By Tom Murray, Head of Product Strategy for LifePlus Solutions at Majesco.
They have to be convinced of their need for it. And that convincing is generally done by a financial adviser on commission.
This commission based approach is often decried in the financial press by journalists, who denounce the paying of commission for pure protection products. They seek to have it moved to a fee-based only scenario by extending the RDR rules to cover these products.
Pure protection products are a cheap way of providing affordable financial protection to the lower-paid. Yet it is among this group that these products are least prevalent. The irony is that lower income earners are the very people who will be most affected financially in the event of an illness or sudden death of the main income earner and therefore are actually the most in need of protection products. Without resources to fall back on, their lives will be completely disrupted by an event that they could have insured themselves against. Insurance is therefore far more necessary for them than it is for the wealthier sections of society.
There are a number of reasons for the lack of financial protection in this group; those who are on low-incomes have generally enough of a battle to find the money for necessities and don’t have the luxury of considering what to do with what’s left over. They also tend to have less financial knowledge and, when life is tough, can find it easier to avoid thinking about what can go wrong, rather than trying to protect themselves from it.
Even the small number of these who actually consider taking financial advice to plan for their future, will be put off if there are large fees to be paid up-front when they are seeking to know what the best and cheapest way of protecting themselves financially is. They need financial advice from an expert but the prospect of having to pay fees will discourage them from even starting the process, as the cost of seeking out this expertise can appear prohibitive.
Commission remains a key way to give access to financial advice to those who either cannot pay up-front or are put off by the idea of paying in advance. Those who oppose commission have not yet come up with a good alternative way to ensure that the people in most need of financial advice actually get it.
Commission is paid to advisers for sales but that does not automatically make it bad. The risk of the wrong sale being made due to commission being a bad incentive, does not mean we have to abolish commission. It just means we need to strengthen the regulations to make sure that the adviser is working in the best interest of the client. Surely this is not beyond us.
There is already strong regulation in place with regard to treating customers fairly and this is about to be strengthened with new regulations covering the sale of financial products to consumers as part of the FCA’s new Consumer Duty regulations, due to come into effect in 2023.
Whilst in the past, commission incentives have led to mis-selling scandals, there are surely sufficient regulations now in place to ensure that the benefits of commission – the incentivization of financial advisers to reach out to the lower-paid and the ability of those without much resources to engage with financial advisers without incurring immediate cost – outweighs the risks of the client being sold the wrong product and having no recourse to sort it out.
The current and new regulations put the onus on the adviser to act in the best interest of the client, irrespective of commission levels and this should surely be enough to ensure that the availability of different levels of commission on different products will not sway the adviser towards recommending an incorrect product; the risk for him or her would be too great.
|
