To FAP or not to FAP, the update
Jon-Paul Hale on licensing, commission structure changes and the benefits of dealer groups.
Tuesday, June 30th 2020, 12:09PM 
8 Comments
by Jon-Paul Hale
Jon-Paul Hale
Interesting times. We have seen many companies make moves around corralling advisers and we have a few changed parameters to operate with.
While I’m an advocate for having your own licence, and this hasn’t changed, the behaviour of one insurer is already upsetting the apple cart – creating a reason for advisers to move, but should come with a pause.
Well done Partners Life, a classic show me the incentive, and I’ll show you the behaviour moment. Yes, money talks – BS walks.
It’s added an incentive for advisers to move and get their licensing sorted. This is a good thing, albeit it has issues too.
However, the FAPO isn’t the value of return many perceive, particularly for those outside the industry looking in.
And I’m going to talk more on the product piece in another article. For now, I’m focusing on the FAP or not to FAP aspects.
The breather afforded by the extension of transitional licensing has proven useful and needed. What has been interesting to watch is the market politics that have ensued.
It’s highlighted a few things we sorta expected, and we have discussed at length in the past; the money involved in the advice transaction is paid to those in the transaction giving the advice, which leaves dealer groups out in the cold when applied with this cold logic.
While the Partners Life FAP bonus scheme they have announced looks good to advisers on the outside, the reality is it’s far less than what the sticker suggests.
On reading the fine print, there are a few “gotchas” most advisers haven’t considered. Then there are the issues that being a FAP entails with the whole regulation and compliance bit which needs working through, as it’s not an increase in income, but a tool to assist managing additional business expenses associated with regulation.
Which brings us to the dealer groups, or more to the point, the stark focus on the relevance of dealer groups.
Don’t get me wrong; I think there is a need for dealer groups to support independent advisers.
However, the PL FAP bonus changes have raised both questions on how this is going to play out for dealer groups and also has questioned the relevance and value of services from dealer groups by advisers.
One thing I know and was quite clear from my time with the adviser panel to the code working group was dealer groups were outside of the framework of licensing. No ifs or buts – though we have seen and heard plenty on the subject.
So where am I going with this?
We have some changes on the commission structure side, alluding to the possibility of advisers getting their hands on money they previously were not entitled to.
Ho hum, what’s happened is pretty typical behaviours I have seen over the last 20 years in the industry. And that applies to humans as a whole and not just financial services.
We have the questions on the relevance of dealer groups too. However, before running out and signing up to receive the FAP bonus, consider a few things.
- How did you get to where you are today?
- Did it involve a dealer group, or did you work with one company?
- Do you value independence of advice, or are you happy with a provider or two?
- Are you happy with effectively returning to a tied agency model?
Now that may sound like scaremongering; it’s not intended to. But the subject does need to have us thinking a bit further ahead than just our noses.
Independent advice in the New Zealand market is going to require third party distribution support.
This is where dealer groups fit, and it is where your support of dealer groups now is needed to ensure you have the choices on how you operate your business in the future.
Without dealer groups or the scale to operate alone, the cottage industry businesses of financial advice – as we see it today – are likely to disappear if not significantly reduce. They may still be around in name, but the form is likely going to be different.
It might be Joe Smith and Associates on the door, but inside they are tied to one or two providers. They have to source a lot of their internal support from those providers, and they effectively have golden handcuffs limiting the scope of independent advice their business provides today.
They look independent to the consumer, but they are far from it.
And I have seen this in the past, and it is happening today already, we need to be vigilant on how we proceed to ensure that it doesn’t get worse, and it doesn’t remove the choices we can give clients as professional advisers.
Where I’m going with this is: still get your transitional licence – it gives you a choice about how you operate. Also, stay with your dealer group, or if they aren’t providing you with what you need with what you know, find one that does.
There are three players in this advice market: the regulator, the providers, and us – the advisers.
Dealer groups are dependent on advisers; they are on our side. And they are the only ones that can advocate for us, collectively, with providers.
It has and does have an impact on how we do business, don’t misunderstand the net positives that dealer groups have provided us all in this regard.
From my days inside providers, dealer groups were and are disruptive, as much as value is questioned, they have sway with the industry that does drive change, useful and interesting. I didn’t use bad there for a reason. The dealer group may ask, but it is the provider that is the enabler – they hold the purse strings.
Based on: “He who has the gold makes the rules” and “Show me the incentive, I’ll show you the outcome”.
So where does this all fit with the other players?
Training and compliance organisations are part of this, and dealer groups are likely to rely heavily on them to assist with what they ultimately offer.
Industry bodies, Financial Advice NZ and the others out there that do similar things are also part of the mix. They do an excellent job of providing industry support for advisers, and they advocate with regulators and legislators very well too.
There is a distinct difference in provider lobbying and advocacy compared to regulator and legislative lobbying and advocacy.
And while we have new rules coming in, as advisers, we need to both have the strength to do the jobs expected of us to minimise the individual workloads we all must carry while we adapt to change and run our businesses.
Many hands make light work.
One other thing that does need to change is our collective attitude. The one that always has their hand out.
As a discipline life insurance is the one area of financial services where there is a significant view that everything will be provided for free, it doesn’t apply to mortgages, investment or general insurance in the same way.
Risk advisers need to wake up to the fact that the days of trips, marketing grants and other incentives really are behind us.
We need to wake up to the fact that all of these, including commission, are conflicts of interest. Yes, how we get paid is a conflict of interest, and every approach has some sort of conflict. It is the reality of sales which is part of what we do too.
It is going to cost us more to run our businesses. It is going to mean that expectations need to be adjusted. It is also going to have a depressing impact on the value of businesses, as the compliance cost of a client base is going to impact the returns of that investment.
Long story short, we need to get with the programme.
So what’s my long-winded epistle really about?
Support your dealer group, leave your PL FAPO where it is. All of the other providers are indicating they aren’t changing at this stage. So it is a one-horse dog and pony show at the moment.
Like most of the industry, dealer groups haven’t sorted out what their offering is yet because like us, they haven’t had the clarity on what’s coming either.
Go sort your transitional FAP licence, sign across your FAPO to your dealer group of choice, and give them some time to pull things together.
End of the day, if you don’t like it, then you have the choice to reassign it to your FAP or another dealer group of your choice.
Either way, the overrides paid by insurers are not increased income commissions; they are money designed to build, assist, and grow adviser businesses. This is what it needs to be used for.
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Comments from our readers
Good. Now if I join a DG FAP, they will need to make sure that I'm up to scratch with all my advice documents, product updates, disclosure, processes, record keeping, and CPD.
What's the diff? Simple - the difference is which one will cost more to get the same result?
And no, I don't believe it's the one that has "scale" and "resources".
As I said:
"Support your dealer group, leave your PL FAPO where it is. All of the other providers are indicating they aren’t changing at this stage. So it is a one-horse dog and pony show at the moment.
Like most of the industry, dealer groups haven’t sorted out what their offering is yet because like us, they haven’t had the clarity on what’s coming either.
Go sort your transitional FAP licence, sign across your FAPO to your dealer group of choice, and give them some time to pull things together.
End of the day, if you don’t like it, then you have the choice to reassign it to your FAP or another dealer group of your choice."
The fullness of time is going to show us the way, what you don't want to be doing is shooting yourself in the foot with your dealer group relationship if things go against you over just one player's approach to the market, especially when they have made a significant sector of our target audience undesirable for coverage.
Also, many advisers think they're ok when they are far from being ok.
And much of what we have seen with the FMA has been driven by lack of resources. Given more focus on increasing FMA resources, as recessions and depressions typically do with regulation, this is likely to change.
And as has been discussed to death and ignored by most, the new rules have not been tested yet, so we are all working on the assumption of how it is going to be regulated, both from the industry and the regulators.
Which is all well and good up to the point there is a problem that the FMA needs to address, and the approach they have expected, once it meets the cold hard reality of the road, needs to change.
Sure we have examples of what has been done overseas, and none of them have ultimately been successful for all players in the market either. Which suggests that expecting what has happened elsewhere in the past to happen is a fraught position too.
And sure competent, professional, and well-trained advisers are likely to be fine on their own, but as we know that is not the majority either.
Putting everything aside for a minute, the one question all advisers should ask themselves is this:
"Will I be able to do and resource everything all by myself to satisfy ongoing FAP licence requirements AND find new business at the same time."
It's a simple question. Some will, but most won't. What's equally apparent, and what many observers have not considered, is that a lot of Advisers that cannot do everything themselves will probably not be wanted by the dealer group either.
What happens to them?
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Incidentally, what are the "gotcha's" you claim exist. Stump up with some actual facts and evidence. Long rambling and unsupported musings are unhelpful JP.
I see no risk to independence of provider recommendation brought about by FAPO, on the contrary, potential for interference by dealer groups as to where business goes is a much more real possibility.