“Empowering consumers to make informed decisions will be the key to success for the life insurance industry in the future.”
The latest Sigma study by reinsurer Swiss-Re revealed that clients do not want to be sold to. Research found that, instead, empowering consumers to make informed decisions will be the key to success for the life insurance industry in the future.
One of the worst aphorisms to have characterised the advisory industry is that “financial products are sold, not bought”. It has ingrained the public perception that financial planners work for “free”. In fact, the planning profession is maturing and arguably at the forefront of this process has been the certified financial planner (CFP). As a postgraduate qualification, with supervision and CPD requirements, a professional code of conduct, and a national and international association, all of this makes for a highly aspirational profession.
While this aspiration involves helping clients protect themselves from “when life happens” events like death or disability, saving towards a home or retirement – it is nonetheless certainly not a self-sacrificing profession working for free. But it’s one that gives full value. Like everyone, financial planners have to pay off study loans and homes, put food on the table, pay medical bills, and cater for kids’ education.
Yet with insurance seen as a grudge purchase, it has in fact been the case that advice is “sold”. Life insurance and investment houses catered to this with a basic infrastructure of commission and incentives for successful sales.
The regulator – Financial Services Board (FSB) – and consumer press have forced the pace of simplifying distribution with more transparent fee structures. Under FAIS, intermediaries are required to avoid conflicts of interest such as perverse incentives, and to disclose commissions earned. Treating customers fairly (TCF) provides for transparency and fairness. The various Ombud offices provide for dispute resolution.
The FSB’s Jonathon Dixon says: “The current distribution model has problems regarding mis-selling and poor customer outcomes and is fundamentally flawed in terms of what advisers earn from product providers and the conflicts that ensue. The system is not transparent, as commissions on products are often hidden from the client.” One of the broader objectives of RDR (retail distribution review) is to align remuneration and distribution models with TCF.
Globally, the industry trend favours a fee-based approach in which fees are paid as and when service is rendered in place of upfront commissions which have been lucrative for advisers but often punitive for clients. Locally, the growth of independent, fee-based practices on a sustainable basis is being encouraged.
Never before has there been so much debate as to how advisers should be paid and by whom, and this bodes well for the consumer. However, as a quid pro quo, consumers should inspect lingering misconceptions that planners “work for free”. ❐
Author: Mike Lledo CA(SA) is the CEO at Consolidated Financial Planning