Financial planning firms will have to adjust their business models so they can remain viable should the proposed ban on commissions for both individual and group risk within superannuation become enshrined in legislation.
Dealer group heads and industry practitioners say advisers who are unwilling to invest the time and effort to prepare for the changes will likely see their revenue impacted on significantly and will be forced to shut up shop.
Futuro Financial Services managing director Dennis Bashford says the reforms will be disastrous, particularly for independent financial advisers because a lot of them are dependent on commissions from insurers to remain viable. "So they will have to look at changing their business models and diversifying and I don't think some of them have the expertise or infrastructure to do that effectively," Bashford says.
"What that means is that a lot of independents will go out of business and get bought out by the institutions, so the consumer will ultimately suffer because research, for example by Roy Morgan, has proven that a majority of institutionally-aligned financial advisers recommend their own company's product."
He says advisers reliant on selling insurance and earning commissions will have to adapt to the fee model, which many in the industry argue would make insurance advice unaffordable and hence exacerbate Australia's underinsurance problem.
A recent survey by Beaton Research and Consulting showed 72 per cent of advisers strongly disagreed with the proposed upfront fee-only model for buying insurance products inside super. The firm's adviser sentiment report on the banning of commissions also said that if life risk sales commissions were banned, most advisers expected the amount of life risk insurance they wrote to fall, with 61 per cent estimating a decrease in excess of 40 per cent.
"Many advisers believe the proposed model will result in changes to the insurance advice process, requiring significant customer education," the research said.
"Many advisers predict a flight to retirement or a mass exodus from the industry due to challenges of selling insurance with a direct fee to end customers."
However, Bashford believes advisers with a clearly defined offering will do well.
"The reforms will force insurance advisers to look at the way they are remunerated and I think there is some merit in that. A lot of advisers have been taking commissions in corporate super and providing very little service back - mind you they haven't been making much money out of it," he says.
"But I think there's an opportunity to make more money out of recommending insurance for corporate super, but it will be in exchange for providing a higher level of service, including ongoing education and support to the company's employees.
"Some of our planners have been doing fairly well on the corporate super by charging a fee - the costs are higher but they have a very clearly defined offering and provide a very strong service."
Financial planning practice OneInsure's principal, Andrew Holmes, says that while it is difficult to assess the impact of the reforms on the industry, advisers will certainly look to offer more insurance outside of super. "At the end of the day, life insurance is being recommended for the insurance itself regardless of how it's paid and what entity it is in," Holmes says.
He says a proportion of Victoria-based OneInsure's revenue is based on recommending insurance within super and if the ban goes ahead, the practice may continue to offer insurance within super but charge a fee instead. "The changes haven't been put through Parliament yet, but if they do we will have to adapt," he says.
"The situation may be that if we recommend life insurance and it has some other components attached to it like a trauma policy, we would most likely look to offer that outside of super and therefore we would still be able to receive commissions as we do now.
"So it really depends on the individual client and what they are after. Ultimately we need to be paid in some form and it will be disclosed the same way as before."
Specialist life insurer Asteron general manager Jordan Hawke agrees the industry will have to examine alternative revenue streams if the proposal becomes enshrined in legislation. "I think [the reform] will have an impact. Advisers will continue to provide advice in the best interests of the client, but as an industry we are going to have to look at how we have alternative revenue streams to pay for that advice if the reform remains," Hawke says.
"We will need to work with them to come up with a solution on how they do get paid for that advice."
In its final FOFA reform package, the government introduced a prospective requirement for advisers to get clients to opt-in or renew their advice agreement every two years from July 2012.
While numerous commentators and surveys have pointed to uncertainty for risk advisers, listed financial services company Clearview Wealth managing director Simon Swanson says the industry may actually benefit, depending on how the scaled advice proposals in the FOFA package pan out.
"I think the scaled advice proposals work very well and if they are articulated clearly in legislation, that will have an advantage for advisers because they will be able to give appropriate advice to the circumstances of the individual," Swanson says.
"In Australia today you really have a no-advice or full-advice story whereas under these reforms there is a chance to have light advice and the like or scaled advice as it's called in the FOFA documents."
He says if the legislation allows for specific light advice, then planners will be able to service customers they may not have been able to service before.
There is no doubt that while advisers and insurers have made strong arguments against the banning of commissions for risk within super, the government appears adamant to get the reform through Parliament.
Advisers may be best served by using their time to think about how to survive and get ahead in a post-FOFA environment.
