Is independent advice under threat?

01 August 2013 Michael Blain, Altrisk

Unrelenting pressure to achieve growth is causing division within the life insurance sector, pitting advisor against advisor, advisor against direct agents, and even advisor against insurer.

While pursuit of growth and profits will always drive the market, the burning question is whether this can be at the cost of independent financial advice? Is our industry undermining the very survival of the independent advisor? I ask this because I believe we are at a tipping point – the sustainability of independent advice is under threat.

Giving advice in current conditions

One would have expected that the FAIS drive to professionalise the industry would give rise to a greater level of distinction between the different distribution models, with advisors now imminently more qualified to provide advice, factual information, interpretation and proposals with higher levels of competence and transparency. Giving advice incorporates the exercise of judgement and interpretation for a client’s unique circumstances. It should be independent of product or provider influence. But is it?

In tough market conditions profits are being hammered by cost pressures on all sides for intermediaries and insurers alike. In the face of such pressure, we have seen direct insurers with deep pockets raising the ante when it comes to aggressively marketing their commoditised products. But the threat to the independent advisor does not stop there.

Indecent proposal

Independent financial advisors are being courted by product providers with large upfront payments and ongoing sales remuneration, well in excess of regulated commission. This is conditional on them entering into tied agency agreements with a particular product provider.
The consequences of these arrangements are that advisors are no longer independent. They are heavily incentivised to favour the product suite of their principal product provider and are placed under intense production pressure, which inevitably leads to the churn of their existing client base in favour of their new masters.
Churning is seldom in the best interests of the consumer – this incurs unnecessary expenses which are passed on to all consumers. The reality remains that current practices by some product providers and intermediaries are threatening the future of all independent advisors.
Thriving agency models

However, I certainly don’t want to paint all tied agency models as inherently bad – I believe there is a desperate need for true agency models to thrive and to be a platform to attract young people into the financial services industry with support and mentoring. Many of us bought our first policy from a company representative with a well-known brand on their business card.
But the issue of independent advice is called to question when certain financial advisors enter into so-called tied arrangements, but are for all intents and purposes continuing to represent themselves to the public as independent financial advisors – despite being heavily incentivised to favour particular product providers.

No guidelines

There is inadequate upfront disclosure that the intermediary represents a single product provider – many tied agents continue to have direct contracts with multiple product providers, either directly or via associated entities. There is no general agency arrangement in place to access other product provider products. The intermediary acts just as they did before but with an undisclosed revenue stream buying their loyalty. This looks to me like a get rich quick scheme at the expense of sustainable independent financial advice.
What happened to the principles behind conflict of interest regulations? What happened to the FSB’s directive 132.A.ii (LT) on general agencies and equivalence of reward? What happened to professionalism? We need to put the spotlight on these arrangements to see if they stand up to scrutiny. The very survival of professional, independent advice is at stake. It’s time to focus our energy on building a sustainable, professional and respected financial services industry and to stamp out self-interest and greed.
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