Has compliance knocked the insurance adviser market?
Russell Hucthinson reviews the impact of regulations on the life insurance market and comes to some surprising conclusions.
Monday, February 11th 2013, 6:00AM 
16 Comments
The rate of new business generation appears to be down. After years of steady growth, the amount of new business being done has been disappointing (for the industry as a whole) for a year now.
Although we all like to talk positively of regulation bringing best practice a number of advisers are saying that it has cost them time and money over the past two years, and that’s why they are writing less business.
We like to be positive about regulation. In the medium term it should yield benefits: higher consumer confidence, better products, better advice, and best practice in advice-giving.
Many of those things could lead to more business, holding the view that they will is almost an article of faith. Without it a kind of sullen minimalism could creep into the industry response to the regulator. I think it is too early to say that is happening. Instead I think that most companies and advisers are generally positive in their views. But unless more progress is made soon the mood could harden.
That being said, there can still be a negative effect on business while advisers adapt to the new rules. Most are trying to work out how to change long-used sales approaches so that they fit with a six-step sales process – even if they are RFAs.
Most RFAs I meet are seeking to apply the principles of the AFA code of practice to their advice process. While working with new, unfamiliar, fact finds, systems, and new draft Statements of Advice they are often less effective.
These advisers are often not natural administrators – so they go slowly with that sort of work. Also, most being experienced and well into the second half of their career they are careful, and will simply tend to do less while they are trying to work it all out. Several have said to me that they have been switching business less because of the compliance risk.
That may be music to the ears of some life companies – but what if the client really should have switched? What if other important tasks at renewal aren’t being done?
Whatever choice you are making I would suggest this: try to quickly get across these compliance issues and make it a goal to achieve growth compared to your last ‘peak production year’. There are lots of people out there that need cover, and they need your help.
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Comments from our readers
On 15 February 2013 at 9:36 am Graeme said:
w k . you have put aptly what many of us think. I have been in the industry 40 years. I now look at prospective clients and weigh up return versus risk (to me). I have seen a colleague faced with a client challenge 'pay or face the regulator' knowing the claim was less than the automatic dispute resolution fee.
On 15 February 2013 at 9:59 am Dr Mike Naylor said:
A 'professional approach' to insurance advising is clear enough and has been used around the world for 20 years - if you are in doubt as to what it is buy my book. If advisers are confused as to what the professional approach involves then advisers either need to leave the industry or get themselves educated.
Regulation requires RFAs to use skills appropriate to what they do. With general insurance that is fairly simple - knowing policies and correctly assessing clients needs. What you don't do is just try to sell what gives the highest commission. However for personal insurance, things are complex and advisers really have to do a 'full financial needs analysis'. If you don't know what that means you are in trouble. And yes - complaints and lawsuits will increase even for RFAs.
I have been pushing for over a decade that the key to income in an adviser business is quality computerised administration systems. Your software, run by a medium paid administrator, should do most of the low value paperwork, and nearly all the no-value regulation trail, leaving the adviser free to do the high value stuff - talking to clients. One person agencies are no longer viable as the adviser will spend 80% of their time doing low value paperwork.
Lawyers have no excuse. Sure, there will be doubt as to what the terms of the Act mean until Judges define them in caselaw, but lawyers in this field should know very clearly that if advisers follow a best practice 'professional process' they can stand confidentially before the FMA or a Judge. The FMA are not vindictive, they will guide you towards best practice. It is just that that is not the traditional sell fast customer beware approach.
On 15 February 2013 at 10:41 am Broker said:
Great article. Agree that it is very important to choose who to do business with - we are self employed after all so we are allowed to say no we can't help you. It's important to not only keep your sanity and self respect (some people are just too much of headache) and of course the regulation and the potential complaints these days. As an RFA I love saying to people who want their rip off superannuation plans reviewed - sorry I can't help you as I'm not an AFA - and then refer it...
Don't let this regulatory environment stop you having some fun and do what you do well I say...
On 15 February 2013 at 11:35 am Amused said:
I agree completely with w k & Graeme comments as I am sure the vast majority of risk advisers would also.
If Dr Mike Naylor is correct and regulation is indeed going to mean the end of the "one man band risk adviser" then that is clearly a step backwards for the consumer. We all know that such an outcome will lead ultimately to more and more advisers (including those new to the industry) joining QFEs and this will remove "choice" for prospective policy holders with whom they ultimately are placed for their cover. End result is that they may not receive terms as favourable as that which another insurer may have potentially offered them.
If regulation means that a one person adviser can no longer operate his/her business without employing someone whose sole function is to deal with regulation related paperwork etc. Then the overriding issue of addressing New Zealand’s horrible underinsurance problem will never be addressed.
On 15 February 2013 at 4:25 pm Broker said:
Thanks Dr Naylor for implying the rest of us need an education. People are not robots and my everyday kiwi clients seem to value a good old fashioned chat, simplistic advice without all the jargon and a 50 page report. But each to their own ah? On 15 February 2013 at 4:49 pm Dirty Harry said:
Let me stop you right there Dr Mike.
I have attended your contact course as part of my massey paper, and I bought your little book because you set it as the text book for your course.
Both the lectures and the book are delivered in the tone of an autocratic father speaking down to a petulant child.
From up on the Massey hill secluded in the tree-lined alternative reality of academia come asinine theories of spreadsheets and complex methodologies and staff doing the "low value" work such as building recommendations and doing research and talking to underwriters and generally being a good adviser.
The problem is these theories are backwards. They treat paperwork and compliance as a separate issue from the sales process. A good, robust best practice process streamlines the "low value paperwork" and the "no-value compliance trail" and turns it all not only into a compliant business with the correct documents in place, but creates tremendous value at the same time. The client sees a professional at work, it builds trust and identifies greater sale and referral opportunities.
This one-man business aced set C, and could "confidentially" stand in front either a judge or the FMA, I just don't expect to have to.
On 15 February 2013 at 5:12 pm Amused said:
Well said Broker! On 15 February 2013 at 7:07 pm Ron Flood said:
Amused, Dr Naylor is not saying that there will be an end to one man band risk adviser practices. What he is saying is that the adviser should not be engaging in administration, compliance requirement documention, client data base management etc. These functions need to be handled by competent and efficient administration staff.
This allows the adviser to do what they do best, seeing clients.
As a "one man band" I engaged a very capable and efficient office manager and in the first year alone, my productivity increased by 84%.
Dr Naylor has simply stated that the days of doing it all yourself is no longer commercially viable.
On 16 February 2013 at 10:56 pm Amused said:
Ron Flood - I refer you to Dirty Harry's comment above. He has eloquently summed up what many of us "one man bands" will be thinking upon reading Dr Naylor's comment. On 17 February 2013 at 11:29 am w k said:
@ron flood. If the increased in productivity meant your real income has increased by 84%, I would like to congratulate you. Very well done indeed.
The way I calculate is like this - if my turnover was, say, $100k, and by employing one staff, the turnover has increased to, say, $180k. The cost of hiring a very good employee could be $50k all up (including ACC, leave, benefits, etc). There's $30k left, and deduct, say, 30% tax, that's a nett $21k into the pocket. That is to say, real income has increased by 21%, and that is provided there is no increase in the working hours. However, if I had been working 40hrs/wk, but is doing 48hrs, then my real income has not up, 'cos, I am working 20% more. More business also means greater risks (complaints, mistakes, etc), higher expenses (more clients to service), and I suspect higher PI premium as well, all that for the extra $21k?
Next question, is the above scenario worth it? Many may say, yes, but not for me, unless there is an increase in my real income. It is the same for fees charged by fund managers. I do not ask for their fees, but rather what's the nett returns on my investment. I would pay a fund manager 10% fee if he can consistently get me 10-15% ROI, but not a cent to one who gives me 2-3% ROI. If that make sense.
You pointed out quite correctly that it may no longer be commercially viable for a one-man band, but that is purely because of the new regulation and nothing else. New technologies have already enable one-man band to operate far more efficiently than 20-30 years ago.
In conclusion, some figures may look good from far, it's far from good. An increase in turnover does not necessarily translate to increase in real income.
These are my personal views and I am NOT an AFA.
On 17 February 2013 at 9:23 pm Dr Mike Naylor said:
Thanks Ron. By 'one man band' I mean one adviser on staff. The one adviser, with staff, business may well survive.
w.k. - The problem facing the industry is that a lot of insurance advisers have been one- person doing every thing, including all clerical administration. That has worked OK in the past. However now you have had lumped on you a pile of regulation paperwork as well best practice requirements - so the old ways are no longer viable. So, apart from complaining, what to do?
My suggested answer was to look at all the tasks you will be doing with regulation and to calculate how much profit each task brings in - if the profit per hour is less that your current income then doing those task makes you poorer. And how many advisers do paperwork well? A lot of the regulation stuff and client reports is mostly repetition as it can be done via software. Thus combining quality insurance advising software with one or two quality admin staff get all the paperwork/ phone calls etc done efficiently.
The adviser is left doing the things which are important - talking to clients, doing analysis, etc. If you do more of these tasks because of staff help then income should expand to cover the increased costs.
Dirty Harry - I agree with you on one thing - a system which is seen to be streamlined and robust by clients, which enables efficient response to phone calls, which can be used to assess risk levels during meetings is very added-value to a practice, as you expressed well.
Note however that it needs quality software, most of the ones currently on offer are inadequate. Apart from that - play the ball and not the man. If you see me at a conf - come up.
On 18 February 2013 at 10:38 am Broker said:
'a lot of the regulation stuff and client reporting is repetitive and can be done by software' - so where is the need for extra staff Dr Naylor? I don't quite get it...just good systems and software I would have thought... On 18 February 2013 at 1:20 pm w k said:
@Dr M.Naylor. Thank you for your response.
We have agreed on one point, that the cause of all these is the regulator, nothing else. However, you missed my point, why should I, or any advisers for that matter, be earning the extra dollars which does not go into our pockets?
Academia and businessman see things differently. Academias work on assumptions and scenarios, and gets paid regardless if they are right or wrong. Businessmen makes money making the right decision, but incur losses with the wrong decision, hence, look at bottomline.
To put it simply, is it feasible to hire someone for $50k to increase your gross profit by $50k? To an acedamia, this may be ok, because this is not costing the institution anything, maybe a good decision. However, from the business viewpoint, if I generate an extra $50k, a good portion (nett of tax) of it must return to my pocket, otherwise, it's just a waste of my time. And I believe many still prefer to do it on their own, like myself, rather than employing someone is the "easy to hire, hard to fire" employment law. Have you consider this factor as well?
On 19 February 2013 at 10:35 am Mike Naylor said:
Broker - how good are you at working software? Most insurance guys aren't. Also its still repetitive and low value-added.
w.k. - I agree, each business needs to look at the $$ equation carefully. For an example of good business practice look at Triple Jump - they employ a lot of admin staff and the advisers do well financially. The key is that each adviser can handle at least twice as many clients so revenue does jump. Its not the same as your current practise but it works for them.
The key point is - can you continue as is? If you combine with another adviser you can jointly employ staff and buy software. You can also jointly pay for business consultants to help set things up.
The FMA are currently targeting AFAs, but will get round to RFAs by year end. You need your files set up to keep them happy. Times are tough - so yes, I'm glad I'm not in your shoes.
On 25 February 2013 at 11:32 am w k said:
@r naylor:
- in theory (assumption) the more $ advisers make, the better.
- in practice (reality) some are just happy making 70-80k/yr doing minimum hrs, spend more time with family, hobbies, don't want too many clients.
As mentioned, increased in revenue does not necessarily translates to increase in the bottomline, and I don't call that financially better off or smart practice.
My target is to be out of the industry in two years, and FMA can use that time for other advisers, and I don't run a charity.
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Theoretically speaking, regulations will weed out cowboys, hence more opportunities are created for good advisers. However, this regulation is not only not weeding out cowboys, it is creating more paper work, increased compliance costs, headache, etc to many advisers. The extra paper work needed in trying to meet the requirement for compliance is taking away precious time to get those opportunities out there.
Because clients are now shown how to complain, whether they are right or wrong, I am now even more cautious. How? I am even more selective with my clients, that is, turn away those whom I think are undesirable, a "ticking time bomb" if you want to call them. I believe I am not alone.
So, the regulator think consumers have more confidence now and it is boomtown charlie for advisers? Think again.