moneyblog

The Forgotten Term Insurance Debate

Over in the US, punch in a query about life insurance and soon you'll find the debate "Term versus Permanent" - here in NZ that debate seemed to be settled a long time ago. Overwhelmingly in favour of term insurance. Returning to the argument, though, is helpful because it reminds us what insurance is for. The debate runs something like this:

1. You need insurance that is inforce when you die. Most people don't die when they are in their 30s or 40s, they die when they are 65 plus.

2. Buying cheap term cover means you have plenty of insurance inforce when you are less likely to use it, but probably very little later because it gets so expensive.

3. Level premiums associated with permanent cover means affordability is dealt with through a form of saving.

The argument against permanent term hass always been:

1. That if you save, you should save outside of insurance - preferably in a transparent savings or investment vehicle where fees and return are clear.

2. That your need for insurance probably tracks an inverse relationship to your premium curve (more is needed to cover debts and contingencies when you are younger, much less when you turn 65 plus).

3. That having separate savings is more flexible.

Consumers, it seems, are not good at saving up to pay insurance premiums though. The medical insurance ownership curve illustrates this well - they find other exciting distractions. The old whole of life salesman knew this, and would therefore often recommend a mix, some permanent life cover and some term insurance.

However, such solutions, however sensible, are unlikely to be seen in New Zealand for a long time. Our approach to regulating financial services is about to make it harder still to recommend permanent insurance - as this is classed as a security and is a category 1 product under the recent Financial Advisers Act. You will need to be an Authorised Financial Adviser to sell it.

"Shifty" Powers

This is from Joe Galloway - not me:

We're hearing a lot today about big splashy memorial services.

I want a nationwide memorial service for Darrell "Shifty" Powers.

Shifty volunteered for the airborne in WWII and served with Easy
Company of the 506th Parachute Infantry Regiment, part of the 101st
Airborne Infantry. If you've seen Band of Brothers on HBO or the
History Channel, you know Shifty. His character appears in all 10
episodes, and Shifty himself is interviewed in several of them.

I met Shifty in the Philadelphia airport several years ago. I didn't
know who he was at the time. I just saw an elderly gentleman having
trouble reading his ticket. I offered to help, assured him that he was
at the right gate, and noticed the "Screaming Eagle", the symbol of
the 101st Airborne, on his hat.

Making conversation, I asked him if he'd been in the 101st Airborne or
if his son was serving. He said quietly that he had been in the 101st.
I thanked him for his service, then asked him when he served, and how
many jumps he made.

Quietly and humbly, he said "Well, I guess I signed up in 1941 or so,
and was in until sometime in 1945 . . . " at which point my heart
skipped.

At that point, again, very humbly, he said "I made the 5 training
jumps at Toccoa, and then jumped into Normandy . . . . do you know
where Normandy is?" At this point my heart stopped.

I told him yes, I know exactly where Normandy was, and I know what
D-Day was. At that point he said "I also made a second jump into
Holland , into Arnhem " I wa s standing with a genuine war hero . . .
. and then I realized that it was June, just after the anniversary of
D-Day.

I asked Shifty if he was on his way back from France , and he said
"Yes. And it's real sad because these days so few of the guys are
left, and those that are, lots of them can't make the trip." My heart
was in my throat and I didn't know what to say.

I helped Shifty get onto the plane and then realized he was back in
Coach, while I was in First Class. I sent the flight attendant back to
get him and said that I wanted to switch seats. When Shifty came
forward, I got up out of the seat and told him I wanted him to have
it, that I'd take his in coach.

He said "No, son, you enjoy that seat. Just knowing that there are
still some who remember what we did and still care is enough to make
an old man very happy." His eyes were filling up as he said it. And
mine are brimming up now as I write this.

Shifty died on June 17 after fighting cancer.

There was no parade.

No big event in Staples Center .

No wall to wall back to back 24x7 news coverage.

No weeping fans on television.

And that's not right.

Let's give Shifty his own Memorial Service, online, in our own quiet
way. Please forward this email to everyone you know. Especially to the
veterans.

Rest in peace, Shifty.

"A nation without heroes is nothing."
(Roberto Clemente)

CI review

I recently wrote at goodreturns about the provocative opinion Noel Vaughan has of critical illness insurance. A view could be advanced that the financial impacts of critical illness are already managed by adequate disability income cover and private medical insurance. In the presence of both of these it can look like trauma cover is superfluous. There are four main arguments to advance to undermine this view:

• The first is that income protection is incomplete - being only 75% of income earned, and most people don't tend to save 25% of their income.
• The second is that income protection is about income replacement, and Trauma cover (or Critical Illness insurance, etc) is about asset protection (lump sum benefit, see). This argument is dealt with in this summary.
• The third is the theory of complete cover - if you have a risk, cover it. Perhaps a touch idealistic, but at least an internally consistent way of dealing with the question: how much is enough?
• The fourth is that income protection and medical insurance are not available to many people to whom Trauma cover is available.

I am collecting information for a post on changes in Trauma definitions if you would like to contribute please drop any relevant notes to my email.

Tax Reform

Tax reform - or at least the debate about tax reform - is like the poor, always with us. This, though, appears sensible and helps to reduce the silly number of different rates you can be taxed at depending on what type of income you earn from different sources or in different vehicles. That's almost as silly as taxing income differently depending on whether it is a 'capital' gain or an 'income' gain. Which leads to pretty much the same silly behaviour as taxing the last dollar of income at a vastly different rate from the first dollar.

Coffee Helps Stave off Alzheimers - maybe...

There is a theory. Well, it's about caffeinated water used with mice. Although I am especially interested in how you tell if a mouse has Alzheimers (without dissecting it, that is). Link.

NZMBA Member Survey

If you do business with mortgage brokers you need to reassess how this channel will operate, what it looks like, how attitudes have changed, and how it might perform for you in the future. To do that you need good information.

The NZMBA is about to survey it’s members again in the first comprehensive member survey since 2006. Now is a great time to be doing this – the industry is very different from where it was in 2006, so are the people, what they think their business is about, and their requirements of product providers.

Designing the Future Industry Survey

We are currently inviting industry people to a workshop to help design the content of the survey. This is an opportunity to shape the content of the survey – and it’s completely free of charge. We want to make sure the survey will best meet your requirements. Gathering your input and ideas is therefore crucial.

Your input will help the NZMBA – and they are keen to recognise that help. If you participate in the design workshop and subsequently decide to buy the survey output we will reduce the cost to you in recognition of your participation. Also, even if you don’t decide to proceed with the survey purchase, you will know that you have helped shape the information available – so that when you do require good channel information, you know that what you want is available, and you will know exactly where to go to get it.

Survey Design Content

While the survey design meeting, and subsequent work with the NZMBA will settle the content, the kinds of subjects we envisage including are:

·    Career intentions
·    Product mix
·    Product provider rankings
·    Advice-giving practices
·    Client base mix
·    Changing practices
·    NZMBA Standards development
·    Product provider issues and strategies
·    Product provider goals for NZMBA and membership
·    NZMBA membership goals and aspirations
·    Adviser rating of provider companies
·    Regulations and compliance regime development
·    Fees and commission
·    Aggregators: membership and use
·    Marketing communications.

Tracking Information

Tracking information has been found useful and we would therefore continue the monitoring of certain factors which we surveyed before, including:

·    Technology use: hardware, software, internet use, and mobile platforms.
·    Media preferred by advisers: what advisers are reading and how they like it.
·    Revenue and Incomes: how much advisers make, and sources of income.
·    Client base: the size, use, and servicing of client bases.
·    Business size: size and support staff.

Please let us know if you would like to join the survey design workshop – remember, it’s free to attend, and you will certainly learn a lot.

Two degrees adverts

I was tipped off to check these out on Youtube, and they're great. Link.

Guide to Referendum Voting

In a break from the non-stop stodge of reviewing discussion documents on the never ending procession of legal and regulatory change - here's your guide to voting in the forthcoming referendum - by Lyndon at Scoop Enjoy.

Compliance Round-up

The IFA points out that the glut of documents dealing with aspects of the new rules for financial advisers could mean the analysis isn't good. I think they are right - but I wouldn't want them one at a time, it would just be nice to have longer to review them all.

One of our readers thinks that QFE isn't so much about the advice process - it's more about arse covering - and my answer is - maybe. Although I am paid to think about how the implementation of these new rules will affect the market I do not profess to have a perfect crystal ball. It could depend on where QFEs want to position themsevlves, and like most commercial choices there is the ability to do it well or do it badly.

When will all this start? Well, recent information from Securities Commission Staff paper on Regulating and Supervising financial advisers showed that they expected to take registrations for QFE during the fourth quarter this year, and page 3, para numbered 4.

The MED's discussion paper on disclosure have also stirred up plenty of discussion - look at the options for commission disclosure. I would encourage every adviser, every adviser group, dealer group, and interest group to make submissions on this. It's meant to stir up discussion so which should it be? Option 1, 2, or 3.

ANZ's Mike Smith talks strategy on the Banking Conversation

Take a look at this video - it's a good interview. Link.

The Lawyer vs the Head of Sales

Your corporate lawyer will say "Don't become a QFE - the risks are too great" - but the Head of Sales knows he needs to keep running his business.

The life insurance market in New Zealand has been one of wholesaling, not retailing, over the past 20 years - and QFE status is about taking responsibility for how a product is sold. There is justifiable concern that this is a very big step and insurers and brokers alike are not yet ready.

But they will have to get ready, and soon.

Advisers will neither want, nor be able, to bear all the risks themselves. Consumers will want the confidence of knowing that a large business with deep pockets stands behind the advice that recommended their product. Without compliance mechanisms in the brokerage channel that recognise this there could be a big shift to channels where that risk is managed - for example, in banks, or larger international brokerages.

QFE all about advice process

Registering to be a QFE will not be hard - nor should it be - as it is mainly a question of putting up your hand and saying "yes, I am happy to take on this potential liability". Whether registering is a wise choice is another matter entirely.

For product providers and dealer groups considering this step it will require a discovery, or a re-discovery, of the advice process. Not merely having an advice process, but having a good one - with a defensible theoretical and practical basis. Not merely having one that could work, and does work when practiced, but one that can you can show was actually used. Then backing that up with the management processes to kick advisers out that do not use the process, or operate beyond the process.

That is a whole new set of tricks for many organisations.

Aviva Australia sold - but not their stake in PIS

The financial standard reports that the stake in PIS is retained. Of course, this may have been unwanted in the deal, but there are other explanations. The financial standard tries one, still another is that it allows Aviva a toe hold in distribution should they ever wish to return. Link.

Eating Can be Risky Business

The heart attack grill looks like it is true to label with that it serves.... and many of the clients look like they have been regular attenders and are well on their way to achieving their goal. Still, I am quite comfortable with these individuals eating their way to a heart attack - so long as they pay for their treatment and their meds themselves! The waitresses dress up nicely too - perhaps seeking to provide the stimulation necessary to finally tip clients over the edge. Link.

Political Survey

Apparently...

My Political Views
I am a right social libertarian
Right: 5.05, Libertarian: 5.89

Political Spectrum Quiz

The survey was quite good - if a little US-centric as these things tend to be. Don't accuse me of wearing a brown shirt and jack boots until you've done the survey yourself please.

Case: Not Proven

This article from Michael Coote draws on the Australian debates to raise the issue of whether commissions should be banned in New Zealand. As that's the direction the UK's RDR is taking as well as our nearest neighbour and - it has to be said - the leader in such matters, then Kiwi financial advisers should take note. This is a real issue.

The debate usually centres around whether commission creates a hopeless ocnflict of interest. I have deliberately inserted the word 'hopeless' because virtually all sellers of goods and services to consumers have an interest, sometimes a very large one (think houses), and sometimes an ongoing one (think contracts for service over time) and sometimes for critical services (think medical). Nothing that is done in financial services is particularly unusual compared to those.

So the first step is whether a conflict of interest exists and the answer has to be - yes.
The second step is whether that conflict is such that it cannot be overcome and that it therefore causes greater damage to consumers than the other conflicts that we tolerate everyday in the provision of equally valuable, complex, and vital services.
The third step is to prove that forbidding commission represents an effective remedy - both in solving the problem (i.e. it must improve client outcomes) and in being cost effective - after all we're not here to impoverish everyone are we?

Right now, I'd say: not proven.

RDR Update

This editor's summary of the direction of the retail distribution review is well worth a read - even if you could not give a fig what the British choose, its the debate about the principles which is interesting. Link.

This response to one of the proposals - that advisers charge fees only - from Ernst & Young is also worth considering. undoubtedly we will again hear calls that fee only is the only true way advisers can be rewarded. Link.

Super article on interest rates

This is a great discussion on interest rates and why they are doing what they are doing and the pointless huffing and puffing in politics about them. Link.

Advisers Likely to find QFEs Attractive

The recent staff paper from the Securities Commission underlined for me how important QFE status will be. They clearly indicate through the use of examples an expectation that QFE status will not be the preserve of the largest and best organised companies (say, banks) but will likely suit smaller companies as well. The paper goes on to list examples including companies selling consumer finance, general insurance, and travel insurance. It would therefore seem to be well within the capabilities of a moderately well organised insurance brokerage or life company to achieve QFE status.

But why will it be so attractive?

Because so much liability is effectively transferred to the QFE. Essentially, even for Authorised Financial Advisers (AFAs) the remaining liability will be in respect of their conduct and disclosure obligations. Put simply, tell the truth, follow the system, and don't steal - and your QFE will be liable for pretty much everything else. That's because the QFE will be responsible for the advice process, research used, tools, recommendations arising from the process, and even things like whether or not you, the adviser, are authorised if you need to be authorised, and they'll handle membership of disputes and resolution.

Distribution offers will likely soon be segmented between non QFE and QFE. Other segmentation will emerge as well, but will likely fall below that in order of priority.

Don't depend on your employer insurance

Having insurance cover through your work is a great benefit. It's nice that your employer provides benefits like that. It helps a great deal to have cover which you probably didn't have to go through medical checks in order to complete.

The problem with the cover is that people think, 'oh great, now I have employed cover I don't need this personal stuff' - so existing cover may be canceled, or not taken up, because it is not required. But people do not stay with their current employer. They often leave. In the course of leaving they forget about things. The employer meanwhile may not be as diligent as it might in reminding the former employee about their continuation options. Even if they are, the employee may ignore it, or try to come back to it later. They join their new employer - who maybe doesn't have this cover. They mean to follow it up...

They end up without cover. Continuity of cover is a lost virtue in insurance. I don't know how many people say they have cover. Then they spend 20 minutes sifting through a messy file, or heap of papers next to their computer, and find a policy. The policy turns out not to be in force.

This moment is merely embarrassing if it is the life assured that is performing the search. If it is the life assured surviving partner conducting the search in the midst of their grief and worry then it is a sad and dismal time of reflection. You need to make sure you take responsibility for your own insurance cover.