Only after I had written last month’s note to you pondering the extent of change to come as new regulatory frameworks are bedded down, did I discover Professor of Commercial Law and Regulation, Pamela Hanrahan’s commentary on the subject. I was fascinated. I am sure we all knew the number of advisers choosing to continue working in the industry is in heavy decline ‒ and I am sure I am not alone in considering new business models to replace revenue lost through diminishing commissions income ‒ but still it was a little sobering to read yet more evidence of the significant impacts the changing regulatory framework will have on our sector, such as a dramatic reduction in the number of people seeking advice.
AFRM started out as a highly niche risk advice business servicing high net worth clientele. We are proud to have broadened our client base to be able to help more and more everyday Australians. However, Professor Hanrahan contends that the age of affordable financial advice may be coming to an end. She says the cost of advice will simply become too costly for many.
“I suspect we’ll end up with a situation where the number of clients that need personal advice in respect of their financial future will be much smaller than it is now,” Professor Hanrahan is reported to have said. “If the policy agenda unfolds as we expect… it won’t be economically viable to provide that level of services to a mass market of clients,’ Hanrahan commented.
‘It’s going to be a more niche solution.”
Importantly, continuing upon my theme of unintended consequences from last month, Professor Hanrahan said the reduction in the number of people choosing to pay for financial advice will not be caused by a lack of need – but as I say – a lack of affordability. This is a very scary thought when looked upon through the lens of Zurich’s, February 2019 white paper The Risk Advice Disconnect, Briefing paper – life insurance commissions. Zurich’s paper highlights Rice Warner research into Australian consumers’ attitude to paying up front for life insurance advice. The white paper observed:
“…There was an alarming – although unsurprising – disconnect between what they would pay and what they would need to pay. 78% of consumers said they would only be willing to pay $500 or less (28% unwilling to pay a fee at all), and none were willing to pay $2,000 (or more).”
This fact was held up against a survey of advisers and their estimated costs of giving advice. And we all know, as the white paper states, that:
“Even the most basic life insurance advice can take at least 8 hours of preparation time. Charging this at a market average margin can easily see this advice cost $2,000 or more.
“Indeed, Rice Warner surveyed advisers about what they would need to charge as an out of pocket fee for life insurance advice and found almost two thirds would need to charge $2,000 or more. Only 1% said that they could charge less than $500 (although even this is possibly overstated).”
So, in a world where advice is going to get more expensive to provide and where consumers already believe we charge too much for the services we provide, it seems we can only accept Professor Hanrahan’s forecast of our shrinking marketplace.
But as my colleague, AFRM Director Rob Vitnell, said recently: with a strong core business, specialist expertise, robust processes and systems, plus great people who can take advantage of the opportunities that lie ahead, those of us that have these fundamentals in place will weather the storm and potentially enjoy bright skies to come. It won’t be easy, but I do believe it can be done. By allowing us to continue to provide expert risk advice to your clients, we can in turn allow you more time to focus on your core business. Together we can ensure the continued survival of a specialist advice industry to support the needs of Australians and serve them well into the future. Take for example the case study below which illustrates the added value AFRM provides to its referral partners through our specialist knowledge in the field of life insurance definitions and our determination to do everything we can to help our clients. AFRM Risk Analyst, Camillia Batten’s, dogged determination to protect her client’s best interests dramatically improved “Jim’s” life. Until next time, live your life well!
Sincerely,
Nicholas Hatherly
Managing Director AFRM
Case Study
Taking over a new client book brings with it a duty of care to review the circumstances of your new clients to ensure their risk management strategy meets their current circumstances. That’s exactly what AFRM Risk Analyst, Camillia Batten, was working through earlier this year when liaising with Jim [named changed to protect client privacy] who became a client of AFRM in December 2018. Camillia reached out to Jim in January 2019 to see how she could help after Jim’s Income Protection (IP) premium dishonoured in December 2018. The monthly premium was about $1,300 for an IP policy that had a monthly benefit of almost $10,000 and a two-year benefit period. He was off work due to mental health issues and that was the basis of his IP claim.
“Upon speaking to Jim, I found that he had been on claim for the previous two years under his IP policy (the maximum benefit period allowed) and because his claim had finished, with no income, he couldn’t afford to continue to pay his premiums,” Camillia said.
Naturally, Camillia asked Jim if he held any additional insurance policies. She found that Jim had held Life and TPD cover under his Superannuation for about $1.4m ‒ but it had cancelled in August 2018. The insurance premium for this cover has been about $1700 per month but like most self-employed people, Jim wasn’t making regular contributions to his superannuation prior to going on his Income Protection claim. Camillia investigated further and found a convoluted backstory of issues regarding his superannuation-related insurances that had occurred earlier in 2018. During the period that he was on claim, Jim’s insurance premiums eroded his superannuation savings resulting in the attached insurance cover lapsing. Jim was never made aware, in advance, by his superannuation fund that his Life and TPD cover were due to lapse. After this was flagged with the superannuation fund, it agreed to reinstate Jim’s Life and TPD cover as a gesture of goodwill. However, because of Jim’s low superannuation balance and inability to make regular contributions to his superannuation fund, the fact remained that the $1700 per month premiums could not be covered by his superannuation fund balance. As a result, Jim’s previous adviser assisted in facilitating the cancellation of Jim’s TPD cover and in reducing his Life cover down to $1m, as a means of reducing his insurance costs. All of this occurred while Jim was unable to work in any capacity and was still on his Income Protection claim. Therefore, he wasn’t in a financial position to make contributions to his superannuation fund to keep the revised $1m in Life cover in place ‒ so this also lapsed! At the time his TPD cover lapsed, Jim was already 18 months into his Income Protection (IP) claim. To Jim’s credit, he had somehow managed completing the ongoing IP claim forms, while managing his significant health issues without assistance. Thinking back on all the work she had done to assist Jim, Camillia said:
“Jim told me on so many occasions during our conversations over a five month period that he never knew he could have claimed for Mental Health under his TPD policy and he wished that someone had told him this at the outset.”
In January 2019, a month after taking over management of Jim’s risk advice, Camillia started fighting to have a mental health claim under his former TPD cover honoured. At that time, Jim’s financial situation was desperate. He had no income; his wife was also mentally ill and was spending long stints in hospital; and he was being forced to sell his house in a bad market because he was defaulting on his home loan. Camillia took on management of a lengthy claim process, requiring the gathering of multiple treating specialist reports, confirming there had been no non-disclosure when the policy was originally taken out, and also locking down the official date of disablement.
A situation complicated by the fact Jim was previously self-employed and hadn’t completed tax returns since 2015.
“Multiple times Jim told me that if he had to go through the claim process without my help he would have simply given up,” Camillia said.
At the end of the day, Jim’s claim was approved, and his total benefit was in excess of $1.3m.
“When I called and told him the news, he was speechless,” Camillia said. “The benefit meant he was able to keep his family home, which was always his wish, and he said he planned on spending more time with his children and young granddaughter who had just turned two.”
We asked Camillia what Jim said to her once he had finally got over the initial shock of learning that the claim had been approved.
Jim said: “If I had a choice between my health and the money, I would choose my health; but having the money has removed the financial stress and given me the best chance to focus on my health and finding happiness again.”
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