Standing the test of time

“The measure of intelligence is the ability to change,” Albert Einstein said. You do not need to be Einstein to understand just how much change the financial advice sector has endured over the past three decades, culminating in the Government-imposed Financial Adviser Standards and Ethics Authority (FASEA) standards of the past three years.

If we believe that navigating or embracing change is smart, then financial advisers must rank amongst the most intelligent of professions based purely on the sheer scale of regulatory, cultural, and systemic change they have dealt with.

Rather than look back in anger at the changes wrought upon advisers, this column seeks to understand the drivers of change, and celebrate the triumph of a clear consumer benefit which – arguably – is also the higher purpose of advice: serving the client’s best interest.

This core attribute has forever characterised the heart of the best of Australia’s advice community. Moving forward, it will stand the test of time as the most enduring quality trait of committed, professional advisers operating in the world’s most stringently monitored and regulated advice environment.

My following comments were written with risk-specialist advisers in mind, but also largely apply to financial planners.

THE PAST 50 YEARS AND MORE

It is instructive to look back to the ‘beginning’ to understand the root cause of the reputation issues that have fallen at the feet of financial advisers, often without due cause.

Large, systemic shifts occurred with the arrival of institutional influence in advice. This influence began with large life insurers, emerging from humble beginnings as mutual aid organisations. Life insurance mutual brands became powerhouses in their heyday. Their formation and success in Australia were in response to a failure by private companies to adequately service customer needs.

The mutuals existed for the benefit of their members. Because mutuals can take a long-term view, they are inherently suited to life insurance due to the long-term nature of policy coverage. With the advent of multi-agents and brokers in the 1970s, advisers were able to offer consumers product choice, which was another major step forward for the consumer.

Problems for the life industry can be traced to the demutualisation of the major life companies during the 1990s. Mutual life insurers were owned by their policyholders.

Once demutualised, a sudden shift of priorities occurred. First obligations were now to shareholders, no longer was the policyholder prime focus. This fundamental misalignment of interests between shareholders and customers was exacerbated by the short-term pressures that come with being a publicly-listed entity. Shareholders reigned supreme and meeting short-term growth targets became the priority. Watching the woes of once great AMP at present is difficult, but further proof that the demutualisation experiment of the 1990s was flawed.

We saw the (quite chic catchphrase for its time) ‘bancassurance’ model, whereby banks entered the industry by setting up or purchasing major life insurers and privately-owned financial planning groups. The Commonwealth Bank of Australia (CBA) acquired mutual insurers like Colonial Mutual, a strategy predicated on the vertically integrated business model whereby high-margin in-house products were sold through captive or aligned distribution networks.

Even though it was possible to get approval for external products on bank-owned licensee approved product lists, deliberate roadblocks and conflicted incentives gave the impartial product selection part of advising a client a high degree of difficulty and risk.

The legacy of this model? Awful. A report by the Australian Securities and Investments Commission (ASIC) in January 2018 showed the product bias of the vertical institutions, where clients invested more than 68% into in-house products and 65% for insurance placement into own products. It was common for the banks to run their licensee businesses at break-even or even at a loss, offset by margins made from in-house products and platform fees. This model clearly fell short when it came to providing advice that was in the client’s best interest.

It was this fundamental misalignment of shareholder interests with customer interests overlaid with the vertically integrated business model that was the root cause of most of the scandals identified by the 2018 Hayne Royal Commission.

The key proposition of Professor Steven Kerr’s ‘On the Folly of Rewarding A While Hoping for B’, is that a company’s incentive system will always trump their stated cultural values. If you tell employees to behave in one way and you incentivise them to behave in another way – which will ultimately win?

Had the major life insurers in Australia read Kerr’s paper, indeed if they had not demutualised in the 1990s, breaking the honourable link between owners and customers, then the Hayne Royal Commission and consequential actions of Government may have been avoided.

2021… AND BEYOND

Fast forward to a very different time and place, but as always, an environment marked by constant change. The sector has come full circle: the 20 year ‘bancassurance’ promise has collapsed with vertically-integrated business models within the banks offloaded swiftly since 2018.

The separation of product and advice has all but happened largely due to the reputational damage incurred by the banks and the incompatibility between banks and insurers.

Westpac brand BT Life, the last of the big bank owned insurers, is now up for sale.

The Hayne Royal Commission also recognised the pitfalls of selling life insurance direct to the public. The final report served serious consequences for outbound phone-based life insurance sales. The report emphasised the importance of quality advice in improving outcomes in the industry, saying the most damaging case studies of the Commission’s hearings involved consumers who were “unlikely to be armed with the information they needed to assess critically the features of the (usually complex) product that was being offered”.

Following public scrutiny of both financial advice and direct insurance over the course of the Commission’s hearings, consumers who need life insurance to protect themselves financially may ask who they can trust to provide the best outcome in terms of product quality and security.

The answer is that financial advice is still the best way for consumers to ensure they purchase the right type of life insurance that will not be denied at claim time.

The divestment by the banks of their life insurance operations and adviser licensees, mass privatisation of the adviser market, constraints on the sale of ‘direct’ insurance to customers, ‘client best interest’ duty, product neutral remuneration structures for advisers and extending unfair contract terms for insurers, has once again given us the opportunity to put client interests at the heart of everything we do as an industry.

All withstanding, adviser and client relationship has stood the test of time.

It is imperative that the life insurance industry continues to step up its advocacy of the value that advisers provide. Government and regulators also need to ensure that advisers are not smothered by reform overload and excessive red tape. Sustainability demands a strong and vibrant non-aligned life advice sector with the interests of the client at the centre of its activities.

I am a strong advocate that both receiving and acting on appropriate life insurance advice can be the most important financial decision an individual will ever make. Suncorp Life research shows a clear link between consumers holding adequate levels of insurance cover and their choice to receive advice from a financial adviser.

Recent research, compiled by CoreData on behalf of CPA Australia, found that respondents reported benefits to their physical and mental health, family and social life, relationships, and work satisfaction from receiving professional advice.

The ‘True Value of Advice’ report, with research conducted by IOOF and CoreData, found the majority (90%) of advised clients said that accessing financial advice has left them in a better position financially.

Especially regarding insurance claims, the proportion of claims paid for individual covers are far higher for claimants with an adviser than for non-advised claims (source: the Australian Prudential Regulation Authority’s (APRA’s) ‘Life Insurance Claims and Disputes Statistics’ report).

But claim time is not the only part of the insurance process where an adviser can assist a client to make a wiser purchase decision. Specialist risk advisers can offer technical skills and product knowledge that ensures a policy fits within the consumer’s circumstances and lifestyle.

Importantly, advisers work with clients to understand the coverage level that they need based on their own personal situation, taking into account their income, dependents, and any debts they have. Consumers not buying through an adviser, risk underinsurance – that is, not gaining enough coverage to meet their financial needs. This is a widespread problem in Australia as many people simply do not realise the level of cover they need if they cannot work due to sickness or injury.

Ultimately, the industry has come full circle. The sector has come to the blunt but honest realisation that the interests of the client must be at the centre of its activities, lest the industry will not prevail. The goal is in delivering best interest outcomes to the client. Most individual advisers focussed on building long-term relationships and trust will, like the rock-solid scientific discoveries of Albert Einstein, continue to stand the test of time.

Michael Pillemer is chief executive of PPS Mutual.