The PAA have completed their final SGM on the 4th of October to wind-up the PAA.
The Financial Advice NZ Advisers Conference was held a few weeks ago in Rotorua and on the last day of the Conference the PAA board carried out a commemorative tree planting ceremony in recognition of the PAA. In Blomfield Gully - a spot designated by the Rotorua Council for regeneration - 'we planted a Miro tree as a lasting, living memory of the PAA. It was a lovely and appropriate gesture as the very first PAA (then PLUA) conference was held in Rotorua in 1953.' Click here to watch the video.
Click here to read the last piece of correspondence sent out from the PAA thanking its members.
Susan Edmunds, at Goodreturns, raises the Code Working Group's proposal that compliance requirements may be met by a combination of systems and training. I don't really see how Angus Dale-Jones and the rest of the working group could reach any other conclusion. MBIE having already decided that the new Financial Services Legislation Amendment Bill would allow for digital advice - in effect decreed that systems could meet 100% of the requirements - it would be hard to argue that in a systems-human hybrid the systems contribution should be rated at zero.
Even after the dust has settled on the Code Working Group's proposals to recognise the contribution of systems to an overall delivery most people working as financial advisers will still get the level five certificate. Those concerned that the 'big end of town' will have an advantage because they can deploy capital to develop compliant systems and have them operated by cheaper, less qualified, staff have a point, but it is a point that started to be made with protests against mechanical looms at the very start of the industrial revolution. Also, it is not as large as the one might think. After all, the small end of town uses plenty of computer systems too: Quotemonster is a way to share the cost of a large, complex, system between two thousand advisers. Other advantages will be procured through dealer groups, and other third-party systems and service providers. But I back up Fred Dodd's suggestion that advisers, even if you find a financial advice provider that offers lots of systems, will enjoy more freedom to move if they do the study.
I had a good day yesterday hanging out with the team from Quotemonster and IDS and a lot of advisers who came by the stand to say hello. It was a good day. Congratulations also to all the award winners, with a special mention to Philip Macalsiter, Anand Srinivasan, and Andries van Graan for theirs.
Congratulations to Richard Klipin and AIA for a return to the FSC. More details at this link. We hope that the benefits of collective action, where that is possible will be realised. There are many areas which require collective approaches. One is setting the rules of the industry, so it is good to have, essentially, the whole industry co-operating in discussing law and regulation changes with the various agencies responsible. Another is public relations, and for insurance, it is important to retain the right of insurers to inderwrite cases, load, and defer, where they need to do so - a battle being fought in countless articles about underwriting and claims right now.
The joint IFA PAA conference has been great so far and I am looking forward to Friday. Here was a quick shot from Oliver Hartwich's talk on the future for New Zealand. Twin themes of educational performance and house prices were both tied back to political organisation and the relative weakness of our over-large councils.
Do pop over and visit the IDS stand which Quotemonster is sharing. We are demonstrating the new needs analysis functionality (now available for subscribers to the research service). Alan, Kelly, and I will be at the stand all day Friday. Look forward to seeing you there. But if you aren't at the conference and you would like a demonstration please email me and I shall let you know when we will be nearby and we can demonstrate it to you.
One of the possible outcomes of the proposed changes to the Financial Advisers Act is an increase in average business size. In an article by Jenée Tibshraeny at interest.co.nz quotes Richard Klipin contemplating the rise of multi-disciplinary advice businesses.
The proposed changes make this more likely through a number of mechanisms. While a lot of attention is focused on the licensing of the Financial Advice Business, "...licensing would be required at the firm level (for the avoidance of doubt, a sole-trader is considered a firm) " - p.62 this is not the main issue. If there were no difference in either cost or requirements for registering as a sole trader then there would be no real drive to form advice businesses.
But I think Richard Klipin is right, and there will be a strong drive.
That push is mainly provided through increasing the requirements on RFAs. One part of Coase's theory of the firm holds that as fixed costs rise then average business size rises. Another argues that if larger organisations can reduce error rates then they are more attractive. Both those factors could explain increasing scale in financial advice businesses.
Will such factors increase? The FMA fee for registration is only a small factor. The requirement for, say, increased education is a much bigger contribution to the new cost model. Even bigger than that are the business changes required to provide detailed compliant personalised advice in an efficient way. That usually requires good information technology, regularly updated and maintained. That fixed cost will push many advisers to contemplate participation in the kinds of advice businesses Klipin mentions in the article. In addition, larger organisations with good processes for ensuring compliant advice will have smaller error rates and may apply lessons learned more quickly to more advisers.
Theoretical models are buttressed by current experience. Several commenters are already pointing out the similarity between the FAA review proposals and the existing Australian regime. That approach led to larger businesses in Australia. In New Zealand the current FAA has already led to larger businesses - consolidation has been ongoing across the insurance sector. To some extent cost sharing has explained the rise of our broker groups, and recently professional associations are joining the movement.
The report is good analysis of relative hazard rates – and some of these should give us cause for concern. As a supporter of great financial advice it is slightly depressing to find that whether an insurer has an incentive travel programme running has such a strong correlation with increased risk of lapse. Let us be clear, the only way that can happen is through replacement activity.
The report does have limits - see below - and should be seen as a contribution to further research. It clearly identifies a direction for further research, and enforcement, and even some policy changes already under discussion in the FAA review get a further push.
It is vital, of course, not to do great harm to the cause of financial advice by eliminating any incentive to work as an adviser. Advice matters, and advisers must be paid to do the job. Consumers have told us (in some research conducted by MBIE as part of the FAA review) that they know commission is paid and are reasonably happy with it. We cannot overlook the fact that for a replacement to take place the client must have accepted the reasons for the proposed move. They will have only done so because they would gain from it.
To people that know the industry there are some expected but nonetheless useful to have stated features. Things like industry structure, and issues like time dependent factors. Although whether a policy is before or after claw-back period is significant, we can also expect that the longer it is since issue date the more likely a policy will lapse.
Some of the interesting findings of the research are:
Membership of one group over another doesn’t matter much – groups are groups – and it seems the benefits must be pretty similar
Product scores made no difference – although the measurement was a crude ‘high versus low.’ The inverse relationship was identified by one adviser reading the report as proof that a lot of lapse activity is clients with good products being hazardously replaced by direct or no-advice channels. It may also indicate that clients are lapsing good-but-expensive products in favour of cheaper versions. But we won’t know, because that isn’t examined in this report.
The most material variable was the size of the renewal commission, where it is low it represents that there was probably a high upfront paid. So it is a proxy for higher upfront commission.
However the amount of bonus commission was not found to be material on its own.
The presence of overseas incentive trips is as significant as it is shown to be - and that is strongly significant.
The amount of switching is concentrated among about 200 of more than 4,000 advisers.
Some analysis problems exist:
The big factor absent is price. This is important because it could tell us about the causal factor. Did the client get sick of rate for age steps taking the premium up 10% to 14% a year and finally lapse it? Or did the adviser call them up and say ‘it’s time to shift.’ This is crucial, but the way the data was collected meant it was not possible for the FMA analysts to examine. We know that a lot of lapse activity by clients is substantially driven by cost (call centre staff report that as a major factor). Not having that factor in this research may mean we are only examining the variable dependent on that one. Or put simply – when the cost of cover rises too high people go and see their financial adviser. At that point the research shows that they are more likely to help you reduce the cover if you are out of responsibility period, and qualification for incentive travel is running... That may not actually be a problem at all, what happens after that might be the best advice possible, but the FMA may now want to check a few cases.
The data is about lapse, not replacement – there is no direct measure of replacement. Make no mistake, some of these factors could not have an effect unless replacement is what is going on, so replacement is what we are hunting here, but, for example, actual replacement rates are still not known. We would benefit greatly from analysis that steps through: old product, cause of advice seeking, statement of advice, advice on replacement business, to new product. There is a world of difference between an engaged customer with an engaged adviser and a ‘set-and-forget’ customer who buys and holds cover. If we could just see how advice is being given we would learn a lot. The report title is 'life insurance replacement - who benefits?' but without an examination of actual replacements and the benefits to the customer, it cannot be answered.
There is no account taken of non-adviser channel: from the executive summary: “Other types of advisers could still be mis-selling but because they only sell one brand, they are unlikely to be churning policies.” But this ignores real-world fact that they are cheerfully replacing the policies clients bought from another company, to the single brand available to such advisers. We know this because we mystery shop them frequently. In this sense the report follows in the footsteps of its predecessors by ignoring other channels. Advisers may feel that they are being unfairly singled out - are there no replacement issues with direct? Banks? or Employer group insurance? In fact, there are issues. All of the harms to consumers listed in the front of the FMA document can be created by a hazardous switch from an existing product purchased elsewhere into the single product offered by a vertical channel. Advisers might legitimately feel that the second point in the FMA's replacement advice for consumers unfairly targets them - all sellers of life insurance hope to enjoy a financial gain when they sell a new policy.
But still, there is comfort to be taken from this research.
Firstly, the problem isn’t that big. With a limited number of advisers (200 out of more than 3700 RFAs plus 760 AFAs) then this is something that is quite fixable.
Secondly, the actual advisers having been identified, the FMA now has a relatively simple job of talking with them. They can actually take a look at the cases and see what is happening. I expect results will vary: some where replacement is entirely justified, and some where it wasn't.
After that guidance could be issued to help advisers know with more certainty what kind of switching is expected – presumably that which places the client’s interest first, and could limit some incentives which are seen as exerting an undue influence.
MBIE might consider the finding that AFAs replace policies less often as a model for change.
Before this report those next steps were not possible. In particular the detailed investigation into the actual advice could not be done by anyone other than the regulator. So this represents good progress. It would be good if investigation into replacement activity included other channels as well, because that will reassure all market participants that they are being treated fairly. But I also know that the FMA finds this point frustrating. Everyone has limited resources and they will not forget to look hard at other replacement issues, they probably feel that given the different dynamics of each channel it is logical to treat them differently, and at different times.
In a recent email PAA CEO Rod Severn say that they will not promote company product launch invitations in the future. Their statement reads:
"The PAA believes that all members should keep up to date with product development relative to the discipline they specialise in. However, please be advised that this type of communication will not be sent to members in the future, as this contravenes the Associations stance regarding impartiality and neutrality, and that the Board have made it clear that the PAA membership database is not to be used for the purpose of general invitations of this nature."
Rod Severn has issued an email to PAA members telling them off in plain language. He reminds them that one goal of the PAA is "...to promote our members as educated and professional advisers" and then proceeds to lay out some detailed numbers about the low proportion of members that register for educational events and the rate of no-shows for the events even when registered.
I know that this is an issue that regularly frustrates training providers. When we run events we like people to attend if they say they will, and let us know if they are not going to make the meeting. We always try to do the same when we are in the same situation. But Severn has a broader point to make than one about manners:
"It doesn't reflect well on our industry and the level of commitment many members have to professional development when only 22.3% register to attend and only 16% actually show up."
Imagine if 9,000 registered advisers were actually undertaking one week of study each, per year, and sharing all that knowledge with their clients - the shift in New Zealand's overall financial literacy would be dramatic.