“Call me a relic, call me what you will
Say I’m old-fashioned, say I’m over the hill”
— “Old Time Rock & Roll”, Bob Seger & The Silver Bullet Band
Rethinking risk (advice)
OK, so REP413 (Review of retail life insurance advice) is a little dated, but it’s still relevant.
ASIC have provided a list of warning signs for poor advice and they are somewhat inextricably connected and still current. Sadly, they are also still occurring in the wild.
Being too inquisitive may get you into trouble but not when advice is concerned. This applies to uncovering information about relevant circumstances in the provision of advice and frequently asked questions. It is not uncommon for our discussions with advisers to turn to questions. After all, we are here to assist, and we do like a chat when we have the time. There are circumstances when the answer is black and white and then there are those which require some of the grey in between. Every client is different, and every adviser is different, and this is definitely a good thing.
Some of our time during the review can be spent with advisers discussing relevant issues they are facing, and we also provide additional and holistic advice to businesses and Licensees. These discussions will usually occur after we’ve covered specific issues arising from the review and the support will often include fielding questions from advisers in their day to day activities.
We are finding that there are some questions appearing more frequently and we thought we’d address some of these concerns from advisers and draw on a previous ASIC report for some data, as well as past experience.
READ ASIC REPORT413
I don’t take orders. I barely take suggestions.
What do I do if my client tells me how much insurance they want?
Ask why. Ask why again, then consider against the circumstances. S961B of the Corporations Act requires the advice you provide to be based on your client’s relevant circumstances; a requirement , reinforced by the FASEA Code of Ethics.
These Standards echo, support and reinforce your Best Interests Duty and Standard 6 gives the clearest indication as to what is required and mirrors S961B(2)(b)(ii)(f)(g) –
“You must take into account the broad effects arising from the client acting on your advice and actively consider the clients broader, long-term interests and likely circumstances.”
Given that your consideration – and your duty to actively ‘take into account’ your client’s circumstances, it’s surprising that there’s still so much confusion on this obligation: polarising views on this subject range from blindly following the client’s request, to giving the client everything they need, regardless of what they asked for, or can afford.
The trouble is the best approach lies somewhere in between in most cases.
Under-insurance is a problem in the event of a claim and over-insurance can be a problem every day there is not a claim.
In a perfect world, every client gets what they need, their cover is affordable forever and everyone lives happily ever after. In the real world, however, many clients cancel the insurance when they are most vulnerable and end up being underinsured anyway because they can’t afford to maintain their cover.
It’s tempting to blame insurers for these lapses, but re-pricing products may not be the entire cause.
At the heart of every (good) advice file we (should) find the adviser’s active consideration of the goals, objectives and identified needs. Unfortunately, this does not always occur.
“The sum insured and the affordability of the premium are interdependent issues and go to the heart of the provision of appropriate personal advice that complies with the best interests duty and related obligations.”
— ASIC Report 413: Review of retail life insurance advice
If advice is to be solely provided on the client’s request, then this can be a cause of concern for ASIC as it poses a risk that the client may be over or under insured relative to needs and income. A financial adviser is not an ‘order taker’ and must exercise their professional judgement when providing risk advice to their clients.
ASIC specifically address this early in the report and state “Quality financial advice helps consumers identify their life insurance needs and find appropriate and affordable products that meet those needs.” ASIC also highlight their concern with advisers failing to adequately enquire into the personal circumstances and perform an appropriate needs analysis, based on the adviser’s findings and client discussions. Scaled advice may be provided but not without the appropriate assessment of the relevant circumstances, uncovering of needs and the provision of applicable warnings and implications of requesting and receiving the scaled advice.
How to demonstrate your consideration:
Documenting the process is important, along with the use of tools to assess the specific outcome of various scenarios and the impact of these. Then of course, documenting the recommendations in a way that both explains the advice and provides the relevant (and specific) warnings for any priorities, preferences and decisions made by the client or adviser.
Product providers are offering more and more options for consumers, so the need for professional insurance advice has never been more important. One of the advantages in receiving professional advice is the guidance and education that can be delivered by the adviser. Not only from a strategical perspective, but also at a product level. There are a huge range of providers offering cover and balancing and personalising policy features and benefits is where the adviser can assist.
- Consider the needs and circumstances in detail against the request;
- Discuss the current position against any future plans or long-term objectives;
- Assess affordability now and over time;
- Address the impact of the advice to the immediate and ongoing circumstances;
- Discuss the level of control required over the policy;
- Canvas the personal situation and specific requirements or requests for beneficiaries;
- Adjust the methodology to suit the client and circumstances.
Superman versus Commander Cash
The client needs the cover. Why can’t I put it all in their super if they can’t afford it?
Recommending cover in super can be advantageous for clients with expense limitations or other competing cash flow objectives (debt reduction).
Unfortunately, it can also sometimes be viewed as an easier option due to the immediate impact not being seen from day to day as the premium is paid. It can be a beneficial strategy for some client and the important thing to remember is that it should not be at the expense of all else.
Appropriateness will depend on a range of factors within client circumstance and what the intended cover is designed to do. Ownership is a critical factor and depending on the beneficiary, the benefit may be reduced if they are a non-financial dependent. There is also the added layer of complexity and a Trustee becomes involved – especially when disability cover is concerned. Another concern in the personal ownership of the policy is when there is no estate plan in place and the beneficiary is listed as Legal Personal Representative.
One of the most frequent reasons why insurance recommendations are often found to be inappropriate is because the adviser didn’t confirm the sustainability of the strategy.
At a minimum, the basic information (current provider, balances and contributions) is required and the adviser’s consideration of this information is critical to assess the impact. We also encounter advice with the premiums being higher than the level of all contributions. This is a big problem and can have a significant effect on the client.
“Generic warnings to clients that paying for insurance from superannuation has cash flow benefits but will erode retirement savings are not adequate.”
— ASIC Report 413: Review of Retail Life Insurance Advice
Other instances include the recommendation of cover that simply is not affordable for the client. Whether it be from the adviser not adequately assessing the cash flow details, to recommending cover costing more than what is available within the budget.
Again, this comes down to balancing the needs of the client, their relevant circumstances and the subject matter of the advice.
Personal and super ownership have their own merits and pitfalls.
Using the client’s superannuation to fund insurances may assist with affordability and competing objectives but the overall impact cannot be ignored.
- Assess a range of options and combinations;
- Discuss and address the implications of the differences in ownership;
- Consider contributions to support the strategy;
- Balance the potential outcome against retirement goals and objectives;
- Canvas budgeting and cash flow;
- Obtain statements and confirm balances and contributions.
On the level: premium options
Shouldn’t everyone under 40 have level premiums? And everyone over 40 have stepped?
Premium structure should vary from client to client and be measured against the individual circumstances. One size fits all approach is fraught with danger.
Generally speaking, a younger client may benefit from a level premium but only if the policy will be maintained for a sufficient amount of time to surpass the cumulative premium differential. It is not sufficient to simply throw a blanket over every client under 40 and provide advice for level premiums. It is expected that the adviser will identify elements of the client circumstances to support the approach and explain the specific reasoning and benefits within the advice document.
Stepped premiums tend to be the most popular choice due to the flexibility offered but, again this needs to be directly linked to the circumstances and explained. An appropriate assessment of position and future goals and objectives will assist the adviser in determining the short-term and long-term needs and decide how much flexibility is required.
Report 413 highlights some information surrounding lapse rates and ASIC have based this data on policies which were cancelled by the client or lapsed due to non-payment of premiums. What it does show is that the lapse rate for stepped premiums is higher than that of level but whether these policies are being cancelled or simply being replaced is unknown.
What is concerning is that a number of policies are being cancelled prior to the benefit of level premiums being realised and ASIC stated that they found a number of files where the adviser failed to add any meaningful value to their clients by: “helping the client evaluate the merits of stepped versus level premiums relative to the amount of time the client may expect to hold insurance— for example, until debts are repaid, children are adults or the client transitions to retirement.”
“In other cases, we found limited consideration of the merits of different premium options or any engaged discussion with the client about how long they intended to hold the cover, and therefore the effect of stepped premium increases on the premium (and the client’s cash flow) across that timeframe.”
— ASIC Report 413: Review of Retail Life Insurance Advice
Exploring and assessing the client’s details and future plans in greater detail will allow for some future planning. A proper assessment of all relevant circumstances should result in the adviser being able to create a fluid timeline and consider strategies to meet specific needs at each major junction or milestone. Structuring a balanced insurance plan which meets the immediate needs and allows for changes in the future will likely result in an appropriate outcome for the client and minimise the risk of policies being cancelled when they are needed most.
The risk of the policy lapsing in later years can be mitigated in future years by structuring the cover in the initial stages to allow for likely and planned changes. This may include the use of a combination of existing cover with new, and the use of stepped and level premiums, both within and outside of superannuation.
- Canvas budgeting and cash flow;
- Uncover any obstacles relevant to the client circumstances;
- Consider the short, medium and long-term goals and objectives;
- Adequately consider the existing liabilities;
- Document and actively assess a range of products and strategies;
- Consider the immediate and ongoing impact of the strategy.