Remuneration Changes in the Wind..
The recent announcement by AMP Australia that the company's commission structures have been altered in favour of a hybrid arrangement, has been followed a number of licensed Dealer Groups adopting similar compensation models. These Groups are hoping that taking the initiative to 'self regulate' will pre-empt further intrusive action by the regulators.
However, New Zealand stakeholders should take note of the following from Ray Miles, Executive Chairman of Fortnum, one of the Groups adopting the new model -
“There are advisers who churn and they’re known to the insurance companies who continue to accept business from them so perhaps part of the problem is how executives are incentivised to deliver new business growth.”
In NZ, the mechanism to prevent churn already exists, and it is under the direct control of the Life Insurance Companies, as suggested by Ray Miles' comment.
From the FMA April 15 Report on "Authorised Financial Advisers In NZ", we are informed that -
"A small number of AFAs (less than 2%) re providing a high volume of financial advice about insurance product replacement"
Of course, it's always possible to interpret findings to suit intentions, but from experience, the AFAs who are providing such advice will likely have good and substantial reasons for recommending replacement.
The question is - do the non-AFAs advising on replacement have such good and substantial reasons for replacing business?
The only evidence we have for churning is anecdotal, or the assumption that, as the whole industry reports a 2%-3% growth in new premium income (after deducting automatic rate-for-age and indexation increases), any company reporting a higher than industry growth rate must be receiving churned business.
This needs further and more detailed investigation - as do some of the statements of concern in the FMA's previously cited April 2015 document.
For example, the report expresses concern '..if retail clients were being inappropriately categorised as wholesale clients or vice-versa" .
I've studied the report and can find no evidence to suggest that this is happening.
Similarly, - "We have previously stated that distribution models such as volume-based incentives and up-front commissions should not encourage conflicts of interest between AFAs and their clients."
Again, there is no evidence to suggest that this alleged conflict of interest is actually occurring within the AFA ranks.
Furthermore, - when referring to advice on recommending 'alternative' investment products, the document expresses concern that ..."it is therefore vital that clients are informed about the balance between risk and reward for such investments."
Yet again, the document provides no evidence to support the concerns expressed.
I'm all in favour of an efficient and effective regulator overseeing an efficient and effective regulatory regime, but expressing concerns on vague circumstances which may or may not exist - without the slightest shred of evidence or research - seems to be looking for shadows.
With regard to the current remuneration models creating conflicts of interest, it is quite clear that the statistics which the regulator should be looking at are at the disposal of the Life Insurance Companies, and the ability to reduce and/or eliminate churn lies with those companies.
Perhaps the FMA should be asking why the alleged churn is not being actively discouraged and prevented by the companies involved?
As Ray Miles suggests of the Australian industry, the life companies know which advisers churn business, yet they continue to accept business from those advisers.
Do you think the situation is really any different in NZ?