“Those who cannot change their minds cannot change anything” — George Bernard Shaw
De-risking risk advice
Considering that the Assured Support Team has reviewed well in excess of 11,000 adviser files, we are well placed to identify recurring issues. Normally, we start with objective data, but in the warm glow of the new financial year, we thought we’d shake things up a little by highlighting subjective observations.
In this article, three of our Senior Consultants identify where advisers are struggling with risk advice and, by focusing on specific issues, offset their observations with practical suggestions.
You may be surprised by their observations but thrilled with their practical suggestions.
Advice Process failures
Avoid taking short cuts to nowhere
The biggest mistake I see advisers making is that when recommending a client replace an existing insurance product, they take between one and three common shortcuts in their process.
First – and this is where things can go spectacularly wrong – they don’t read their own research. Another staff member in the business (or an outsourced provider) may assist with the initial product research on existing insurance and superannuation, and that is fine – but “the left hand has to speak to the right”.
Advisers need to pay attention to each detail of the available research. For example:
- Is there an exclusion or loading that may indicate an underlying health issue?
- Is there a “plus” income protection policy attached to a core policy?
- Is the employer making additional contributions to fund insurance premiums?
- Is the existing product paid monthly rather than annually?
- Does the existing occupation rating seem to be out of date?
- Is there an option to change the existing product without underwriting?
- Has the client actually been contributing to super over the last 3 financial years (for example in the case they are self-employed)?
- Is there a “loyalty” benefit built in to the existing product?
Any of the above factors could have significant ramifications when considering replacing an existing product.
Next, advisers frequently don’t carefully read the PDS or insurance guide of the existing product. Assumption is the mother of all mistakes … and it is important to retain an open mind when considering replacing an existing product. A classic example advisers miss is when a client has default insurance cover in an industry fund that costs “X” dollars, with the option to change the occupation rating without underwriting, thereby reducing the cost to “Y” dollars. In that case, it’s hardly reasonable to use “X” as the point of comparison with other products!
Third, advisers may unduly rely on “Risk Researcher”, “Life Risk Research” or other software research. These can be fantastic tools, but they are not the “source of truth”. Their reports explicitly state that advisers need to generate quotes directly from the insurer to verify details. Also, the “core and supplementary ratings” and the list of “benefits gained and benefits lost” are not, in and of themselves, the basis for product replacement: the adviser needs to explicitly interpret key differences.
I believe it is crucial that advisers do not take these short-cuts in their process. Four out of five times the outcome may be fine, but on that fifth occasion, the product replacement recommendation may not be reasonable or in the clients’ best interests, and this is not a good outcome for the client, the adviser or the Licensee.
Records of Advice
Be empowered to use an ROA!
Much is written about the increasing compliance cost being carried by advice businesses. For those who provide a lot of insurance advice, significant premium increases in certain demographics and decreasing commissions on the backdrop of some reduced policy features and pandemic-related disclosures have caused clients to rethink their level of cover, creating a wave of demand for advice over the past 12 months.
Coaching advisers to be confident in the practical application of their compliance obligations is part of what we do. Needless to say, we continue to be surprised when advisers tell us they do SOAs for any insurance change just to be covered. Adding extra to your workload does not necessarily improve the client experience or enhance their understanding; sometimes, less is more. Hence, we would like to share the 3 most common insurance scenarios where an ROA referencing the previous SOA can be used instead of producing a new SOA, assuming there are no material changes in the client’s circumstances.
Scenario 1 – Due to stringent underwriting, a client may receive a contract offer with a premium loading or an area of exclusion that the adviser was not expecting. The adviser then wants to recommend an alternative product. Can an ROA be used?
Answer is yes. The new product can be recommended, and the product advice for replacement can be revised. If the unconditional contract premium is higher than the previous disclosure, the difference will need to be included.
Scenario 2 – The client has received their renewal notice and would like to keep their current level of cover, or reduce their cover to maintain their existing premium level prior to the increase offered at renewal. Can an ROA be used?
Answer is yes. If the adviser needs to research an alternative product and recommend a provider that is cheaper but maintains the same level of cover, an ROA can be used. If the adviser assesses that the level of cover needed to maintain the current cost of premiums is aligned to the client’s relevant circumstances and is in their best interests, an ROA can be used.
Scenario 3 – A client would like to receive advice on an existing employer-funded income protection policy, which has a 2-year benefit period and a 30 or 60-day nomination period to exercise a continuation option, which means the client will commence paying premiums. Can an ROA be used to recommend the option be exercised until more comprehensive advice can be provided?
The answer is yes. If the policy was considered in the original statement advice, and your advice included an income protection policy with a 2 year waiting period, quotes need to be applied for and research completed, an ROA can be used as an interim measure to allow the adviser time to provide an SOA.
Of course, with any efficiency measure, there can be areas of misunderstanding. One common area is when a client receives a contract offer with an exclusion or loading. Advisers may have the misconception that the decision whether to accept the terms is that of the clients’. This is incorrect. As it is a consequence of your product advice, the adviser needs to assess the client’s relevant circumstances, review any products considered being replaced, and document advice accordingly in the client’s best interests using an ROA.
Insurance cancellation: pre-retirees and retirees
Avoid automatic responses to risk needs.
Insurance is an integral element for most clients’ advice journey, but its priority will change over time and, eventually, may disappear entirely. Most advisers understand this, but it is still vitally important to manage when and how it becomes extraneous to the clients’ needs and strategies.
Sometimes I see insurance being overlooked, cancelled, or ignored in the lead-up to retirement, or in the retirement advice itself. With retirement looming, this aspect can be easily overlooked – especially when superannuation products are being rolled over, or replaced with income streams.
But, despite the distractions, advisers still need to identify their clients’ relevant circumstances and give them proper consideration. Too often, in my experience, advisers cancel or replace insurance that they consider to be redundant, given their clients’ age and imminent retirement.
Before you make that mistake, remember that relevancy should be gauged at an individual client level and not based on general rules. This may be occurring, but it’s sometimes difficult to confirm based on the records maintained by the adviser. In other cases, the file strongly suggests that this aspect of the client’s relevant personal circumstance (insurance) was overlooked or excluded because of the retirement or pre-retirement advice provided.
If you’re an advice professional, you understand that your client file (including but not limited to the Statement of Advice) needs to clearly tell the story. If you cancel insurance, for any reason, your recommendations must clearly explain how you arrived at the decision to cancel any insurance coverage. This is a reasonable expectation, but there are occasions when the adviser’s reasoning isn’t clear, and others where it isn’t discussed or even considered at all.
Whether it is the first time that this client is seeking advice, or an ongoing client, we suggest starting with everything ‘on the table’ and being systematic about insurance needs, prior to including or discounting.
In fact, there may be compelling reasons to maintain cover in the lead up to, and sometimes even after, retirement.
For pre-retirees, there may be a heavy reliance on the client’s ability to continue to make contributions in the lead-up to retirement. It’s common to presume that work will continue to ensure that a certain level of assets is reached. However, plans don’t always match reality. It becomes even more difficult when your client plans to retire before their partner, or when they decide they don’t want to take current debt into retirement.
For retirees, debt may be carried over into retirement and dual income levels may be sufficient for their needs and circumstances. But, if they’ll be relying on the Age Pension, it’s important to consider, and model, whether the single benefit will be be sufficient. Likewise, if your client wants to leave a bequest to a charity, there may be specific estate planning objectives to maintain cover. In addition, the cover may pay a portion of the expected estate taxes.
While it may be your natural reaction to cancel insurance in the lead-up to, or at their retirement, it’s important to resist that automatic response. To minimise your risk, you need to ensure that their needs and circumstances are adequately explored and that they are made aware of their options.
It may be expensive (but palatable for some) and there are some lump sum policies that cover past 65. It’s not ideal, but there may be a specific risk that needs to be addressed for a limited time. There are a few companies that offer Age 70 benefit period. If the client is still working, then it’s an option. Although it’s probably prohibitively expensive, if the need exists, then it should at least be discussed.
Ask more questions and get more answers.
TIPS:
- Consider the impact of a client’s income ceasing prior to retirement
- Consider the impact of an early retirement due to injury or illness
- Explore estate planning needs and bequests
- Discuss options for funding any shortfall
- Document pivotal discussions
- Clearly outline the scope of the advice and detail reasoning for specific exclusions (insurances)
- Include worst-case scenarios within the advice
- Uncover and devise contingency plans (Plan B)
