No commission for an adviser if you replace one life policy with another, says RDR

Financial advisers will be able to receive commissions on life policies they advise you to buy, but if they recommend that you replace one policy with another, they can earn only an advice fee, the Financial Services Board (FSB) is proposing in its Retail Distribution Review (RDR).

The extensive review of the fees you pay for being sold and advised on financial products says advisers should continue to earn commission for selling life assurance policies against death, dread disease and disability, but it proposes a limit on how much of the commission is paid upfront.

The RDR proposals suggest that only 50 percent is paid upfront and 50 percent is paid on an ongoing basis when you pay your policy premiums. The exception is life policies sold to low-income earners, where the FSB proposes an upfront commission set at a minimum rand amount.

However, if you replace one risk policy with another policy that has similar benefits, your adviser will not be paid commission on the new policy and must negotiate an advice fee with you. This proposal stems from the FSB’s concern about the churning of life assurance risk policies, which, it says, is exacerbated by “substantial” incentives that life assurers offer when they recruit advisers to work for them.

These incentives are paid when a life assurer takes on what is known as a tied agent and offers to pay him or her an incentive for the clients that the adviser signs up. The adviser is then tempted to advise all his or her existing clients to move to the new assurer without considering their interests.

Jonathan Dixon, the deputy executive officer in charge of insurance at the FSB, says the advice fee you will pay for a replacement life policy can be paid in cash upfront or added to your premiums and paid over time, if your new life assurer agrees to this.

The FSB’s proposal document says it decided against all commissions on life policies being paid on an ongoing basis, because the main stakeholders in the financial services industry argued that most of the advice and intermediary services occur upfront and advisers need to be remunerated for their time.

The RDR document says further consultations will take place to set the level and structure of the commissions for risk policies, but the 50-percent upfront commission will be paid in full at the start of the policy, rather than in the first two years of the life of the policy, as is currently the case.

Life assurers will still be able to claw back the upfront commission paid to an adviser if you do not keep the policy for a certain period.

Currently, life assurers create what are known as “mini policies” when you increase your premiums, and pay new commissions on the increases. The RDR proposals suggest that commissions are calculated to take these premium escalations into account at the start of the policy, but with a limit on the escalation that is taken into account for commission purposes – for example, five percent a year. This is to avoid your being missold a policy with a premium escalation that you are unlikely to be able to afford in the future.

The RDR document proposes that a list of services that your adviser can perform for a life assurer be drawn up and that life assurers be allowed to pay fees for these services within limits, as long as these fees are disclosed to you.

The RDR document proposes that your life assurer monitor whether your adviser is providing an ongoing service to you, and stop paying the ongoing commission if he or she is not.

It also proposes that you should be able to instruct a product provider to stop paying commission to an adviser who is no longer giving you advice.

Short-term insurance brokers currently earn commission on your insurance policy premiums when you pay these, and the RDR document proposes that this continue and that the level of commission paid, as well as any service payments made to brokers, continue to be regulated.

It also proposes that a list of services that brokers can perform for insurers is drawn up, and that the fees for these services be regulated.

The RDR proposals suggest that the commission on short-term insurance policies be disclosed to you, and that you be allowed to opt out of paying this commission if you can show that the broker is no longer providing a service to you.