The ASIC Report

Early in October ASIC released its much-anticipated report outlining the findings of its investigation into the risk advice and life insurance sectors – The results didn’t paint a very complimentary picture and sparked a number of conversations both in and out of the industry.

The report found that from the advice that was reviewed (202 files across 70 advisers), that only 63 per cent passed and were found complaint. Analysis of pre and post FoFA was a little more positive.

Although “question marks” about the investigative methodology remain (is a sample of 70 in an industry of over 18,000 planners, truly representative?), there is of course no excuse for non-compliance, particularly non-compliance associated with bad advice (note: the 37% non-compliance was not all associated with bad advice). While many of the problems identified are simply a product of poor knowledge (yet again another reason to lift education standards), undoubtedly it’s the remuneration model and it’s link to product turnover that has caused the most contention.

Risk advice is fundamentally a commission based industry, and by all accounts will remain so in the long-term (life insurance was excluded from the FoFA reforms ‘ban on commissions’ on the grounds that as a nation we are grossly under-insured, it’s the commission structure that keeps risk advice affordable). Currently advisers have a choice of three commission structures; upfront, ongoing and hybrid. Whilst the insurance premiums under all three structures are identical, it’s the upfront appeal that can “influence” some advisers and is taking the wrap for the industry’s increase in turnover rates and non-compliance issues.

An increase in product turnover (or churning as it is commonly referred to) due to conflicted advice is not an issue to be ignored. However, it is important to consider that product changes cannot always be talked about in the context of financial advisers and churn, to do so would be to ignore the significant consumer and industry dynamics at play. For instance it’s often engaged consumers looking for better deals that drive policy changes, not to mention the constancy of change, product evolution and the necessity for many individuals to regularly review.

What many also fail to realise is the role insurance companies play, it is seldom acknowledged that most expect a level of turnover and actually rely on it as part of their own risk management strategy.

At the end of the day the insurance pricing and remuneration debate is a multi-layered conundrum without a quick fix. It’s certainly not a conversation that can just be confined to one part of the industry either.

The answer does not lie in removing risk commissions (this would lead to chronic underinsurance only), rather policy reforms need to look at removing conflicted remuneration and the inherent, product selling culture of the 80’s & 90’s.

For consumers this report highlights once again the value of good advice.

Note: At FinSec all commissions paid for advice are disclosed as both a % and $ figure within both your ongoing service agreement and statement of advice.