The ‘modern’ financial planning industry now only allows commission to be paid to financial advisers on the sale of life insurance products. All other income must be generated via a fee for service arrangement with a client. Now getting back to insurance, these products can include a variety of policy types including Income Protection, Trauma, TPD and Life insurance. Because life insurance policies (of all types) often seen intangible to the end client (….until the client makes a claim when it becomes the best decision they ever made), the reality is life insurance still needs to be ‘sold’ in the first instance. This requires humans – namely financial planners. Because policies have so many different benefits, features and price points (even just with one provider, let alone across providers), it pays to have an adviser work through the key issues with a prospective client, in almost all situations. Ok, so nothing new so far right? Well the new part, which has not been welcomed by financial advisers, is that the life insurance industry recently advocated the idea of a 3 year claw back on commissions paid to an adviser, if a client cancels their policy within that 3 year period.
The idea was first announced as far back as 2011 but has recently got continued momentum via articles in Money Management quoting John Brogden, the insurance industry spokesman, as recently as 7 September 2012. The 3 year claw back is a big departure from the historical industry stance of a 12 month maximum commission claw back for clients that cancelled their policy in the first 12 months. The change seems to have been instigated due to a perceived rise in ‘rogue’ advisers churning policies whereby they move a client from one insurance policy to the next to generate additional commission, without actually putting the client in a better position. In other words, self serving advice rather than advice that may require a client to swap policies for very sound and valid reasons. Unfortunately, the upshot of this policy is that honest financial advisers may be adversely impacted through no fault of their own when clients for whatever reason cancel their policy in the first 3 years. Because the insurance industry relies on financial advisers doing the majority of the leg work required to get a client to take out a policy in the first instance (i.e. quotations, applications, underwriting etc), it is disheartening the insurance companies are attacking the same people (advisers) they rely on for their own success. Hopefully common sense will prevail and wiser heads will find a better way to identify rogue advisers doing the wrong thing, without impacting the hip pocket of all the honest advisers doing the right thing each and every day.