Financial advice is on the verge of major change. There is pressure to reduce the distribution costs of financial products which will ultimately make them cheaper and more accessible for a wider range of people. This change will also potentially drive a wedge between product sales and financial advice.
A recent report from NZIER, Resetting Life Insurance, found that insurers paid average commissions of $221 million per year on new business of $123 million per year in the period 2012 to 2014. The report found that cutting commission costs by 25% would initially cut premiums by 3.5% with savings increasing to 6% over time. Some insurers are using online sales of insurance products to cut out the cost of commissions completely.
On the investment front, direct selling of model portfolios online is on the rise. So-called ‘robo advice’ allows DIY investors to work through online algorithms to determine a best-fit model investment portfolio for themselves, Buying direct from the product provider means they do not have to pay advice fees.
Adviser regulation is also moving to keep up with this trend. The next wave of change is likely to see more scope for advisers to provide ‘limited advice’ that does not require a full assessment of a client’s current financial situation and future goals. Limited advice costs less than comprehensive advice.
What this means going forward is that insurance and investment products will become more affordable to a wider range of people and purchasers of these products will have greater choice about the level of advice they receive and pay for. The onus will be on advisers to prove the value of the advice they give. The danger is that those who most need advice will choose not to pay for it and make bad product choices as a result.