The FMA has this media release explaining the link, identified from their recent customer survey, between trust and how well fees are understood. The short version is that consumers trust you more if they feel the products are suitable and can understand what they are paying. This makes me laugh. As I am in the midst of the holiday season surrounded by people who are not in the financial services industry I don't have far to go to get a reality check. With most services, consumers don't even suspect that it should be hard to understand what they are paying...
Rice Warner highlights the challenges of moving to a fee-only model for insurance advice, and the likely impact on access to advice were that done. Link.
The International Association of Insurance Supervisors feels that commission is probably an integral part of insurance advice. Like most of the people I know, I think the same way. But fee-based remuneration is bound to get a bit of attention due to the new, draft Financial Advice Code. I shall write more on that later today. But quite a few advisers already see a role for fees as a part of a balanced remuneration strategy. If you would like to explore that world, please drop me a line. I am aiming to get a few of us together for lunch and ideas sharing.
Fascinating conversation with a financial adviser at the recent national adviser conference in Rotorua. A father and son team have been doing fee-only risk advice for years as part of a broadly-based financial advice practice. The fact that their practice is broadly based may actually make it easier. They do reasonable volumes and find that it gives them significant freedom: for example, they can work with many older clients with many health conditions, and because they are charging a fee they can give advice on existing policies free of many conflicts of interest. Although I continue to subscribe to the view that commission is is a necessary part of insurance distribution (along with the International Association of Insurance Supervisors) there is room for more fee-only advice in the mix.
Hat tip to Tony Vidler for the reference to this piece (from his newsletter) - an article about a commission insurance agent of Northwestern Mutual in Kentucky who started a new business as a fee-only retirement income adviser. It is interesting because the process is richly described, including some of the financial details, and the steps through the process.
There are limitations, though, and anyone contemplating a transition process will need to undertake a lot more investigation and planning. Aside from the obvious difference in jurisdiction, there are other variations: the introduction talks about making the transition in only a few months, yet the founder is yet to pay himself a salary. The transition was not like-for-like advice - I would be interested to see a successful example of a transition to fee-only insurance advice. But well worth a read.
My dentist is, actually, a lovely person. She's from the deep south and enjoys telling a yarn and enjoying a good laugh. I'd laugh with her every time if my mouth wasn't incapacitated, with various drills, clips, clamps, and the numbness from anaesthetic. My sense of humour is dulled slightly by pain, too.
What's more, my dentist can charge fees. Quite large ones at times. She charges them mostly before I'm even in pain - I go for check ups, scans, and so on. She spots a problem and tells me that she needs to fix something - and that will be painful, and expensive. Yet still she can charge fees.
Mainly she asks, and I pay them. There don't seem to be a lot of really clever marketing tricks going on. Her service is great, convenient (right next to my office), and I know it has to be done. I have checked around and I go back there. I think dental treatment and insurance have some things in common. I noticed as I wrote this that I almost never speak about my dental care. It is a grudge buy, it is money I spend largely to avoid a future problem, the benefits are largely invisible, I don't think about it much in between visits, and it's painful. All could be said about insurance advice.
Maybe, if you want advice about charging fees I should get my dentist, Shelley, to write about it. But I know if I suggested it, she'd just laugh.
This article from thisismoney.co.uk gets under the hood of many short-term travel, parcel, and warranty insurance products. You should read it. I have several colleagues in this industry who are convinced of the value of 'micro-insurance' of this type to re-start the engine of growth in the industry. But not if the policies are all this bad. The other thing that struck me was the use of long documents almost designed to have the consumer skip over them. Take this example:
"[in the]...terms and conditions 40 items are exempt, including electrical goods, antiques, jewellery, food and anything made from metals, ceramics or glass. It means barely any items will be insured under the policy. Its website does ask for details of what will be included in the parcel, but it won’t stop the customer buying a policy if they list an item that’s excluded"
Well, that simply is not good enough. The reputation of the insurance industry will remain low and continue to fall with sales practices such as that.
On the weekend I got to read the ‘Review of Retail Life Insurance Advice’ report prepared for the Financial Services Council (FSC). Prepared by MJW, the report does not, in my opinion, meet the goal of reviewing the conflicts of interest in the sale of life insurance across channels.
Like AIA, Asteron Life, and Partners Life, and the PAA, I feel that the report does not present a balanced view. It seems a decision was taken early in the development of the report to focus on one aspect of one channel: commission paid to RFAs. Average commissions are, in fact, substantially lower than the example given, when you look at it top–down from company accounts or bottom up from the mix of business advisers actually sell. That selection means the higher margins in vertically integrated channels which must logically also be a conflict, were ignored, for reasons unexplained.
I was disappointed that a report which is supposed to review advice shared no data or discussion on what constitutes good advice or bad. A comparison of premiums and policy features between commission-bearing channels and those that pay no commission would have been a useful test of whether commission-paid advisers add value. Such a comparison would show that advisers do add value.
Likewise absent was any example of actual customer harm. The report also ignores problems which have been identified around customer confusion over labels. Others have already labelled this single focus as bias. It also appears contrary to the idea of being ‘customer-centric.’ A comparison like this would focus us on exactly what kinds of switching needs to be regulated.
The report focuses on one piece of data: switching rates. In passing it notes that not all switching is bad, but doesn’t offer any definition of a ‘good switch’ or a ‘bad switch’. Many switches help customers save money or get better policies.
Evidence which could have been included on a comparison of channels was either not considered, or left out. These gaps make it difficult to do any cost/benefit assessment of the recommendations.
I like Rod Severn’s comments from the PAA:
"Some good recommendations, but let down by unbalanced view of replacement business and the value of advice."
Like Rod, I agree with some of the recommendations. Here’s your digest of links to commentary on the report:
Goodreturns "Philip Macalister scores the report a 'D'
Goodreturns: 'the report that tore the FSC apart'
Also goodreturns: 'Report slams life insurance conflicts of interest'
Another goodreturns 'Advisers replacing policies are doing their jobs'
All by Susan Edmunds
The New Zealand Herald: 'Conflicts of interest shown in insurance commission report' by Tamsyn Parker
Investment News New Zealand: 'Seven Ways to Improve Life' by David Chaplin
MJW and FSC media release statement: Link.
Below is the presentation that Alan Rafe, Warwick Walker, and I gave to the IFA and PAA conference in June. It seems to be more and more topical: