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Will "Spotters" be used to try and sneak around the Financial Advisers Act?

The Companies Office Blog did a simple promotional post on their shiny new register of financial advisers. They suggest that consumers should use it to check if the financial adviser they are meeting is registered. It's great to get feedback from readers - and they scored with this post. Keith said:

"Do financial advice sales people need to be registered?"

That's an interesting distinction "Financial Advice Salesperson". But before we attempt any analysis we should get the rest of the comment:

"My wife & I had a sales person visit our house last week.
He did emphasise several times that, he personally will not be giving us financial advice.
We were told that our written financial advice would be prepared by a registered adviser. The disclosure statement of that advisor was left with us."

This consumer is doing exactly the right thing - checking up. It smells fishy, but we have to presume innocence, so here are two scenarios.

a) This salesperson was selling something else (say, houses) and came across a financial need (say, a home loan). In that meeting, they have perhaps collected some information to make a referral and have left behind the financial adviser's dislcosure document - the next call will be made by the financial adviser. Provided the sales person has issued no advice, there is no harm done. What's more, the process of giving a referral is specifically exempted by the Act. 

b) The salesperson is a 'spotter' for a financial adviser. The scope of the problem depends on what they say in the meeting. They could, in fact, be acting as a financial adviser. The offence is therefore to act unregistered. Although we don't have enough information to tell, it could be worse. If the salesperson presents recommendations then it is hard to see how they could have much of that conversation without ending up giving advice.The financial adviser may also be failing in their obligations.

Which of these scenarios do you think is more likely?

A Booming Global Insurance Market

China, of course. You should read all about it. Who is the biggest insurer in the world? I won't say, but it is Chinese. The growth story is phenomenal - and we are well past the stage of crazy growth rates in a tiny market. In aggregate the Chinese market is now more than 1/3 of the size of the US market.

Also of note is a table buried in the article which lists expenditure on life insurance per person. In Japan and the UK it is $3,500. In Australia it is just north of $1,500. The figure for New Zealand is not shown in the article because, of course, we're irrelevant to the story, but I sourced it from elsewhere: $250.

Don't tell me there isn't room to grow.

UPDATE: An eagke eyed actuary has spotted that I may not be using strictly comparable figures - my NZ figure wasn't from the same report and was arrived at without including traditional business which is included in the others. A more comparable figure can be obtained by adding that in, which after conversion to USD is about $760 per person. Still lower, but three times my original figure.

136th Cavacade of Risk

Jacob A. Irwin presents the 136th Cavlcade of Risk with his "riskiest sports edition".Go and check it out!

I was perfectly prepared to accept that cave diving is a fabulously risky sport (I have jumped in darkness into metres deep cave pools in Waitomo, and even in such a supervised setting the danger was obvious).

However, I was surprised to see cheerleading listed as dangerous: I thought the greatest danger was that of slights and snubs from peers. There are counter arguments, Claire Bennet found it a dangerous sport.

But to return to more serious matters I think the top pick from the Cavalcade was justly Jason Shafrin's consideration of the links between complexity and income for doctors. This has echoes in financial advice - really complex financial advice doesn't seem to pay quite as well (on average) as fairly complex advice given on a broader scale. But returns drop once again as you enter the territory of simpler advice - as this is delivered very effectively by large businesses enjoying economies of scale.


The History of Life Insurance

I had a good debate with a participant at a conference recently on the origins of insurance. We realised after a little while that we were both right, in a way, which is pleasing. You see, modern life insurance requires a number of skills, and these were developed in different ways at different times - eventually being combined into the form we know today. That's a helpful reminder that as new skills and circumstances emerge it will continue to change. Anyway, here is a brief time line of events with some links to other pages which expand on the summary:

Ancient Period

This site has a nice summary of insurance from ancient origins. This is the story I learned while studying for Insurance Insititute exams more than 20 years ago. In my memory it has the informal title "Yellow River Traders" - here is a sample.

"For example, according to historic accounts, in China, as early as 5000 BC, when ships were commonly lost at sea, farmers made use of boats as a means of shipping their crops to purchasers or to markets where their produce was to be put on sale. Without a doubt, accidents occurred, boats sank, the harvests were lost, and the farmers faced financial devastation. These farmers, using common sense, conceived the idea of not "putting all their eggs in one basket," or in this case, boat. Instead, farming families relieved their anxieties about their shipments by using multiple boats to ship their merchandise. Therefore, this primitive form of insurance was utilized for situations where one or more shippers could avoid being financially buried by the catastrophic consequences that occurred whenever a boat or boats sank."

Kotak has a slightly different take on their history page:

Almost 4,500 years ago, in the ancient land of Babylonia, traders used to bear risk of the caravan trade by giving loans that had to be later repaid with interest when the goods arrived safely. In 2100 BC, the Code of Hammurabi granted legal status to the practice. That, perhaps, was how insurance made its beginning.

The humility of placing that 'perhaps' in the description marks the author out as a thoughtful person.

Early Period

The Romans had burial clubs, and the details of these from around 450 can be found in a variety of places. Here is a representative comment from another financial blog:

Life insurance policies also could be traced back to Rome in 450 AD when many burial clubs were formed and the funeral expenses were covered. Even the survivors of the dead people were given money to support them. The concept of life insurance had already taken its roots in the middle ages and in different parts of the world.

Doubtless similar arrangements sprung up in lots of places. These are social copy mechanisms, in India today the concepts survive in the Hindu Undivided Family - an economic and legal entity mainly to attach responsibility for a family which loses it's main income earner to the wider family. Also, modern families sometimes make guardianship arrangements in ways which are only slightly more formalised - pledging to look after each other's children, for example, should either set of parents die.

14th Century

Wikipedia identifies separate insurance contracts from the 14th century with reference to Genoa:

Separate insurance contracts (i.e., insurance policies not bundled with loans or other kinds of contracts) were invented in Genoa in the 14th century, as were insurance pools backed by pledges of landed estates. The first known insurance contract dates from Genoa in 1347.

In their excellent article. The article includes useful introductory comments for the casual reader on moral hazard, plus details of the darker side of the past - such as insurance slaves.

16th Century

The early modern period begins with William Gibbons on 18 June 1583 - and at last we have a reconogisably modern term life insurance contract. It was written down, it was underwritten, and it was for a period of 12 months, but not guaranteed to be renewed. This author thinks it may have been 'in part' a 'drunken joke' so the presence of alcohol may represent the fir mis-selling scandal as well. Oh well.

17th Century

In 1693, astronomer Edmond Halley constructed the first mortality table to provide a link between the life insurance premium and the average life spans based on statistical laws of mortality and compound interest.

18th Century

In 1756, Joseph Dodson reworked the table, linking premium rate to age. We then also have the arrival of properly incorporated businesses in England, Scotland, and the United States. These businesses introduced permanent contracts which participated in profits. The approach was essentially welfare based and brought together the issue of mortality and retirement benefits - natural partners: cash for your family if you die, cash for you to retire on if you don't.

More details also at Kotak.

19th Century

This site has some good information about early friendly societies (mostly in the United States) and includes a good discussion on what was seen as a moral or ethical problem with life insurance. So much so that it was advanced as a reason that the life insurance industry was slow to take off. Link.  Here is a sample:

This connection between life insurance and gambling, and the easy money promised by both, offended the basic Protestant notion that hard work, and hard work alone, was the key to economic salvation. In his 1852 treatise "Work and Wealth", Hunt lamented that: "Gambling lures men from industry, frugality, and accumulation… and in this result, life insurance assimilates with gambling."

Apparently reluctance extended even to professionals, with actuaries showing reluctance to work in the field in the United States as late as 1896 according to this book which can now be read free online.

Up to date:

The 20th century, and the beginning of the 21st have brought some other innovations. Marius Barnard's involvement in the development of Trauma insurance. The addition of income protection insurance - which has had its ups and downs. The arrival, and in some places almost complete departure again, of universaal life insurance and investment plans.

Readers are welcome to submit more examples if they would like. I willl add them into this informal timeline and update anyone who seeks a copy.