This manual looks at the chain of events leading to the Federal Government’s decision in late 2015 to allow ASIC to cap commissions paid by insurers to advisers in connection with risk insurance policies.

It examines the effect of these changes on a typical risk insurance practice. It finds that the real value of gross commission income will fall by as much as 40% in the first year, recovering somewhat in subsequent years as the increased trailer commissions are paid, but not completely, leaving the typical risk adviser 20% worse off after seven years.

This is a much worse result than most observers are predicting. Their observations are flawed because they simply compare the halving of the first year commission with the doubling of the subsequent year commissions and conclude that it will be the same, and well, in the end.

They are wrong. Their observations ignore the effects of doubling the claw back period to two years, high lapse rates and the time value of money. These mean the amount of commissions will fall by much more than the government is indicating.

It’s a massive profit transfer from advisers to insurers. 

This massive drop in the real value of gross income is an existential threat for most practices. Net cash flow, profit and goodwill values will fall more than proportionately. This means fewer new advisers will enter the risk advice space and many will leave, worsening the already chronic under-insurance position and leading to reduce new business for the insurers and increased social welfare costs for the government.

The second part of this manual looks at what risk advisers have to do to adapt to their changing environment. This includes improving their systems, reducing the length, time and scope of their statements of advice, emphasizing strategies over product placement, and widening the range of services they provide to clients.

This changing environment will see some advisers prosper and others fail, and this manual is one of the many ways Dover helps advisers prosper and not fail under the new LIF reforms.

Terry McMaster

22 January 2016

The Dover Group