I just listened to this great podcast which carries the provocative title "real financial advisers should always have an opinion" - although I might take issue with the word 'always' I would like to go with the main thrust of the argument. Hat tip: Tony Vidler.
Advice means, in the current Financial Advisers Act: "...a recommendation or gives an opinion in relation to acquiring or disposing of (including refraining from acquiring or disposing of) a financial product." So clearly, you are not a financial adviser unless you give a recommendation or an opinion.
That is a worthwhile definition, not least because it is the law, but also because it matches client expectations.
Clients of advisers want advice. Calling yourself an adviser and not giving advice is probably misleading.
There are, of course, exceptions. From time to time a financial adviser will provide limited services: perhaps just execution-only, sometimes just class advice. But if these come to dominate their advice business I suggest a re-branding.
There is a great deal of debate about tax treatment of Income Protection. Given the importance of this product as society progressively shifts towards greater dependence on living benefits from a focus on death benefits this matters. A little while ago I asked the FSC to tell me what their goal in lobbying for consistent tax treatment is. This was their response:
- Consistent income tax and GST treatment of income protection products. The income tax treatment is on the current Government work programme with an Officials Issues Paper the likely next step as part of the Government Generic Tax Policy Process (“GTPP”). The TAG will continue to lobby Tax Policy Officials for consistent GST treatment as part of this process also.
So far so good. So I blogged that, and this tax watcher on Twitter said something which shall we say contrasted with the above.
One of the possible outcomes of the proposed changes to the Financial Advisers Act is an increase in average business size. In an article by Jenée Tibshraeny at interest.co.nz quotes Richard Klipin contemplating the rise of multi-disciplinary advice businesses.
The proposed changes make this more likely through a number of mechanisms. While a lot of attention is focused on the licensing of the Financial Advice Business, "...licensing would be required at the firm level (for the avoidance of doubt, a sole-trader is considered a firm) " - p.62 this is not the main issue. If there were no difference in either cost or requirements for registering as a sole trader then there would be no real drive to form advice businesses.
But I think Richard Klipin is right, and there will be a strong drive.
That push is mainly provided through increasing the requirements on RFAs. One part of Coase's theory of the firm holds that as fixed costs rise then average business size rises. Another argues that if larger organisations can reduce error rates then they are more attractive. Both those factors could explain increasing scale in financial advice businesses.
Will such factors increase? The FMA fee for registration is only a small factor. The requirement for, say, increased education is a much bigger contribution to the new cost model. Even bigger than that are the business changes required to provide detailed compliant personalised advice in an efficient way. That usually requires good information technology, regularly updated and maintained. That fixed cost will push many advisers to contemplate participation in the kinds of advice businesses Klipin mentions in the article. In addition, larger organisations with good processes for ensuring compliant advice will have smaller error rates and may apply lessons learned more quickly to more advisers.
Theoretical models are buttressed by current experience. Several commenters are already pointing out the similarity between the FAA review proposals and the existing Australian regime. That approach led to larger businesses in Australia. In New Zealand the current FAA has already led to larger businesses - consolidation has been ongoing across the insurance sector. To some extent cost sharing has explained the rise of our broker groups, and recently professional associations are joining the movement.
The FMA has this new page of advice to consumers on replacement. Link.
The first thing to note is that this is very 'pro-advice'. The premise of the page is that the consumer should get advice on insurance replacement, and that advice is essentially the best way to overcome the risks of replacement. Including suggestions which advisers may find useful when faced with, say, an inability to get good information on an existing policy.
The second is that they are very clear about the consumer's obligations in the replacement process - honesty.
Finally they also make it clear to consumers the kinds of incentives that advisers may enjoy for replacing a policy - listing commission, and types of soft commissions as well.
In this article by Rob Stock he discusses the review of insurance policies by banks in New Zealand after recent scandal involving the Commonwealth Bank of Australia.
Quality Product Research compared the NZ policies in our recent roadshow - you can view the presentation here.
Quotemonster already helps more than 3,700 advisers to do price comparisons on the most popular insurance products in the market - completely free. Out of them more than 1,300 advisers have also discovered the power of insurance product research to help them identify the meaningful differences in product, personalised to each individual client based on their age, gender, occupation, and product selection choices. But just a couple of hundred advisers are “power users” sucking every possible advantage out of the system. These are the extra services that they use to build the best insurance report possible.
- Head to head – a more detailed comparison of just two products ‘head-to-head’ showing the differences between them to help your client make an informed choice.
- Underwriting requirements – based on your client’s choice of products and sums insured we do the hard work of picking through the non-medical requirements and produce a report which shows exactly what paperwork, tests, and exams are required. A huge time-saver. Really useful for clients scared of needles. Eliminates ‘you didn’t tell me that’ objections.
- Statistics that help you sell: everyone can add a personalised client risks report which tells your clients their working life risk of death, total disability, temporary disability, and trauma.
- Recommended product premium choices: if you have chosen a specific company to recommend but you don’t know whether the client would prefer a wait period of 4, 8, 13, or 26 weeks, or perhaps an excess amount on their medical of nil, $250, $500, $1,000, or more? This makes it easy: it includes a table of all the different premiums for each option at the end of your price comparison report. Saves lots of requoting.
- Needs analysis – enables you to develop a scope of service, set objectives, record what advice your client wants, capture basic financial information, and calculate an ideal cover package – in minutes, not hours, and adds all that data to the comparison report. Automatically sends the values to the quote saving more time.
- Historical policy documents are searchable by date, company name, and type.
I've recently been sent a great piece from Gen Re on heart attack definitions. At the start of what is a pretty through review of the use of different diagnostic techniques they ask some great questions which bear repeating:
Although medical definitions are part of an insurance contract, suggesting an absolute meaning, the insurer’s claims philosophy must address questions such as, “What is intended to be covered?” or “Is the condition covered even if not all claims criteria are fully met?”
This should be contrasted with a media which has a taste for black and white declarations on the subject, such as recent articles which talk about '...using “out-dated” medical definitions in their
Trauma (Critical Illness) policies" that was a quote from the Australian media, but it happens that Rob Stock wrote about this very issue in an article published this morning (at this link).
In their review Gen Re talk about the value of being clear about what is intended to be covered. In doing so they talk about impact, impairment and loss: all reaching back to a concept that should be behind every insurance, the principle of indemnity. Put another way, insurance shouldn't be a kind of lottery where a small heart attack could trigger a financial 'win'. In order to have affordable products which can protect us all from real losses we need to have payments that broadly match impacts. So Gen re suggests that insurance wordings may never match the terms used by medical staff, and that perhaps they never should. That is why I am not in favour of a general ban on some more restrictive conditions, but I am in favour of clear communication of what we mean by each definition, in terms that at least most people reading the document can understand (see my post at this link). Indeed, there are many circumstances in which having a tough definition is preferable: one is when you want to reduce cost, another is when you only want a payment triggered by a serious event (such as shareholder protection). But whatever the wording, if an insurance definition differs from a medical term the customer should know how and why. To prevent 'scandals' the customer probably need to know that before they buy, not right after they claim. The challenge is that when buying the cover, clients are rarely that interested.
For those advisers that like the idea of a lower, non-taxable, income protection benefit the potential for a review of the taxation of income protection adds risks, or complexity, or both.
For example, if a future review were conducted by Inland Revenue, and the position were changed so that all IP benefits (AV, LOE, or Indemnity) are deductible and taxable then those clients with existing AV benefits may have a problem. If the tax position changes for in-force contracts then they probably need to buy extra cover. A boon, perhaps, to insurers and advisers, but difficult for some clients that have developed health problems in the meantime. Alternatively the change could apply from a certain date forward, adding to the complexity of giving advice to clients with in-force AV contracts which will remain non-deductible and non-taxable. Insurers could make like easier for advisers by allowing a one-off increase to the benefit if it is deemed to be taxable. They are only likely to be tempted to do this if there were better information and enforcement around the taxation of IP benefits.
We continue to hear of complaints that claimants do not declare their income and then discover that they have unpaid tax problems to add to their health issues. Which brings us to the other eventuality: assuming everything becomes non-deductible and non-taxable, then the reverse problem applies. Some may seek to reduce their benefits, a one-off hit to insurers. But the gains to consumers and reduced replacement ratios may be worth it. Each of these costs probably still outweigh the complexity of staying with the current situation.
Emma Conyngham, a Kiwi breast cancer survivor has come up with a unique product, 'NiceNips' for women after having a mastectomy. Click here to see what it is.
Zurich have done an international survey and find that people underestimate their personal risk and overestimate the cost of coverage. You can read more and download the full report at this link.
The result: they assume that coverage is not needed and too expensive. There is, of course, a solution. We have to tell them what their risks are and show them that coverage can be cost effective. Because they won't be looking out for it, the message needs to be attractive, positive, and engaging. Moaning about underinsurance doesn't tick any of those boxes. Creating engaging content looks like the better way to go.