, one we have seen before and has more impact than soft dollar trips.
I agree the soft dollar bits make us look bad, especially the extravagant ones. It's the extremes that tend to skew things. However other industries do have them and they get by.
Some perspective about this is needed. A trip to Fiji vs a trip to the world cup with finals tickets are two quite different things. People know the Fiji trip is cheap, hell some advisers give them away with their referral programs, a line drawn around our pacific neighbours might be an approach to that's the limit/line.
Reality is it takes effort and motivation to find clients, work through their needs and deliver this effectively, how this is funded is important if we are to avoid becoming tied advisers because the reduced remuneration only works because of financial support in other ways.
Given AMP and Sovereign have both had something to say about this, even those with 'tied' adviser forces are seeing this as a poor answer for the industry.
On 17 November 2015 at 5:49 pm Mr Slater said:
I sat next to an adviser friend at an industry conference last week who made a comment that to me summed up the IFA added value. He said "when there is a claim (especially an emotional one) who would a consumer rather call. 0800bankclaims or me?"
I think that is what has been left out of this argument and that is the great help advisers provide when it comes to claim time. Would a bank rep deliver the claim form, help you fill it out and lodge it for you so you don't have to worry and can get on with caring for your wife/husband/partner when they are very ill.
On 17 November 2015 at 6:35 pm Bruce Cortesi said:
Ladies and gentlemen, it is indeed a sad day when the industry starts to fragment. Have you not learned by now that the only person who loses when their is internal industry dissension is the very reason for our being?
The Consumer.
Is it not now time for the industry to support each other and speak the same language?
It does not send out a good message when we start to implode by our own doing. Instead let us hope that MBIE will be true to word and allow the industry itself to provide more Disclosure and demonstrate it places the Consumer first without interfering with the Adviser revenue road that leads to consumers having access to advice.
However, in order for that to happen, we must also prove ourselves worthy of being able to do so as an industry.
Can we do that? Imagine the possibilities if you say YES!
On 18 November 2015 at 10:07 am Mike Naylor said:
The industry does need to come to some joint agreement on commission regulation, as the issue won't go away.
Looking at this from a customer viewpoint, as well as FMA angle, soft dollars have to go, apart from training. They're just a bad look.
There needs to be max caps on commissions as NZ is way above the rest of the world. Trails are also too low to incentive customer maintenance The trick here is decrease upfronts and increase trail so adviser income is at least the same - which is easy done. The problem with the reported MJW report is that the caps are too low. The industry needs to justify why NZ requires higher caps than Aust.
A key part of the FSC job should be to convince Goldsmith to ensure regulation differentiates clearly between banks offering product sales and proper advisers. His comments at the ICNZ indicate that he will open to this.
In the medium term increasing competition from online distribution and generic robo-advice mean that brokers/advisers who only do paper work have a limited future - the industry has to be about the value-added - making customers work in their own long-term interest and looking after customers.
On 18 November 2015 at 2:45 pm Tash said:
The biggest problem is one of ignorance. Too many commentators who have never actually tried to sell insurance to a client. Mr Weaver, Mr Naylor, MR FMA and so on and consequently they do not have a real understanding of what advisers actually go through to put a client on an insurance companies books. On 19 November 2015 at 10:28 am dcwhyte said:
I agree with Tash that some commentators with no first-hand experience of running an advisory business are making unqualified statements and recommendations. Such is life.
@Mike being out of step with other markets is no reason to cap commissions. This small market provides sophisticated distribtuion channels and can't spread the cost over the large populations of UK and Australia.
If the NZ consumer rejects commission levels, so be it. But so far, despite best efforts, the only voices raised in this context are from academics and actuaries - let the market decide.
On 19 November 2015 at 10:29 am Majella said:
@Tash - so true. These 'industry experts' seem to think that the commission we generate is also the INCOME we pay tax on. The costs are tremendous. When I started in the early 1990's, like most advisers I worked for a mutual. I had NIL costs aside from running a vehicle. Computers, phone, office, secretarial services, conferences, education courses and every kind of support imaginable.
All this for commission of 80% with bonuses quarterly.
Now, WE pay for ALL those services - the insurers have shed those costs and have elected to meet them through an enhanced commission structure instead.
The Insurers can, as a result, accurately identify what it costs to get a policy on the books.
It is estimated that a Broker's costs amount to $2,000 per APPLICATION, let alone per issued policy.
How can these 'wonks' come up with unsubstantiated remarks (like the MJW Clown-In-Chief) that the commissions should be slashed to levels LOWER than the old Mutuals were paying a tied & fully supported agency force, and expected to be taken seriously?
On 19 November 2015 at 2:32 pm dcwhyte said:
I agree with Tash that some commentators with no first-hand experience of running an advisory business are making unqualified statements and recommendations. Such is life.
@Mike being out of step with other markets is no reason to cap commissions. This small market provides sophisticated distribtuion channels and can't spread the cost over the large populations of UK and Australia. If the NZ consumer rejects commission levels, so be it.
But so far, despite best efforts, the only voices raised in this context are from academics and actuaries - let the market decide.
On 20 November 2015 at 8:45 am Teddy2Toes said:
After reading the absurd "Key Points" of MJW report, I thought I'd do some research into the team suggesting profound detrimental change to the life insurance industry in NZ.
My Findings on Melville Jessup Weaver (All from their own website):
The Team:
Bernard Reid - Specialises in super/investments
Craig Lough – Specialises in general insurance
Ian Midgley – Specialises in superannuation
Jeremy Holmes - Specialises in general insurance
Linda Caradus – Has some “technical” expertise in Life and Super
Mark Weaver - Specialises in superannuation
David Chamberlain – Specialises in Life Insurance
So basically, David is the only one who specialises in field.
Check out where David’s background and expertise of life insurance comes from:
“Prior to joining MJW David led the team building an insurance business for a New Zealand government owned bank in New Zealand”!!!
You have to be kidding me right??!!!!
THE FSC ASKED A TEAM OF INVESTMENT SPECIALISTS (WITH ONE FORMER BANK RISK GUY) TO WRITE A REPORT THAT COULD REVOLUTIONISE/DESTROY THE IFA MARKET???
What a JOKE!!!
I’m constantly saying it, the banks are trying to destroy the IFA market for their own gain!! This report is not impartial, or well researched and should be binned immediately!
Well done Partners and AIA for standing up! Asteron and Fidelity – you talk a big game about supporting IFA’s – time to front up!!!
On 20 November 2015 at 4:17 pm w k said:
@teddy2toes: relax mate, it's just the old boys' club. with asteron also quitting it looks like fsc hired a very expensive grave digger.
On 21 November 2015 at 11:58 am payton said:
Further research of the Partners Life accounts shows MJW were the consulting actuaries to Partners life up until the 31 March 2014 accounts providing the Appointed Actuary. MJW then lost this revenue stream (fee for service so no conflict haha) and they were replaced by an actuary from Deloiites for the 2015 accounts. Maybe you need to be careful with a scorned actuary. Did MJW disclose this in their report? Sign In to add your comment
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Or maybe they shopuld be paid nothing, especially since the quality of their advice doesn't meed the code we all live by. Does it match the stated goals, objectives and mandate of their clients? Is it clear and concise? Fit for purpose? Backed by appropriate research?
At least it meets code standard 1.