Uncertain future for insurance advisers

Consumer advocates warn a ban or cap on commissions paid by insurers to the advisers who sell their products will likely result in a drop in the number of financial advisers in New Zealand.

That’s prompted concern from the industry that Kiwis could find it harder to get good quality advice.

The Government announced this week that it will get rid of sales incentives in the insurance industry after a damning report on the sector was released by regulators. It criticised its culture for promoting sales over customers’ interests.

Commerce and consumer minister Kris Faafoi has called out overseas trips and loaded upfront commissions, saying they create a conflict for salespeople and changes are needed to protect consumers.

It is not only life insurers in the gun, with general insurers also captured by the pending changes.

Consultation on how the changes might happen is due in May, with legislation fast-tracked to hit Parliament this year.

Life insurers have already canned overseas trips so any change in that area would only serve to prevent them resurfacing. But a change to commissions and other incentives would be a much bigger step.

Aaron Gilbert, head of the finance department at AUT, says the impact on the industry will depend on whether the Government decides to ban the internal incentive structures at insurers or the commissions paid to external financial advisers.

Regulators have been quick to point out that Kiwis are paying higher insurance commissions compared to other countries, with more than 20 per cent of the cost of the premium going in commissions, compared to just over 10 per cent in Australia, and less than 10 per cent in Europe.

Gilbert says scrapping the internal incentives, which put the focus on sales rather than customer service, make sense.

“That’s brilliant. The idea should have been done a long time ago.”

But he says the problem with capping or removing the external commissions paid to advisers is that New Zealanders don’t value advice and don’t want to pay for it. “It could drive a lot more [advisers] out of the industry,” Gilbert says.

The industry already saw an exodus in 2011 after new legislation was brought in to license advisers and introduce a code of conduct.

There are around 2000 authorised financial advisers who must inform consumers how much commission they get from product providers.

Another 6000 registered financial advisers don’t have to reveal how they get paid although legislation is underway which requiring them to.

Most life insurance advisers fit into the second group. And then there are the bank staff who also sell insurance.

Katrina Shanks, chief executive of Financial Advice New Zealand, the industry body for advisers, says it wants to talk to the minister to ensure Kiwis can still access quality financial advice at the end of the process.

“We want to ensure the public can have confidence and trust in the advice they receive.”

But she says any change also needs to make sure there is a sustainable future for advisers as well.

“None of us want to see an industry dismantled.”

Shanks says comparing commissions paid in different countries needs to be looked at more closely to understand how different models operate overseas.

“Financial advisers deliver advice but they also have costs in running a business.”

Some advisers have already gone down the fee-only route but it is still only a small number.

Shanks says there are lots of possibilities for the remuneration model.

“But New Zealand is a comparatively small market. We have got to find a remuneration structure that is fit for New Zealand. We don’t have the scale other countries do.

“That is not to say it might not be part of the solution and something we build up to.”

She won’t comment on whether lower commission paid to advisers would result in consumers getting a better deal.

“That really comes from the manufacturers side not the financial adviser side.”

Advisers have already gone through a lot of change in the last 10 years and more is set to come.

“For many it is a matter of wait and see where it is going to go,” Shanks says.