The removal of grandfathered commissions, a decrease in insurance commissions and a rise in compliance and ASIC costs has forced a lot of smaller product-based practices to rethink their business model.
An obvious solution is to move to a fee-for-service model but this is often easier said than done. It is much more than a mathematical conversion.
It’s a mindset conversion; and one that requires changing career-long habits.
The receipt of product commissions has traditionally added to an adviser’s ‘book of business’, with a relatively light touch from the client perspective. Clients consent to them but they don’t feel the impact directly, unlike the impact felt of premiums paid to the insurer.
Therefore, product advisers have rarely had to grapple with issue of valuing their own worth. Product providers have done that for them by substituting a proxy value being the quantum of commissions paid; a value which the government has subsequently driven down.
This brings me to the next point of ongoing service. Because a contract of insurance is between client and insurer, there has never been an obligation on the risk adviser to provide ongoing service, unless there is a formal ongoing advice agreement in place with client. This point was made in AFCA determination # 736062.
So risk insurance advisers often lack experience when it comes to the ‘ongoing fee-for-service’ concept. Recall that the payment of insurance premiums by clients and the receipt of commissions by advisers are excluded from the FDS obligations.
So when an insurance adviser tries to move from commission income to fee-for-service income, they do so with considerable lack of experience in a world where the client is the only person paying; and the first question a client will ask is, “I am already paying premiums to the insurer, so what value can you add to justify a fee that is the commission-equivalent?”
It is a fair question and one that is difficult to answer whilst looking through the lens of a product driven business model. Hence the need to change!
The question becomes easy to answer once the true value of financial advice is understood. And this requires letting go of the product agency mindset and moving to an advice service model where the adviser is the central valuable resource who determines his or her own value.
The price placed on value is different for every adviser and it depends on a number of factors which include – area of practice, degree of specialisation, education, experience, opportunity and the extent to which the adviser is open to new ideas and new learning.
The real risk in the move to fee-for-service is the tendency for advisers to undervalue their worth and therefore significantly undercharge clients for the services they provide. This in turn leads to a stressful business model.
Undercharging often comes from a fear that existing clients won’t see the same value as the advisers does and won’t accept the service proposition. It is also a common human trait to err on the side of modesty when trying to self-assess self-worth and value.
So before transitioning from commissions to fee-for-service, advisers need to acknowledge the change of income source; grapple with the concept of their own worth in order to be able to espouse their advice model and pricing going forward.