MJW Report Skirts the Issues at the Expense of Advice
Some good recommendations, but let down by unbalanced view of replacement business and conflict of interest
Comments from the CEO of the Professional Advisers Association, Rod Severn
The MJW Report got one thing right – quality advice is essential to the financial well-being of New Zealanders. In fact, there were a few recommendations that we agreed with – in part or in full. However, on the central assessment and recommendations, we cannot disagree more.
Before getting into our views on the report, it is important to note that a number of now ex-members of the FSC have publicly stated that the findings are unbalanced. The Report’s deviation from the initial scope has been questioned, and the focus on the advice channel has been challenged. Valid criticism as this is very much the case.
The FAA Review deserves adviser attention; not the MJW Report
In the style of the Trowbridge report in Australia, the Report has focused on adviser remuneration as the key lever to address issues such as replacement business and conflict of interest. A blunt instrument in the wrong hands.
The Report is unbalanced in its assessment of two key themes – replacement business and conflict of interest. It did not address or fully qualify these issues in equal measure across all channels in the industry, but rather focused on the advice channel. This resulted in an unbalanced assessment and associated set of recommendations, and a central recommendation that is not in the best interest of consumers.
For those who have yet to see the full report, it recommends that remuneration for life and income protection insurance advisers be structured as follows:
- Initial commissions for policies written for new customers: An initial commission not exceeding 70% comprising a 50% initial payment and 20% servicing commission
- Initial commissions for replacement policies for existing customers within seven years of inception of any existing policy: No initial commission unless the premiums are higher, in which case a commission not exceeding 50% of the premium increase would apply
- Servicing (renewal) commission: A maximum of 20% of premiums payable to the adviser nominated by the customer as the customer currently servicing the customer.
- Volume based incentives: In cash or kind to be banned.
Again, a blunt instrument in the wrong hands. As we all know, it would not serve the consumer to tip the adviser business model upside down and make the task of providing a quality service to a shrinking market that much harder, or for some, impossible.
As an industry, it is important that we continually evolve and take on board views that can continue to drive better outcomes for consumers. We do not disagree that we as an industry – like all industries – have more work to do. That is what the FAA Review is for. The MJW Report is incongruous to that process and to the bigger picture.
The advice community has undergone considerable change in the past five years, and this change has been – appropriately and in the interest of evolving the professional advice community – achieved through behavioural standards. Draconian change in the form of an unsustainable remuneration model (derived from an unbalanced assessment of issues) is in sharp conflict with this. We’re not in the school yard.
As we all know, the FAA Review is underway – involving considerable consultation with MBIE and the FMA. Representatives of the Professional Advisers Association and other associations have met and discussed the continuing development of the industry with the FMA six times this year, and with MBIE on a further three occasions; the last being in early November to review the FAA Review Options Paper. In this meeting, the regulator provided a clear indication that a number of adviser-led suggestions – one code for all advisers to reduce consumer confusion; clear delineation between those selling a product and those providing advice; clearer disclosure to the consumer, to name only a few – were viewed favourably.
As for remuneration, the Minister of Commerce and Consumer Affairs Paul Goldsmith indicated in a press statement recently that it is unlikely that the Review of the FAA will result in changes to adviser remuneration.
The interests of consumers are central to these discussions and we congratulate the regulators on their open communication and considered approach in assessing options for the FAA review; options which focus both on consumer interests and ensuring the industry can continue to provide access to quality advice.
Again, the FAA Review deserves adviser attention, not this Report.
PAA Views on MJW Report Recommendations
A summary of our views in relation to specific recommendations made in the MJW Report is included at the end of this document. For commentary on the central recommendation and themes of the Report, read on below.
A smarter approach to remuneration
The formula for the current remuneration model needs to provide more clarity for consumers. However, reducing remuneration by up to 75 per cent would decimate the industry; it is not a sustainable model and would exacerbate the chronic underinsurance issue in New Zealand by further limiting consumer access to advice. The MJW remuneration structure shows a lack of understanding of the advice process and the cost of providing advice.
Recent research from the PAA has indicated that if the John Trowbridge report (created for the Australian market and on which many of the MJW Report recommendations appear to be based) was overlaid across the New Zealand financial industry, an estimated 40 per cent of impacted advisers would close their doors, which would ultimately impact the consumer.
If the underinsurance issue was not as it is in New Zealand, and consumers were more aware of the value of advice, a fee-for-service model would be possible and preferable. It provides unquestionable transparency for all involved. But this is a model which needs to be designed by those in the industry – those who are consulting with the regulator on a regular basis; those who understand the complexities of the advice process and consumer needs.
Such work is underway by the Professional Advisers Association. In contrast to the broad-sword approach recommended in this report, it is a model (for industry discussion) that will serve the interests of consumer clarity as well as supporting a vital adviser industry.
The cost of advice and the role of the adviser
The Report’s focus on adviser remuneration is also unbalanced in that it is not assessed in relation to the cost of providing advice – whether that be in adviser time, operational costs, professional development, marketing, or compliance costs. We don’t need to outline the cost of providing advice to you – in running your own business you know all too well the considerable costs involved. We found it very surprising that the MJW Report chose not to give this subject the attention it deserves, given the focus adviser remuneration was afforded.
Similarly, we found the assertion that advisers need a higher ‘servicing’ commission to ensure the channel is there for clients after the initial policy is placed particularly ill-informed.
Getting to know the adviser process better, would have highlighted for MJW that quality advisers dedicate considerable time and resources to claim time. As you know, claims can occur at any time, and is when the adviser’s initial advice process gets to work, coupled with considerable support provided to the client in helping them through a difficult situation. We regularly speak with adviser businesses who have a 100 per cent or similar success rate on claims, which evidences the considerable work undertaken on the client’s behalf long after the initial remuneration has been received.
Similarly – in contrast to other channels - advisers are required to encourage clients to review their cover annually, a process which can be as time intensive as when the initial cover was put in place, depending on the change in the client’s circumstances. This sharply contrasts to bank insurance, where an annual review is not required of staff. Bank resources do not encourage nor provide for bank staff to provide an annual review to the consumer. In reality, many consumers state they have never received a review from their bank.
To make the assumption that advisers need a higher ‘servicing’ commission to provide this service – claims and review - shows a complete lack of understanding of why quality advisers do what they do.
Unbalanced assessment of replacement business and conflict of interest
The primary issues the report relies upon as justification for a change to the adviser remuneration model, are replacement business and conflict of interest. We agree that there are some lingering issues in these areas; but they are issues for the whole industry, not simply the adviser channel.
We agree with the recommendation that an industry wide Replacement Policy be introduced; and a Code of Practice that supports that Policy. However, the Report’s assessment of this issue failed to fully qualify the issue and leaves many questions: What percentage of replacement business is being ‘miss-sold’ by which channel; what percentage is consumer directed change; what percentage of this business is inappropriately sold product via a non-adviser channel, which is subsequently replaced through the advice process? Similarly, the question remains: what percentage of replacement business occurs simply because a better option for the consumer arrived on the market and was identified during the review process? The report provided an incomplete picture on the value of each channel in helping consumers access the right products for their needs.
The common term for replacement business - churn - has become a dirty word in the industry which has clouded the issue. As an unquantified issue, there is little clarity on the proportion of this activity that is actual ‘miss-selling’ and that which is a change in the best interests of the consumer. We are constantly being encouraged to change, or in this context churn, our energy contracts etc, and this is promoted as good a decision. Where the consumer’s best interest are served by change, the same thing applies in life and income protection insurance.
Recommending a dramatic change to the viability of the advice community on the basis of industry wide issues that have yet to be properly understood, simply doesn’t pass the validity test.
As mentioned earlier, the advice industry continues to evolve in the best interest of consumers – as we must. Where an issue is highlighted and properly understood, it is our job to address these as a group of professionals by applying new standards of behaviour. Or more simply stated, remuneration change in this form is a blunt instrument to use to address issues that the whole industry can resolve in a much more constructive and meaningful way.
We agree that soft dollars need to be monitored more closely and fully disclosed to the consumer – for all parties in the industry. We do no however agree that soft dollars should be removed all together.
Again the MJW Report provided an unbalanced assessment, which focused on removing soft dollars for advisers, but with little focus on these structures in other channels – for example bonuses bank staff receive for achieving sales targets. When you apply these two structures to the interests of consumers, they are one and the same.
When consumer-interests are put first, whether an adviser benefits from soft dollar incentives is immaterial; it is a by-product of placing their clients with the best cover for their needs.
Aggregators and Groups
The MJW Report’s central recommendation to change the adviser remuneration model would have a catastrophic effect on industry aggregators and groups. In failing to reflect the value these entities bring to the industry – not the least in providing training and professional development – the Report shows a significant lack of understanding. We completely disagree with the approach to aggregators and groups provided by the Report.
New Zealanders needs advice – it is universally agreed
For New Zealanders to access quality advice – as differentiated from a sales experience – we must have a vital and well supported adviser industry.
The recent FSC Mind the Gap Forum aimed at industry and advisers, focused on the lack of income protection insurance in New Zealand. The audience were advisers and other industry sector representatives.
Interestingly, the industry turns to the adviser community to broadcast these messages to their clients. Research from the Mind the Gap Forum stated that 53 per cent of those surveyed aged between 18 and 64 years old could not survive financially for more than four weeks in the event of disability. It is also estimated that another 78,000 policies would need to be placed to increase saturation of Income Protection in the market to 45 per cent.
With figures like that, it really is amazing that the MJW Report could recommend change that would radically reduce the number of advisers, rather than providing recommendations that would grow and better serve the advice community in the interest of consumers.
Addressing the issues in the life and income protection insurance industry to better serve consumers must look at the bigger picture, as follows:
- Address underinsurance. Very little has been done to educate the New Zealand population about the risk of being uninsured, where ACC fits in and the options available to them. We argue that this job has very much been left up to the adviser community in their interactions with clients. Rather than further limiting the adviser’s ability to educate the New Zealand population, all parties need to take a more active role in raising awareness of the role of these insurance classes.
- Awareness of the value of advice. New Zealand is significantly behind other countries in this area; to the detriment of consumers. Accessing advice naturally highlights personal financial well-being issues or opportunities that can otherwise be hidden from view; lack of quality advice limits the consumer’s ability to make the most of their life and choices (whatever they might be) and to safeguard their position.
- Clarify sales and advice. The report agrees with this recommendation, but in our view does not go far enough. Advice is advice and information on a specific product is information. Clarity is needed so that consumers can make an informed decision about whether to choose a product without advice or undertake the full and comprehensive advice process.