Why Fee for Service advice and Doctors work together
There is a lot of misunderstanding about fee structures when it comes to Financial Advice and there are many reasons why this is the case. As we are completely transparent with anyone we talk to, we thought it might be time to dedicate a piece directly to this hotly contested subject and share this information with a wider audience. To keep it simple ill break it down to 3 parts:
Insurance brokers are subject to the same rules, licensing and obligations as financial planners, they must work for you.
Commissions do not vary from insurer to insurer and they are not “free”. You can not access “retail” cover directly. It always pays a licensee, unless they opt out.
Conflicts of interest and how to determine if your adviser is right for you
Please keep in mind that this is just a discussion based on my experience and many other good advisers run their own businesses in different ways for different reasons and each model is not without merit. As you might tell many patients, just because you don’t understand it, doesn’t mean it’s wrong, there are many variables to consider and we rely on experts for their own experience in weighing these up to suit a unique situation.
Your Adviser works for you but it wasn’t always that way
Financial Planner/Adviser is a relatively new designation. In 1997 (when I joined my father’s advice practice as a very green 17 year old) the then Keating govt had just introduced this thing called “Superannuation”. With a compulsory 9% of Australian’s salaries going into an account they couldn’t really withdraw financial institutions wanted to grab as much market share as they could as fast as they could. So how would they do this?
Life Insurance is an old business. Australians are typically more underinsured than their counterparts around the world as the “she will be right mate” spirit shines strong through our sun bleached skin. Life offices were attached to larger financial institutions such as banks and investment houses and had small armies of “agents”. These agents were very highly trained in selling techniques and persuasion that helped them to move more product (insurance premiums and funds under management) and they were heavily incentivised to do so. Paperwork was easy and products were pretty simple so these agents or “brokers” simply acted as a shop front for the bank or insurance company they worked for. If a broker did not properly consider your personal needs and circumstances and you ended up getting into a financial mess it was essentially a buyer beware scenario and you had the same kind of protection as if you bought a toaster than did not work after 3 months. Without oversimplifying the process, the ominous sounding “Agent” became the approachable and caring “financial planner” who asks you about your pets and helps you “achieve your dreams” etc all while taking an ongoing fee of 1-3% on funds under management and getting paid more than you even spend in year one on insurance. If they were very good, they might even get an all expenses paid trip to europe or a fat “volume bonus” for selling a whole lot of one product or fund. This is not to say that these guys were all sharks. I know many advisers, my father was one of them, that had a very strong set of morals and would walk through fire for their clients but for every one that stood their ground and earned a modest living there would be another not bound by such ethical dilemmas, especially with significant financial incentives to help them rationalise their behaviour.
Enter the regulators
In 2012 the Future of Financial Advice (FOFA) reforms were introduced. Essentially this was the first real attempt to deal with conflicts of interest and the cornerstone was around a novel concept known as “Best Interest Duty” which meant an adviser had to consider their clients best interest before their own. This of course is a grey area but this revolved around the concept of a reasonable basis for providing advice and recommending products. Could you reasonably sell life insurance to a widow with no dependents at age 75 for a $15,000 annual premium, even if she asked for it? That one is not so grey if you ask me but it illustrates a point. Advisers had to be appropriately trained and sat a diploma of financial planning which is a 4 part course that could be completed in a few days but at least provided some basis for the adviser knowing what they were doing. Advisers had a complaints body in place that made it possible for clients to be reimbursed for poor advice. This was hard going for many with increasing documentation killing profits and potential claims for misconduct threatening the financial institutions that employed these advisers. The industry was starting to become a profession.
In 2018 the Royal Commission into Banking, Superannuation and Financial Services Industry (RC) began. Still being considered in postmortem, this highlighted some of the weaker points of FOFA but ultimately threw a few advisers and smaller financial institutions under the bus and moved on. What it did make clear is that these rules are in place and they must be followed… or else. Before the RC was even over banks were running for the hills and going into damage control. In the last 2 years almost every single bank and many product manufacturers have disposed of (yes that word is harsh for a reason) and distanced themselves from their advice arm or “licensee”. FASEA and the Code of Conduct came into being and at the end of this year all advisers must have passed the entry exam and be qualified with a an appropriate recognised university degree by 2026. They must also act in a professional manner and there is supposed to be a code monitoring body (yet another regulator) but FASEA actually got dissolved at the end of 2020 so once again we are all left wondering, what next.
Commissions and how they really work
There are no Commissions on Investment or Super. None. Since 2014 they have been banned and the final holdout products known as “grandfathered" commissions ended on 31st Dec 2020. Fees can be charged through investment or super but this must be opted into at least every year or fees are turned off.
Insurance products do have commissions, advisers can now choose only 2 remuneration options across all insurers:
An upfront remuneration which is 66% of the insurance premium in year 1 and 22% ongoing
A level remuneration which is 30% of premium per year.
No exceptions. All insurers are the same. If a policy is cancelled or amended within the first 2 years the adviser must return these funds to the insurer. This is a far cry from the heady days where commissions in year 1 might be 120% up front and this could be cancelled and replaced every 13 months allowing clients to shop around or advisers to “churn”. Advisers can choose to rebate commissions or “dial down” so they receive nothing and charge a fee for the work they do instead. The fundamental nature of insurance is that many policy holders pay a small sum to cover the cost of one claimant needing a large sum to cover their debts or family living costs in the event of their death or disability. This logic is often applied to the insurance pool (insured Australians) as a whole and the idea is that small clients subsidise large clients. Personally, I think we should charge a fair price for work done even if it does mean we have to turn smaller clients away as we are then not overcharging large clients. These are the key reasons for this argument and I cover this with every client. Some are happy to choose the commission model, the majority choose fee for service but it’s always an informed choice, to the point where I am pointing out any commission I might receive with a neon sign and asking “do you understand? Are you sure?”.
Commissions and cross subsidy
If you are an average medical professional you will have an income over $100,000. You might also have a mortgage of $1,000,000 you want to cover. Considering the cost of cover these days for a person in their mid 30s you might spend roughly $4,000pa to cover yourself well for Life, TPD, Trauma and Income Protection using a level premium structure. This pays a $2,640 (66% commission in year 1) which is lower than the $3,500 average fee. The adviser is essentially deferring payment as next year they recieve $880 (22% commission ongoing) and the adviser breaks even year 2. While its a point of contention, there is no obligation for an adviser to do any work to receive ongoing commissions. It is good practice but it’s not required. As your premium increases over the years the adviser collects 22%. This can be rebated but this is complex and can go horribly wrong as it did with McMasters and Big refunds who no longer exist and now nobody collects or rebates that money.
Dialing down and charging hourly or flat rates
Dialing down reduces your premium by 20-30%, depending on the insurer. The average medical professional above would then reduce their $4,000pa premium to $2,900, a saving of $1,100. Based on the standard $3,500 fee this has them breaking even a little after 3 years. That is if the premium does not increase, which it very likely will. There are no clawbacks, you can cancel and modify whenever you like. Assuming you hold that policy for 20 years and it’s not indexed or rates go up, that’s a saving of over $22,000, enough to pay for more than 6 complete do overs at $3,500. If you are coming in every 2.5 years and completely restructuring your cover, this is not a good option. Forgoing the recent rate rises and legislation changes a policy would generally run 5-10 years with minimal intervention and modification.
Note: You can not modify a policy to “rewind the clock” after its been set. It’s either commissions or dial down. In some cases you can use a “dollar for dollar” dial down where the premium is reduced by the same amount as the commission but this policy has to be held for some time and takes a good adviser to navigate this…or you might get lucky and be able to do this yourself.
Claims
The widely accepted argument is that this ongoing commission covers claims which may have been true some time ago as costs were very low to run an advice practice and essentially a long standing risk business simply had to “farm” clients and keep them relatively happy each year and process claims which can range from simply submitting a form to over a years worth of highly skilled work and advocacy. We charge based on the work we do and costs range from $500 to $14,000. One thing that has changed over the years is that insurers often provide a “financial planning benefit”. Typically, if a claim is over $100,000 as a lump sum this benefit pays the adviser $2,000-$10,000 to manage the claim for you. Considering this benefit covers most costs and the majority of clients don’t claim, we think collecting commissions for this promise is not in our clients best interest.
So which is the right choice for you?
Choosing between Commissions and Fees is one part of the picture but this is something your adviser can help you determine. Before you get there though you need to know a few things.
Is my adviser qualified?
Does you adviser have the education they need? Have the passed the FASEA exam? If they don’t by the end of the year they will have their license stripped (This might not be great for a long term plan but it doesn’t mean they cant do the job now). A great resource to check all this is on the Asic Adviser register. You can see who your adviser is licensed by and their education and experience plus any bans or disqualifications they might have. If your adviser has finished their diploma only and started practicing in Nov 2020 and is telling you they are well equipped to handle complex retirement and investment planning I’d be a bit cautious.
Who does my adviser work for?
The old adage used to be if you went to McDonalds you weren’t going to walk away with a bowl of noodles. AMP was up until recently the dominant force in advice in Australia and when you went to them for advice more often than not you would walk away with an AMP super fund, AMP insurance and maybe a squeaky toy. Since the royal commission the onus to consider all products in market from all product providers has been significantly increase and policed. So yes, your adviser might work for a licensee that is owned by a bank or insurer but this doesn’t mean they are not working in your best interest. It doesn’t pay to match that knowledge, available on asic register again, with the advice you receive. Oh and worth mentioning that “independent” or “unbiased” is a restricted term. If your adviser receives commissions for you or any other client they can not use these terms to describe themselves. As we work under Dirigere Advisory, which is not owned by a bank or financial organisation, we are able to proudly call ourselves “Non Institutionally Aligned” which does not have the same ring to it.
Ask around, find a fit, follow your gut
Who do your colleagues use? Are they happy with them? Google is an advertising platform so googling “Financial Advice for Doctors” will likely find you the firm that is happy to bid the highest for advertising space...that you will ultimately pay for. If you are an employee at a hospital with simple needs do you need a firm that runs its own world class accounting and legal support and wants to sell you an investment property to go with it all?
At NOR we operate a business model designed specifically for doctors and their families. All of our clients very similar and this allows us to provide specialised advice for this specific demographic and our pricing model is designed to suit that. We are not trying to be everything to everyone which allows us to keep the costs for specialised advice low. We wont deal with direct shares, we currently wont give you complex retirement planning or deal with clients with over 5mil to invest. We dont sell properties or scheme and most important of all, like many of our sole trader or contract clients, if we don’t do work, we don’t get paid.