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Eating Can be Risky Business

The heart attack grill looks like it is true to label with that it serves.... and many of the clients look like they have been regular attenders and are well on their way to achieving their goal. Still, I am quite comfortable with these individuals eating their way to a heart attack - so long as they pay for their treatment and their meds themselves! The waitresses dress up nicely too - perhaps seeking to provide the stimulation necessary to finally tip clients over the edge. Link.

Case: Not Proven

This article from Michael Coote draws on the Australian debates to raise the issue of whether commissions should be banned in New Zealand. As that's the direction the UK's RDR is taking as well as our nearest neighbour and - it has to be said - the leader in such matters, then Kiwi financial advisers should take note. This is a real issue.

The debate usually centres around whether commission creates a hopeless ocnflict of interest. I have deliberately inserted the word 'hopeless' because virtually all sellers of goods and services to consumers have an interest, sometimes a very large one (think houses), and sometimes an ongoing one (think contracts for service over time) and sometimes for critical services (think medical). Nothing that is done in financial services is particularly unusual compared to those.

So the first step is whether a conflict of interest exists and the answer has to be - yes.
The second step is whether that conflict is such that it cannot be overcome and that it therefore causes greater damage to consumers than the other conflicts that we tolerate everyday in the provision of equally valuable, complex, and vital services.
The third step is to prove that forbidding commission represents an effective remedy - both in solving the problem (i.e. it must improve client outcomes) and in being cost effective - after all we're not here to impoverish everyone are we?

Right now, I'd say: not proven.

RDR Update

This editor's summary of the direction of the retail distribution review is well worth a read - even if you could not give a fig what the British choose, its the debate about the principles which is interesting. Link.

This response to one of the proposals - that advisers charge fees only - from Ernst & Young is also worth considering. undoubtedly we will again hear calls that fee only is the only true way advisers can be rewarded. Link.

Advisers Likely to find QFEs Attractive

The recent staff paper from the Securities Commission underlined for me how important QFE status will be. They clearly indicate through the use of examples an expectation that QFE status will not be the preserve of the largest and best organised companies (say, banks) but will likely suit smaller companies as well. The paper goes on to list examples including companies selling consumer finance, general insurance, and travel insurance. It would therefore seem to be well within the capabilities of a moderately well organised insurance brokerage or life company to achieve QFE status.

But why will it be so attractive?

Because so much liability is effectively transferred to the QFE. Essentially, even for Authorised Financial Advisers (AFAs) the remaining liability will be in respect of their conduct and disclosure obligations. Put simply, tell the truth, follow the system, and don't steal - and your QFE will be liable for pretty much everything else. That's because the QFE will be responsible for the advice process, research used, tools, recommendations arising from the process, and even things like whether or not you, the adviser, are authorised if you need to be authorised, and they'll handle membership of disputes and resolution.

Distribution offers will likely soon be segmented between non QFE and QFE. Other segmentation will emerge as well, but will likely fall below that in order of priority.

Don't depend on your employer insurance

Having insurance cover through your work is a great benefit. It's nice that your employer provides benefits like that. It helps a great deal to have cover which you probably didn't have to go through medical checks in order to complete.

The problem with the cover is that people think, 'oh great, now I have employed cover I don't need this personal stuff' - so existing cover may be canceled, or not taken up, because it is not required. But people do not stay with their current employer. They often leave. In the course of leaving they forget about things. The employer meanwhile may not be as diligent as it might in reminding the former employee about their continuation options. Even if they are, the employee may ignore it, or try to come back to it later. They join their new employer - who maybe doesn't have this cover. They mean to follow it up...

They end up without cover. Continuity of cover is a lost virtue in insurance. I don't know how many people say they have cover. Then they spend 20 minutes sifting through a messy file, or heap of papers next to their computer, and find a policy. The policy turns out not to be in force.

This moment is merely embarrassing if it is the life assured that is performing the search. If it is the life assured surviving partner conducting the search in the midst of their grief and worry then it is a sad and dismal time of reflection. You need to make sure you take responsibility for your own insurance cover.

Worse than wages? We think not...

A recent reading of David Greenslade's "Facing the New Reality Appendix 2" from his 'tough times toolkit' is a bit like a bedtime story - of the scary variety. It's designed to create a certain amount of discomfort for the good of advisers reading it - and  I have written in much the same way, many times, so I understand that. He explains:

"There are no detailed statistics for New Zealand on this topic so the comments in this paper
can certainly be challenged."

I shall take up that invitation, and I hope David accepts these notes as a constructive critique, as I think there is a lot of truth in the broad thrust of his argument. The part that raised eyebrows was the part about denial, here is a sample:

"Sadly the majority of advisers (both investment and risk) are probably earning considerably
less now than what they were two years ago. They admit their revenue is down, but too few
are doing anything significant to revive it."

I do not have figures to hand for investment advisers, but working with a large number of life companies and personal risk advisers I can lay my hands on all sorts of data none of which appears to support the assertion that a majority of risk advisers are earning considerably less than what they were two years ago. Another quote:

"For many personal risk advisers, their trail income may have remained static but their new
business revenue has halved. A number of these advisers have seen their business drop to
0-10% EBIT, and they are certainly feeling the economic pinch. Many are now earning
significantly less than if they worked on wages in another industry."

We shall allow that in this statement the measurement given is 'many' which could simply mean a small minority, rather than the 'majority' described above.

What statistics exist?

The first I would refer to are the ISI statistics. As most of you are based in life companies you will know that the industry has been enjoying excellent growth recently, even in 2009. In fact there is something of a negative correlation between other sectors and personal risk insurance - with the best increase in growth in the last ten years being 2008 and 2009 so far. A summary of the statistics is available from the ISI website - take this quote from 27 May:

"Premiums for risk insurance products, the most popular sector, increased 11.4% to $1.365 billion, according to statistics released by the Investment Savings and Insurance Association."

“The growth in life insurance sales has continued the double digit growth that has been occurring for over a year now”, said Vance Arkinstall.

The details are confidential, but comments from insurers indicate that growth is broadly spread - i.e. that it is being enjoyed by many companies (I have seen evidence of this) and that it is being enjoyed across distribution channels - so we cannot assume that it is being collected only by a very few advisers.

Anecdotal evidence from dealer group heads - Darren Gannon, Jeff Page, and adviser association leaders - Alan Fleet, for the PAA, for example, also indicate good levels of business, and growth as the norm - not a halving of new business revenue.

The contrary case may be limited to certain sectors. Advisers writing life business solely off the back of home loan sales by mortgage brokers have certainly fallen. But these would not represent a majority, in fact they would represent a small minority.

Income statistics exist - the IFA, for example, does member surveys and has historical income information available. It would be able to give reasonable input into an inquiry into the effect on incomes of recent market problems - for both investment and risk advisers. Rather than lumping the two categories together, or even simply splitting them apart, they could look at the historical series and find income levels from the different activities that advisers enjoy. A review of their information may not yield very up to date evidence, but it would show that advisers involved in both investment and risks fields (which, they say, is most of them) probably have a much more robust continuing income stream, have enjoyed higher levels of risk new business, and have enjoyed higher commissions for that business over the last two years. All positive factors. For those that exclusively do risk business, they would generally have pushed incomes up, for those with lower levels of risk business they may have helped offset the suggested fall in other areas.

Finally we can refer to the Statistics department for average annual wage data - in 2008 it was an average of $18.75 for all occupation groups - likely to be far below the average for financial advisers of all types. Sure, for some groups it would be higher. But a comparison with 'wages' in agregate is unlikely to be helpful.

Some denial in such circumstances might merely be the majority of risk advisers glancing at their bank statements, provisional tax bills, and failing to identify with the suggested fall in income.

Having said that, justified complacence can swiftly become denial - and the thrust of David's recommendations holds good for risk advisers, indeed for people in all sorts of businesses: watch your real return, assess the risks and issues, get professional help and so on.

QFE Status as Competitive Advantage

Exploring strategic questions about QFE status we've worked up a couple of dozen questions and answers about how the approach could be used in distribution management. Here is a taste, if you would like the rest, drop me a line.

Will it be possible to use QFE status to competitive advantage?

Possibly, and even likely, but this will not necessarily indicate in itself a failure of the regulation or a tilt in the playing field.

Those companies that have offered a fully compliant environment to advisers have long been able to sell that as an advantageous offer to a certain segment of financial adviser - nothing new in it, except the formal recognition of a certain set of circumstances. It will still cost money. How much will depend on organisational efficiency more than the rules.

What sort of competitive advantage?

Probably a cost-based advantage, but also perhaps about retaining control of expertise. Again it need not be purely associated with the administration of regulation, but more likely an outworking of an advantage an organisation has already - such as scale, niche expertise, vertical integration in a market and so forth.

In such a circumstance - even without any real details of the QFE structure - it can easily be imagined that taking responsibility for the advice-giving process would only be a small step from the processes already undertaken. Some bank advisory models are easy examples, but others can be thought of: Mike Pero Mortgages, TripleJump, and so on, might each consider the structure.

How would one use such an approach?

There are many independent advisers in the market. They will either need to address compliance on their own, or they may be made an offer to have compliance effectively managed for them.

Recall when client management systems first entered the market. Many were available over a period, promoted by various companies, but now the market has settled down to a few solutions. DIY approaches using Outlook and various databases, Pro-planner, E-broker, Climark, and so on.

We may see individual compliance through assisted by standards-based organisations such as the IFA and then a few adviser offers from organisations with QFE status for particular forms of relationship - probably ones where a specific business model is adopted. It may only be extended to advisers that see themselves as independent where some form of central sourcing is offered. A major dealer group might offer it as well, but requiring much greater control than is currently normal.