Advisors reject huge commissions

Absurdly high commissions paid to financial advisers on life insurance policies may be a thing of the past if a new proposal from the financial advice industry itself is adopted.

Currently financial advisers can charge upfront commissions on life insurance products that often amount to more than the first year’s premium.

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Dump insurance commissions

It’s a problem for the life insurance industry, as it encourages advisers to regularly shift their clients into new insurance policies in order to get the upfront commission.

It’s also a problem for consumers, as their adviser may be motivated by personal gain rather than the client’s best interest.

But the advice industry, it seems, now considers the practice a problem for itself, as it damages its reputation, making advisers appear more like salesmen than professional advisers.

The advice industry, together with the life insurance industry (which are by and large one and the same) have proposed to limit upfront commissions to 60 per cent of the annual premium, and limit ongoing annual commissions to 20 per cent of the annual premium. The recommend this regime should come in to effect in 2018.

Speaking on behalf of the industry’s big end of town, Financial Services Council chief executive Sally Loane said: “This model is part of the reform package and is increasingly being adopted by life insurance advisers. In the long run, we expect most advisers will naturally move to a level commission or fee-for-service model.”

The corporate watchdog ASIC, which regulates the financial advice industry, said it would “consider the reform package in the light of the findings from its report, and is committed to working with Government, industry participants and other stakeholders to help lift standards and ensure better outcomes for consumers”.

While the proposal is a major move forward, Industry Super Australia (ISA), which has campaigned against the commissions culture of financial advice, said it did not go far enough.

“While we support the proposal to ban volume rebates (wholesale commissions) and put in place clawback provisions, the proposals do not go far enough given the significant detriment to consumers identified by last year’s ASIC report on life insurance, including that 37 per cent of advice provided was inappropriate for the client,” said Matthew Linden, ISA’s director of public affairs.

“The proposal leaves in place commissions as the dominant remuneration model in life insurance advice. While a 60 per cent commissions are lower than current levels, they are still going to lead to biased advice and poor consumer outcomes.”

Consumer Action Law Centre agreed with ISA.

“While life insurance advisors are still getting commissions, regardless of the size of those commissions, advisers will not be truly independent,” said Gerard Brody, chief executive of Consumer Action.

“This model perpetuates disincentives for advisers to provide strategic advice, or advise consumers to take out group life cover through superannuation. In a commission based system, an adviser must work for free when giving that kind of advice.”

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