AFA responds to QAR submissions from Choice and ISA

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The Association of Financial Advisers (AFA) has slammed both Choice and Industry Super Australia (ISA) for submissions to the Quality Advice Review (QAR) that have included recommendations that “would have a seriously detrimental impact on the financial advice profession and their clients.”

According to AFA, the Choice submission “is full of criticism of financial advisers, unfair judgements, and generalisations.”

The representative body criticised Choice’s submission for not including recommendations that will help make advice more accessible and affordable for everyday Australians, except for one – the suggestion that a government-funded advice and guidance service should be established for low- to middle-income Australians.

Two Choice recommendations, in particular, caught AFA’s ire: the banning of life insurance commissions and the banning asset-based fees.

AFA said Choice claimed that life insurance commissions “create a perverse incentive for advisers to sell life insurance to people that are not suitable for their needs.” In making the claim, Choice quoted from the 2014 ASIC Report 413 on life insurance advice:

“This research into life insurance advice found the way an adviser is paid (e.g. under an upfront commission model compared to a hybrid, level, or no commission model) has a statistically significant bearing on the likelihood of their client receiving advice that is not in their best interest.”

AFA said Choice was oblivious that the quote was saying there was no correlation between poor advice and the use of either hybrid or level commission models. Furthermore, the hybrid model in 2014 (80% upfront, 20% ongoing model) generated a 93% pass rate in ASIC Report 413 – a result that hasn’t been beaten in the last 10 years. The cap is currently 60% for upfront commissions.

“They go on to demonstrate their total ideological opposition to commissions, however, have they bothered to ask life insurance clients about their views on paying advice fees or commissions?” AFA said.

AFA said clients choose to pay by commission for two good reasons: one, it provides a means to spread the cost of the advice over a number of years; and two, clients rarely pay more than a small fee, where they go through the full advice process, however, are ultimately unable to get acceptable cover, due to pre-existing or family health conditions.”

Choice’s discussion on asset-based fees, on the other hand, “goes to the next level, in terms of unfounded claims and inaccuracy,” AFA said.

Choice claimed asset-based fees “do not provide an incentive to provide ongoing services to the client, because the financial adviser is paid regardless” and “have consistently been a source of poor consumer outcomes for decades and have driven disastrous business models.”

AFA said these “extraordinary claims” were stated with no evidence and failed to acknowledge the existence of Fee Disclosure Statements and now the Annual Renewal obligation.

“If Choice really thinks an adviser can get away with providing no service, but still get clients to sign the annual renewal and consent forms, then they are harshly judging the common sense of the hundreds of thousands of existing clients who pay for ongoing advice on the basis of asset-based fees,” it said.

AFA also accused Choice of not knowing how the charging model works, when the Australian consumer body claimed “asset-based fees also allow firms to ‘clip the ticket’ of their client’s hard earned-savings at multiple stages in the process,” including “a ‘platform administration fee’ of 0.75%.”

In the case of ISA’s submission, AFA “strongly opposed” the recommendations to ban ongoing advice fees within Choice funds and to ban life insurance commissions.

The banning of ongoing advice fees in Choice funds has been argued by the ISA on the basis of the lack of competitive neutrality between MySuper funds and Choice funds.

“This recommendation came from [Commissioner Hayne’s] lack of understanding of the value of financial advice and a tight view of the application of the Sole Purpose Test,” AFA said. “He presumably thought that if you had your money in a MySuper option, then there was not much need for ongoing advice. The government took a more balanced perspective and only banned ongoing fees in MySuper funds.”

So, while AFA acknowledged an issue with the lack of a level playing field, and advisers being more likely to work with clients in Choice funds, it said the right step to take was to reconsider what has been done with MySuper fund members.

ISA’s call to ban life insurance commissions is “equally based upon flawed logic” and lacks evidence on the grounds of consumer protection, AFA said.

ISA referred to the 2014 ASIC Report 413 to illustrate poor client outcomes, but as already mentioned, hybrid (80% upfront commission and 20% ongoing) had a 93% compliance result, which is far higher than any other recent report on advice quality.   

In terms of presenting an incentive for advisers to recommend clients move their insurance out of group super funds, AFA said: “An adviser is forced to act in the best interests of their clients. If the existing fund can provide the best cover, then they must recommend this and seek to charge a fee accordingly. If the best option is to place the insurance through an individually advised policy, then they will need to do that. It is certainly not the case that the best option for the client is always to stay where they are. Knowing the options, and understanding what suits the client best, is part of the value that comes with getting financial advice.”

AFA also dismissed ISA’s claim that the clawback of commissions, when a product lapses in the first two years, does not apply to renewal (trail) commissions, which it said, “reduces the disincentive to recommending switching products within the clawback period.”

“This is a nonsensical suggestion when you look at the detail,” AFA said. “If an adviser was to recommend the client move to another insurance policy within the first year, they would lose 100% of the upfront commission, and would not yet have received any servicing commission. If they were to recommend moving during the second year, then they would lose 60% of the upfront commission through the clawback but would retain the first servicing commission.”

ISA also raised the issue of underinsurance referring to a 2019 Rice Warner report, to which AFA said: “the debate on the issue of underinsurance needs to be a bit more substantial, and not just a reference to a dated report that does not reflect the current situation or the likely future situation if commissions were banned.”

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