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The Future of Financial Advice

In Australia the development of proposals under the "Future of Financial Advice" legislation is getting down to the practicalities of implementation. There are some very positive developments. But before we explore those, lets bring to mind the central issue for risk advice: commission payment.

Overwhelmingly this business is sold on a commission basis - even more so than investments. We have seen nothing like the consumer harm done in risk that we have seen in investments. While complaints exist, and so do conflicts of interest, there is a very great public good which is derived from having lots of people with adequate insurance. Billions of dollars in privately funded claims payments for the Christchurch earthquakes are a good case in point.

But in the debate about the more serious conflicts of interest issues that have occurred in investments there remains a risk that the whole distribution structure for risk would be swept away. If it didn't exist as a way to pay for the distribution of a typical life insurance package how would ordinary folk who can't afford to fork out $1,000 for a financial planning service pay for the advice they need?

It is therefore good to see the planned changed in the FoFA legislation in Australia. You can find out more over there, but here is a quick summary:

  • Remember: individual risk business was never included
  • Commissions will now be allowed again for life insurance sold as part of certain superannuation plans (individual choice plans)
  • The government will introduce uniform clawback provisions on commission to reduce 'churning'
  • There will be no ban on existing remuneration arrangements




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Chris Wright

I have to disagree with your blog re consumer harm. Repeated reruns of a program which compares an NPV calculation of life insurance sold via a robust financial planning c/f analysis, and the simple multiplier method used by most agents, banks etc; shows opportunity cost of more than $300,000 for a fairly typical family. In my view this is as damaging as shonky investment advice

Russell Hutchinson

I completely agree that in individual cases advice skewed by commissions can cause harm, and can cause as much harm as biased investment advice - and has done so.

I should have made it clear that what I was referring to is an aggregate position: biased investment advice has demonstrably caused billions of dollars of harm. Biased insurance advice has not.

For policy makers it is about averages.

Chris Wright

With reference to the aggregate, I am referring to the methods of calculation supported by each of the big name bank & insurance organisations posted in your links column. I have researched the calculation methods promoted/trained by each and conclude that the issue of oversold insurance is endemic rather than isolated, and the consumer harm is significant rather than minor.

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