04 – The present of commissions
Commissions on investment and superannuation products have been disallowed since 2013. But commissions on life insurance policies were allowed to remain in place at that time, albeit with a significant amount of scrutiny still being applied.
Later in 2013, ASIC commenced specific research into the life insurance industry. This research was reported in October 2014, via Report 413, Review of Life Insurance Advice. In response, the Financial Services Council and the Association of Financial Advisers instituted a working group, led by John Trowbridge, which culminated in the release of the ‘Review of Life Insurance Advice’ report, more widely known as the ‘Trowbridge Report.’
The Trowbridge Report contained various recommendations, and some of these recommendations lead us to the present situation regarding commissions. As of 1 July 2016, upper limits will be placed on commissions receivable by insurance advisers. The limits will be as follows:
- maximum first year commission rates of no more than:
- 80% from 1 July 2016;
- 70% from 1 July 2017; and
- 60% from 1 July 2018.
- maximum trailing commissions of no more than 20%;
In addition, volume based payments will be prohibited and there will be a minimum two year ‘claw back’ period. This represents a doubling of the standard claw back period of one year.
Despite the positive spin that many are trying to put on things, the net result of these changes is that commission income will substantially reduce. Dover predicts a net fall in cash flow of as much as 20% for commission-only life insurance practices in coming years.
This change comes on top of the 2013 reform which did away with commissions on new investment and super products.
The net effect of these two changes is that commission income is simply not what it used to be. Commissions will remain a substantial part of the income stream for ‘riskies,’ (advisers specialising mostly or completely in risk insurance advice). However, advisers who only write risk will need to find alternative revenue streams – or work at least 25% harder – if they want simply to maintain their existing revenue stream.
Because those alternative revenue streams cannot be commission-based, this means that financial advisers will have to start using some form of direct fee base with clients if they wish to retain or grow their income. That is what this edition of ’50-Up’ is all about.