Feature: Temperature rises as AFA vote looms


By Sarah Kendell

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Next week’s extraordinary general meeting of the Association of Financial Advisers (AFA) will see the culmination of one of the financial advice industry’s biggest internal conflicts in recent history.

Since the release of former Australian Prudential Regulation Authority member John Trowbridge’s report into the life insurance industry last year, which called for upfront commissions on risk advice to be scrapped, the sector has been up in arms as insurers and advice practices scramble to restructure business models, and industry bodies attempt to negotiate a compromise with the government.

The resulting piece of legislation, the life insurance framework (LIF), has attracted harsh criticism from many risk advisers for the drastic reduction in commissions it proposes, as well as clawback provisions that oblige advisers to refund any commissions to the insurer if a client changes policies within two years.

Much anger has particularly been directed at the AFA for its alleged lack of backbone in negotiations, with the anti-LIF Life Insurance Customer Group (LICG) leading the charge for a special resolution to force the association not only to oppose the passing of the bill, but to publicly lobby against it and consult members if there is to be support for any similar future bill.

LICG member and Dunsford Financial Planning principal Mark Dunsford says the association has failed members in its duty to lobby for the interests of advisers and clients, which the legislation does not support.

“The AFA are representing us, and for some reason the board has made decisions without coming back to members to ask,” Dunsford says.

“I know from all the reading up I have done since that the FPA and AFA were bullied [in the LIF negotiations] into thinking that if they didn’t accept this compromised position, they would have been looking at 20 per cent level commissions.

“They should have come back to members and said, ‘This is what we are looking at, what should we do? Should we accept it or fight for our rights?’”

While there is consensus that the LIF outcome is not ideal for advisers, and it also fails to address all the perceived systemic problems in the life industry, advice coaching firm Elixir Consulting’s managing director Sue Viskovic among others gives the association more credit for making the best of a bad situation.

“The AFA was put in a difficult position and there is no way they would have had any seat at all at the [negotiating] table if all they did was fight for the status quo,” says Viskovic, who has authored Worth Paying For, a new self-help book for risk advisers looking to restructure their business model in the wake of the reforms.

“The LICG are being a bit unfair in accusing the AFA of not representing members’ benefits when I think a lot of the issues they are raising are on the AFA agenda already – it’s just that the issue of remuneration has been singled out initially.”

Outgoing AFA national president Deborah Kent says while the association has absolute sympathy for advisers affected by the laws, it is futile to ignore reality.

“We know that the landscape of advice is changing everywhere – we have FOFA [Future of Financial Advice] and now we have the LIF, and it is going to continue to change,” says Kent.

“A lot of it is consumer-driven, and we have to be able to work with change – I know there are advisers who will find it very hard and everyone sympathises with those people, and our role is to try and help them get through that.”

Those opposed to the LIF argue it is likely to be as detrimental – or more so – to consumers as to advisers, pricing middle-income earners out of risk advice by forcing planners to charge high upfront fees and funnelling more consumers into the direct insurance market, where products typically cost more and have more exclusions.

“Looking at the most recent FOS [Financial Ombudsman Service] report, life insurance sourced through a financial adviser accounts for 8 per cent of disputes for income stream products and 13 per cent for lump sum products, compared to direct, which was responsible for 71 per cent of income protection disputes and 70 per cent of lump sum disputes,” says insurance comparison firm Life Insurance Direct chief executive Russell Cain.

“The amount of complaints about that particular channel is absolutely tiny percentage-wise, and I don’t see how this legislation is going to improve or compress that number.”

Cain and Dunsford maintain any reforms should be brought in after the parliamentary joint committee into corporations and financial services’ life insurance inquiry reports back in June 2017, to ensure they address the full picture of the industry’s problems.

“It makes sense for [the LIF] to be delayed until that date – then everyone would be comfortable to understand the full dynamics of the industry and what should come from that,” says Dunsford.

But Financial Rights Legal Centre solicitor Alex Kelly says the idea that cutting commissions will exacerbate underinsurance is “a weak argument”, as how the advice industry will respond to a commission-free environment is still an unknown quantity.

“This is a watershed moment for the industry to think about what is a sustainable way for people to get appropriate life insurance advice when commissions aren’t working,” Kelly says.

“There are very few practices that offer fee for service, and once we start opening that up it might change – there is no data to say that consumers won’t get insurance advice unless it’s free.”

Advice industry veteran Ray Miles, the founder of independent licensee Fortnum Financial Advisers, agrees the impetus is on the industry to innovate around the roadblocks the LIF presents, rather than lashing out at the AFA.

“While it is unpalatable to have adviser revenues dictated by regulators, we now have to consider what business models work under the new environment,” Miles says.

“If the LICG get their proposal up, the AFA will lose Brad Fox and the current board, and that would be a tragedy for the industry – we need a strong AFA to advocate for the industry [and] weakening the board’s powers will weaken the AFA.”

Frisk Retrieval executive director and former FPA general manager Tom Reddacliff is also urging industry leaders to “speak up and put a stake in the ground” to stop a permanent and potentially damaging change to the association’s constitution.

“I’m expecting many to stand against leadership by ‘popularity poll’ and the reputational damage to financial planning should the public unpack the detail,” Reddacliff says.

“Under this outcome everyone loses – the advisers, the AFA and the licensees as well.”

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