What the LIF reforms mean for risk advisers

One person’s costs are another person’s income.

Lower commission costs for insurer’s means lower commission income for advisers. And for the AFSLs they represent (or at least AFSLs that share adviser commission income: Dover does not share commission income because it believes this creates a conflict of interest).

It cannot be otherwise. It’s a zero sum game that will be won by the insurers. It’s a profit shift from advisers to insurers worth hundreds of millions of dollars.

The drop in the real value of the advisers’ gross commission income will be matched by an equal decrease in the real value of the insurers’ gross commission costs.

The logic of this proposition should be blindingly obvious. But for some reason this proposition has been smothered and silenced since 6 November 2015. Some commentators have even said the new commission rules will be good for advisers. For example, on 15th November 2015 Rice Warner observed: “Many life agents will moan about the reduction in upfront commissions but smart dealer groups will realise that the higher renewal commissions, being recurrent income for the practice, will add value to their businesses.”[1]

This is a remarkably wrong observation, which remarkably understates the effect of dropping first year incomes by 50%, doubling claw back rates and high lapse rates on subsequent year commissions and seems to ignore the time value of money.

The position for risk advisers is in fact disastrous. The position is explained on the next page.

There may be more to come. Don’t forget that the Assistant Treasurer also said ASIC has been asked to review whether the new commission caps are working and whether a strict level commission regime should be introduced.

ASIC has already asked the insurers to report lapse data to it as part of its report, due in 2018.

The Dover Group