Why financial advice matters

Fidelity Life acting chief executive Ed Eadie says the FMA report on replacement business has a narrow scope and risks undermining the important role of financial advisers.

Wednesday, June 29th 2016, 11:00AM

I believe that all New Zealanders should have access to financial advice from someone who knows them, understands their family and their needs. But this is going to require us as an industry and a country to make some difficult decisions about how we pay for financial advice.

Increasingly, people are facing complex financial choices. Jobs have changed; most of us will move jobs several times over the course of our lives. Housing market trends mean that people have been finding it harder to save enough to buy their first home. Individuals are expected to take responsibility for their retirement savings. Who will help us make the right choices? Quite simply, financial advisers are equipped to do this.

Independent financial advice has significant benefits for the financial health of New Zealanders.

Advisers form long-term relationships with their clients and their families. Often what’s forgotten in the role of the adviser is what happens after a policy is purchased. It may not make big headlines, but what motivates most advisers is getting the best for their clients, and especially at claim time.

That is when advisers support families and ensure that the family claims all possible benefits from their insurance cover. Helping a family through a traumatic health event is no easy task and we must remember that advisers do not get paid anything extra at this time.

Underinsurance

As a nation, we need to spend more time thinking about our finances. At the end of a long day, very few people want to sit down and have an honest look at their finances or think about risk –

particularly if those risks are serious illness or early death. But that is what financial advisers make us and help us do.

Underinsurance is a big problem in New Zealand; many people do not get the cover they need to protect themselves and their families. Although house and vehicle insurance are common, life insurance and income protection insurance are much less popular.

A person’s income is their biggest asset - over a lifetime they are likely to receive a lot more than the value of their home. However this is not the perception of many New Zealanders. A 2013 Massey University report commissioned by the Financial Services Council concluded that income protection insurance was both the most needed personal insurance product and yet the insurance a person was least likely to have.

Kiwis also tend to be complacent about their future health; yet we are over twice as likely to be off work for more than six months from sickness compared with an accident. Recent polling suggests that approximately half of us can only last a month after using our leave entitlements, before our income massively suffers. Advisers fulfill an important role in ensuring that people think carefully about their options, promoting products such as income protection insurance and making them accessible.

Adviser Remuneration

How should financial advice be paid for? This is currently being debated. We now have the FMA review into replacement business and in July a cabinet paper will be released on changes to the legislation that regulates financial advisers.

Since the UK banned commission many people cannot access the advice and guidance they want or need to help them make financial decisions. The UK Treasury recently reported that a “high standard of advice is primarily accessible and affordable only for the more affluent in society”.

Changes are now occurring in the New Zealand financial services industry. Do we want to face the same challenges as the UK?

Most independent financial advisers are small business owners or employees. The FMA study acknowledges that “only a small percentage of advisers are earning very high income from life

insurance commissions”. With the majority of the adviser’s work involved in arranging the insurance, most of the commission is paid to the adviser at the start of the policy. Advisers also

receive a smaller annual renewal commission for the ongoing review and servicing of a policy. New Zealanders don’t expect to pay a fee for financial advice. Insurers pay the adviser commission, so for the customer the cost of the financial advice is spread across the life of the policy. As small business owners, advisers use this revenue to pay taxes, salaries, rent and all the regular small business expenses. It’s a mistake to think of commission as income; it is the gross revenue that maintains a small Kiwi business.

I welcome the debate on adviser remuneration, but the value of financial advisers must be brought into the debate. Advisers make us think about our finances when many people would rather just borrow and spend. Advisers are there when we lose a family member, when we have a serious illness or if we lose our job.

Replacement business

With the release of the FMA review into replacement business, it is important to recognise that an adviser recommending a customer takes out insurance with another insurer is not inherently churn.

It is critical that consumers are not confused by the terminology as there are many good reasons for replacing an insurance policy.

Your family circumstances may have changed or you may want to increase or decrease the scope of your cover. An independent adviser who can access a range of products from different providers is ideally placed to help people make the right decisions about the cover they need.

Interestingly, the FMA review of replacement business has not identified specific instances of harm.

I believe that the best ways of managing the risk of “churn” is to ensure advisers have long and strong relationships with their customers and communities. I strongly support a change in the law so that the customer’s interests are always put first. All New Zealanders must be able to obtain independent financial advice through competent and ethical financial advisers.

Ed Eadie, Acting CEO of New Zealand-owned insurance company Fidelity Life.

Tags: Fidelity Life