Developing a sustainable new advice model
Change is a constant in any business – from technology to regulation. How you respond to that change will ultimately determine your future.
In the financial services industry, the advent of further regulation will impact life insurance advice revenue models. Some firms are already putting measures in place to manage that while others may be looking at this as an opportunity to exit the sector. We asked some industry insiders for their view on what you should consider before making your next move.
The sooner you can start making plans, the better prepared you'll be for inevitable adjustments.
"This has been on our radar for a while," says Mahesh Roy, Head of the Financial Services segment at Macquarie Business Banking. "It's very rare a change like this will turn up out of nowhere. Good businesses are already looking forward and have been making changes in anticipation."
He gives the example of Macquarie's new debtor management solution. "We were very surprised that many of our first enquiries (and users) were insurance adviser dealer groups, as we'd designed it for financial planning businesses. But although they'd run purely on commissions, they knew in the long term they'd need to get fee-for-service payments from their clients and they wanted to set up their processes for that now."
"Many businesses have already implemented changes to their remuneration structure for insurance advice – in many cases as a result of regular business reviews - to fix an area they want to improve rather than react to legislation," comments Sue Viskovic of Elixir Consulting, an advice advocate. "Change can be painful, but to get comfortable with it consider bringing on new clients under a new pricing model as an interim measure – while you still receive consistent cash flow from existing clients on the old model."
Daniel Burden of Life Risk Management says his firm moved to a new model eight years ago.
"We had a vision for a more sustainable remuneration model. We knew a high upfront commission couldn't support ongoing strategic advice, and we were determined to ensure that our client's strategy would always respond appropriately"
He says having stronger ongoing revenue has enabled the firm to support clients through their claim "without having to put our hands in their pocket during their time of need."
Look into alternative revenue models
As the industry moves away from upfront commissions, hybrid models are becoming more typical.
"Our hybrid model ensures we can still offer initial advice profitably, and then enter ongoing service commitments to keep that strategy aligned with a client's situation from year to year – which of course is in their best interest," explains Burden.
Life Risk Management's business model makes them an outsourced life risk specialist for other financial service providers, where referrers receive a revenue and value split for the work they do in identifying the need and then educating clients about the value of quality strategic risk advice.
"For some services, such as business and personal succession planning, we can charge a facilitation and advice fee for the value we bring as project manager and risk adviser," he says. "Where we enter an ongoing service agreement with these clients we have the flexibility to dial down commission."
"If you're charging a fee directly to the client, it can be a lot more palatable if it's part of a range of services," Roy comments.
"For example, an advice firm that specialises in a complex market such as medicine may offer all types of services for professionals: insurance, mortgages, financial planning, superannuation, even accounting. They could apply one annual fee to manage it all, and then rebate any commission to the client or deduct it from the annual fee."
Viskovic believes it's time to reposition the way insurance services are sold.
"There are a number of ways to subsidise or replace insurance commissions for risk advice," she says. "You may charge an ‘advice fee' to cover the process of putting a ‘disaster recovery plan' in place. If insurance happens to be part of that plan, you could offer clients a choice. They could pay an agreed fee regardless of whether the insurance cover goes in force, and forego the commission but provide additional value through a lower premium. Or you can receive commission from the insurer paid only when the policies complete – a form of ‘success fee' that may be considerably more than the fee you would charge – recognition that you are taking the chance of potentially doing a lot of work for them that may not be paid for."
She says support through the claims process is one of the most valuable services you can offer a client. "Clients should absolutely be made aware that it can pay to have an adviser in your corner at that time."
A number of her clients give customers a ‘Claim Guarantee' once their policy is in place. It includes their mobile number as a 24/7 contact point if they need to make a claim. They don't charge for that service, but they do charge a plan fee and receive a higher ongoing split commission to cover ongoing service costs.
Focus on the value of advice
You're not selling insurance, you're selling the outcome – peace of mind and financial support when they need it most.
"You're not selling insurance, you're selling the outcome – peace of mind and financial support when they need it most," says Viskovic. She says if advisers can demonstrate the value of their advice, the insurance policy itself is really just a by-product.
"Once clients are buying your advice to help them plan the way they handle potential disasters, rather than simply buying insurance, they value their insurance more highly and will have a lower lapse rate. This is also a more profitable model – you'll win more clients and they'll keep renewing."
"Once you have a few poignant claims under your belt, you're in life risk management for all the right reasons," says Burden. He believes underinsurance is a big issue for Australians, and any changes need to help resolve that – rather than potentially force the industry to put up premiums.
Plan ahead for cash flow strain
Shifting from upfront commissions to back-end commissions may make an initial dent in your income cycle. You might need to invest in technology to manage processes more efficiently and keep costs under control. And if acquisition is part of your growth plan, cash flow might take a hit in the short term as you scale.
"We did it tough for a few years, getting over that hump as we transitioned from upfront commissions," Burden admits. "We did more fee-based financial planning work to cover our risk business. It was a big commitment for us and took a few years to build up the ongoing revenue."
"When we help risk advisers transition to a new model, we map out what cash flow will look like first so we can see when the crunch will hit, and can potentially help fund business through this period," explains Roy. "Typically a client might take a hit on revenue in year one, but by year three they're doing better than before with the same amount of new business."
Reframe it into the positive
Whatever changes you make, you'll need to make your customers aware of them. "This can be an empowering thing if you show your clients you're proactively changing things to create a positive experience for them," explains Viskovic.
She says it's important to look at all aspects of your business before making any significant changes. "You might pull one lever and it will impact another part of the business. Get your staff involved in the process early – this will ensure collaborative thinking."
Time for a change?
The flipside of change is that it will force some to reconsider their options and head for the exit. Roy says now is a good time to consider a merger or sale. "We know many people who would be happy to buy all or part of an advice business and still employ the adviser for their skills and experience." It's certainly one way to ease the pressure if you don't want to face this on your own.
Viskovic also emphasises the importance of seeking external support. "Don't try to do all of this yourself – reach out, get some experience on board. You'll find you can short cut the change and learn from the mistakes of others. The process will be much more effective."
Ultimately, it's also important to recognise what this change will do for perceptions of the advice sector, and of insurance in general.
"There's certainly an under-insurance problem in Australia. More people need to feel they can trust advisers to put their interests first – and also recognise and value the hard work good advisors put in to protect people and their families," says Roy.
Change can be powerful. Put a little thought into how you can manage it proactively, and you could make it a force for good in your business – and for your clients.
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