One of the biggest misconceptions in the New Zealand financial services market is the perception that advice is free. It isn't. Someone somewhere pays for it.

We have seen the investment market move away from commission and high percentage-based fees on investment product to advice fees. Also, to a degree, the mortgage broking industry has where the provider doesn't pay them a commission.

However, the mortgage industry is a little different to the rest, as a broker can't turn off the commission if there is a fee paid. I'm going to focus on the insurance market, particularly life insurance, as this is the part that pays our bills.

It's free isn't it?

One of the clear misunderstandings most people have with insurance is the advice is free. It isn't. It may be at no direct cost to you at the time you get advice. The value of that advice is built into the premium you pay. This is in the form of the commission paid to the adviser when the policy is issued.

Typically the cost of the commission in a policy premium is about 20% though every company approaches it a little different. The commission is generally paid upfront on issuing of the policy, as well as an ongoing renewal commission. The cost of this spread over the term of the plan. The current industry view is the renewal commission is paid as a consideration of that policy remaining in place, and there is a value share with the adviser that introduced it. Presently it is not considered a service commission, which is often a misconception on this aspect too.

Over the years, I have heard the comments from clients who have changed adviser desiring that the previous adviser not continuing to receive any remuneration for the policy they have. Because they had a dispute and they have moved adviser. The reality, while that policy remains in place, the originating adviser is entitled to the renewal commission.

We don't wholly agree on that approach, but it is the one that prevails in the industry. Adviser businesses are valued on the value of the renewal commission income, so this is something of a challenge to change without significantly impacting advice business values and valuations. It becomes a significant industry issue, one clients may not care about, but substantially influences how advisers run their businesses.

We would like to see this move to a more service-focused approach, which may come with the new rules coming next year. In the meantime, it is what it is.

Getting back to my original point, why advice isn't free.

You've probably already realised that the advice you receive is not free. You pay part of the ongoing premium for the commission payment from the insurance company on the advice.

Now there are many different views out there, and we've come across many that want discounts on the cover too. The reality of applying a discount to premiums is it takes the money out of the advisers pocket, not the insurers. Which means as an advice business, there needs to be the question of why we would discount premiums when it costs us directly.

On the flip side, if you go direct to a bank or insurer, you're not going to get anywhere with this discussion. The people you're talking to have no discretion on premium discounts, other than the bundled multiple sales ones.

So where am I going with this?

With medical insurance, we have a slightly different approach with commissions, with many providers paying a service commission. Unlike the comments above about renewal commissions, this follows the adviser doing the work, servicing the policy and managing/assisting with the claims.

Last week we had a letter from Southern Cross which outlined how Southern Cross was cutting the service commission and converting this to a service fee with 30 days notice. As did everyone who has an agency with Southern Cross. The nett effect, the average adviser business has just experienced a 75-80% cut on the income they receive from Southern Cross, for both existing and new policies. This also impacts the valuation of their businesses.

Now, I know there are plenty out there that have the view "good job, paid too much anyway". At the same time, that's a view that doesn't understand the costs of running a business. It's not cheap, and those advice businesses like ours that assist with and manage claims, this is a significant issue in terms of how we provide the services we do.

The flip side question to the statement above. How would you feel if your employer came to you and said, we've decided that your job is overpriced, but we're giving you a choice, leave or take an 80% pay cut?

Basically, that's the choice that Southern Cross has presented to the adviser market. Which is to say we are going to need to review how we approach claims management with Southern Cross policyholders.

What's the outcome?

My personal view is this is suicide for Southern Cross with the adviser force. They have demonstrated that they can not be trusted when it comes to adversely modifying policy terms. This is why we only use them when we absolutely have no other choice. And now they have taken a step that significantly undermines access to advice for policyholders.

While advisers presently represent 20% of Southern Cross' new policies. There is a significantly higher number of clients that started with Southern Cross directly and now are looked after by an adviser. Southern Cross have miscalculated the effect on their policyholders.

My most pressing concern actually isn't the commission, the Southern Cross aspect of our business isn't particularly high value in this regard, unlike many others. The more pressing concern I have is directly aligned with why I do what I do, helping people.

The changes Southern Cross have made is going to affect one portion of policyholders that need the most help. Those that have compromised health to the point they need someone else to do things for them.

And I'm not talking about the person who has had a stroke and is in a wheelchair. I'm talking about everyday people facing major medical issues and have no idea how to approach getting help. This article is an example of one of our clients in just this position.

Southern Cross' change is going to force businesses like ours to charge fees for doing the claim work. The service fee Southern Cross has presented us with barely covers the cost of writing a letter and making a phone call. Not to mention the cost of meeting with clients to discuss their ongoing advice needs.

I think what irks me most is Southern Cross has changed the contract on what is already in place. People who have had the expectation on their longstanding Southern Cross medical cover of service, are also included in this change.

What is also a consideration for clients. This is regardless of where you source your Southern Cross policy though an adviser or direct. The premium is the same, and we cannot discount our commission out of it.

The latest decision for Southern Cross is all about keeping money in their pocket and is not about services to their policyholders. Yes, this may be offset against premium rises. But we also haven't seen wholesale restructuring and efficiency building in the Southern Cross business either.

And while Southern Cross' claims approach and their system is very effective it. It is one of the better ones in the industry. It still doesn't provide the support that an adviser provides and is needed.

For example:

• As per the client story above, that was a Southern Cross policyholder, they still needed me to arrange things and provide support to address things quickly.
• Discussing a medical situation with a clients doctor, we've uncovered and had a referral to a specialist rehab organisation. One that is private and would not usually be recommended in a public system only approach. Given this client only has disability cover, the doctor would be unaware that we had access and thus had not suggested it.
• Reviewing medical information for another client, we asked many questions and placed trauma cover as a result, that no other adviser had been able to achieve. Subsequently to that, a further diagnosis was made that has improved their life with the resulting treatment.
• We have also identified with several clients past claims that they have been able to have reimbursed. The largest over $6,000 and all of these have been Southern Cross policy holders.

There are many more examples as the adviser for people we have made profound changes for people that would not have otherwise been accessible. Southern Cross' changes and stance in the market is going to change that significantly.

From day one, we have offered the option of commission-based advice or fee-based advice. Given the changes from Southern Cross and what's coming with licensing, we are going to have to review how we engage with clients.

As we are a full-service operation, and we also have life insurance products for our clients. We can use renewal from all policies with a client to pay for the support they need. Where this potentially is going to see pressure is where we only have a Southern Cross medical policy in place.

One thing is clear, there is a need for a fee-based approach to claims management for those that are not already Willowgrove Consulting clients. We already have this. However, due to how we have been remunerated, it has not been something we've needed to push on.

So what's likely to change:

• Structurally we will look to add an advice fee. Which is about new clients getting advice that doesn't result in us placing new cover that pays the bills.
• We will be making the option of fee-based advice more transparent where the advice results in the placement of cover with a fee charged for an ongoing discount on premiums.
• Clarity around claim management costs, something we have glossed over to a point, will be more specific in our scope of service and terms of engagement documents.

For our existing clients, what will change?

Probably not a great deal. Any specific provider-related matters will be raised with the individual policyholders as we go. Though not anything new right at the moment.

If you do have questions or concerns about what I have discussed here, give me a call, happy to chat and answer any questions.

More specifically with Southern Cross. If the changes outlined are something that concerns you, feel free to contact Southern Cross and tell them so. Blanket decisions like this that impact the vulnerable people in our society are not welcome.