Upcoming changes to adviser remuneration under the Life Insurance Framework will have profound implications. Advisers must act quickly to diversify and grow their revenue or potentially suffer an immediate 20-33 per cent drop in cashflow from January 1, 2018.
Jeffrey Scott details the changes, their likely impact and the options available to plug the revenue gap.
Easter is just around the corner which means there’s only eight months left of the decades- old upfront life insurance commission model.
Advisers only have until December 31, 2017 until the remuneration of risk advice changes dramatically.
From January 1, 2018, the “benefit ratio” for new business written will be 80 per cent of the first year’s premium and 20 per cent of second and subsequent years’ premium, based on guidance by the Australian Securities and Investments Commission (ASIC). From January 1, 2019, the benefit ratio for new business falls to 70 per cent of the first year’s premium and 20 per cent for subsequent years, and from January 1, 2020, the maximum upfront commission will be 60 per cent plus a 20 per cent trail.
(It should be noted that there is no percentage limit on level commission payments. Also the above numbers exclude GST so remuneration paid to advisers from January 1, 2018 can be up to 88 per cent of first year’s premium (80% + 8% GST) and 22 per cent of second and subsequent years’ premium (20% + 2% GST), and so on.)
Under tough new provisions, if a policy lapses within the first year, 100 per cent of all remuneration paid to an adviser (or their licensee) in relation to that policy must be refunded. If a policy lapses before the end of the second year, 60 per cent of the remuneration received must be returned.
Impact on adviser cashflow post-January 1, 2018
The following table illustrates the impact of the LIF changes, assuming a level premium of $1,000 per annum with no indexation. As shown, when upfront commissions are reduced to 80 per cent of first year’s premium (plus GST), advisers may experience a 20 to 33 per cent drop in revenue depending on the upfront commission currently being paid^.
By January 1, 2020, advisers may see their cashflow drop by up to 50 per cent against 2017 upfront commission income.
Impact of LIF on adviser cashflow
This table is for illustrative purposes only. It does not take into account any additional costs or expenses that may be incurred by advisers or deducted from the amounts above. It also assumes that the above policy will remain in force and not change in nature, including increases for indexation or otherwise.
Closer examination reveals, it’ll take risk advisers between 5-6 years to generate the same net income after January 1, 2018^ when commission rates fall to 80 per cent in first year and 20 per cent ongoing.
When commission rates fall to 70 per cent in the first year and 20 per cent ongoing in 2019, it will take practices roughly 6-7 years to generate the same net cashflow they currently earn today.
That figure creeps up to 7-8 years from January 1, 2020 with the introduction of hybrid commissions of 60 per cent in the first year and 20 per cent ongoing.
Plugging the gap
Advisers need to start thinking now about ways to prop up their revenue and manage their cashflow ahead of the looming LIF changes.
LIF requires advisers to reconsider their business models, cashflow, potential clawbacks and client engagement processes.
The sooner they get started, the more prepared they’ll be when the legislative amendments are implemented.
Below are four options for advisers who want to boost their revenue.
1. See more clients
This is an obvious, albeit potentially unsustainable, solution.
In order to maintain the same level of cashflow under LIF, advisers would need to see 25-50 per cent more clients in 2018 and around double current numbers from January 1, 2020^.
2. Sell more insurance to existing clients
LIF presents a unique opportunity for advisers to review their clients’ circumstances and needs. There may be opportunities to offer more insurance (death, TPD, trauma and income protection) or higher levels of cover (sums insured) to clients. Of course this can only be done if it’s in clients’ best interests.
3. Transition to a fee for service model
While wealth advisers have successfully made the transition to fee-for-service, customers are typically reluctant to pay a fee for life insurance advice.
4. Expand the service and advice provided
Advisers should consider expanding the range of advice they provide to include areas such as lending, superannuation and investing, and retirement planning. By doing so, there’s the potential for advisers to diversify and grow their revenue.
^Based on typical current commission arrangements.
Jeff Scott is head of product at ClearView.