FSC report a missed opportunity: Naylor
Advisers would see their incomes and business values slashed if recommendations made in a new report on the industry were enacted, one academic says.
Tuesday, November 24th 2015, 6:00AM 
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by Susan Edmunds
The Melville Jessup Weaver report on life insurance commissions was released on Monday, paid for by the Financial Services Council.
MJW approached the FSC with the idea for the report after a similar one was produced by John Trowbridge in Australia.
The MJW report says high upfront commission rates are driving churn and inappropriate product replacement by advisers. It recommends a new commission model of 50% upfront and 20% trail, instead of up to 200% upfront and about 7.5% trail at present.
Mike Naylor, of Massey University, said the commission structures seemed to have come directly from the Trowbridge report and did not take into account the different cost structures in New Zealand.
“The MJW comparison looks at gross commission rather than adviser profit levels. Any useful analysis would include costs for totally new customer policy origination, costs for replacement customer policy origination, costs for policy maintenance, lapse rates, time discounting,” he said.
Naylor said his calculations showed an adviser earning $66,781 under the current model could expect their profit to drop to $6626. Their business valuation would drop from $200,342 to $19,878.
“The financial impact on new entrants is even worse... MJW are inconsistent. They say that under-insurance is an issue, that insurance ‘needs to be sold’ and that more advisers are needed, yet they recommend drastically reduced adviser income, and therefore a sole reliance on bank staff.”
He said MJW offered no new data or modelling and did even request the correct data to form the basis for its report.
“The worst part of the report is not the recommendations but the low level of analytical quality and the clear mistakes. There are many unsupported assumptions made, based on minimal proof and faulty data.”
Commissions needed to be talked about, he said, and a move to ban soft dollar and change the upfront/trail mix were obvious recommendations to fix an unsustainable situation. But he said: “The biggest issue with this report is the missed opportunity to do that properly. MBIE are now free to impose whatever solution they think fit.”
Read his analysis here.
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