Conduct, culture, and commission

The conduct and culture report published by the FMA and RBNZ recently was meant to be all about insurers, but a significant consequence will be felt by advisers.

Friday, February 1st 2019, 8:59AM

by Russell Hutchinson

Russell Hutchinson

In other places I shall write about the conduct and culture issues (which are real) but here it seems important to write about churn, advice, and commission.

The commission issue is one in which I have some struggles.

First, a disclosure of interest: obviously, I work with a lot of insurance advisers. I work with some excellent advisers, and I also see some very poor ones.

That commission pays for access to advice there is little doubt. Some people would not get advice if it were not paid for by those high upfront commissions the report criticises.

The report is absolutely correct in stating that it can drive bad behaviour – but the FMA’s own investigation into the issue of ‘churn’ found that surprisingly little of it actually happens.

After trawling through five years of data for thousands of advisers only about two dozen were subject to any regulatory action.

As with others in the industry, I was surprised it wasn’t more.

I want to share with you the views of one adviser I spent some time with recently.

Alan Borthwick, an AFA based in Wellington, talked about a trauma insurance case that was replaced by another adviser, badly, and the client has a downgrade in cover as a result.

That is an example of churn. He and his staff are now compiling a complaint about the adviser who didn’t follow current FMA guidance on replacement business.

That is an enforcement issue. Borthwick says it makes him angry. “That guy is the reason I’m being tarred with the same brush. They are screwing it for the rest of us”.

It’s the idea that commission is not paying for anything valuable that upsets him, and me. The assumption is that it is just dead money for the consumer.

Many advisers are giving good value. Borthwick’s model is one of full financial planning, including a complete claims management service.

Much of that work is paid for by those high up-front risk commissions. It won’t be that way if they are cut.

It will mean more fees, which will mean, for lots of people, less advice – because often the people that need help most of all are in a mess financially and don’t have several hundred dollars spare to pay for advice.

Insurers are, in effect, the default funder of advice – allowing consumers to pay off the cost of their advice over time. The terms are very generous, compared to consumer credit.

Of course, there are ways that this can be managed if commissions change – but it will have an impact on advice provision, and it isn’t all going to be good.

More compelling on the commission issues was the chart of the cost as a proportion of premium. It must be admitted, some consumers, with poor advisers, may be getting not much for that money.

Because that money is paid to the insurer, who pays it on to the adviser, it is reasonable to ask what they are doing to ensure some value is being received for it.

This debate has to be had – again. If our legislators and regulators are determined to cut commissions, then effective fee strategies must be implemented, because the cost of advice does not drop just because someone has decided to pay less for it.

Tags: Commission conduct FMA RBNZ Russell Hutchinson