Advisers: MJW report not fair

Advisers and their remuneration structures have been unfairly singled out for criticism, the Professional Advisers Association says.

Monday, November 23rd 2015, 5:00AM

by Susan Edmunds

Melville Jessup Weaver's Review of Retail Life Insurance Advice was released publicly this morning. It was commissioned by the Financial Services Council.

The report says advisers are driven by high upfront commissions to sell more cover than clients need and replace policies more often than they should.

The report wants upfront commissions slashed by about three-quarters.

PAA chief executive Rod Severn said tipping advisers’ business models upside down was not in consumers' interests. He said MJW had approached the report assuming commission should be removed.

Severn said the commission structure suggested by MJW would force advisers out of business. He said PAA researched showed that if the recommendations of Australia’s Trowbridge report were enacted here, about 40% of risk advisers would shut up shop. The MJW recommendations are similar.

“In our view the report raises more questions for the industry as a whole – not just advisers - than it answers on this subject,” he said.

“We also disagree with the view that advisers present the greatest conflict of interest. The industry functions as a whole - therefore singling out one channel does not accurately represent the role and obligations of all parties in evolving the industry in the interest of consumers.

“The whole industry must work together – providers and advisers - to clearly define issues and promote change in the interests of consumers. How consumers access advice and who pays for that advice is not a new subject, and one that is high on the agenda for the advice industry,” Severn said.

“The formula for the current remuneration model needs to provide more clarity for consumers. But reducing remuneration by up to 75 per cent would decimate the industry and is not a sustainable model and would underpin the chronic underinsurance already present in New Zealand. “

Severn said a fee-for-service model would be preferable to commission but consumers needed to be aware of the value of advice for that to work.

“But this is a model which needs to be designed by those in the industry – those who are consulting with the regulator on a regular basis; those who understand the complexities of the advice process and consumer needs. Such work is under way by the Professional Advisers Association, and it is work that should not be side-tracked by the broad-sword approach as recommended in this report.”

Severn said the PAA agreed with some of the recommendations, including the need for an industry-wide replacement business policy, the need for clearer distinction between sales and advice, the need for a single adviser designation and the need to simplify disclosure requirements.

Michael Dowling, president of the Institute of Financial Advisers, said the recommendations were similar to Trowbridge’s but New Zealand’s environment was quite different.

Australia had found evidence of adverse customer effects because of adviser behaviour, he said, while New Zealand had not. “Even MBIE has said it won’t look at draconian measures and is more focused on disclosure and the code [of conduct]. I wonder what will be achieved by taking a different focus.”

Severn said the review was badly timed and did not add anything meaningful to debate that was already happening.

“The report did not comprehensively address the fundamental issues, but instead relied on a financial recommendation to solve the bigger issues; a recommendation that would only serve to disadvantage the consumer,” he said.

“Or in other words, it didn’t go far or high enough to reach a truly meaningful central recommendation for the industry. That is something that the FAA review is tasked to achieve, and we continue to work closely with the regulator towards this goal.”

Severn said the MJW report had been submitted too late for it to have much impact on the FAA review.

MORE REACTION TO THE REPORT

What the MJW report recommended. Plus Minister's response

Partners, OnePath and Asteron have their say

Blog: Philip Macalister scores the report a D

What FSC members wanted

Advisers say not fair

Tags: financial advisers IFA Life insurance MJW Report PAA