Is There A Link Between The Level Of Underinsurance For Personal Insurance In Australia And The Level Of Adviser Commissions?

A recent report by Rice Warner highlighted some important observations when it comes to insurance: The conclusion: on average Australians are dramatically underinsured.

Many people take the time to insure their home and their car, but most do not properly appreciate the scale of the insurance requirements when it comes to protecting family income due to a death, disability or an extended period unable to work.

The report highlighted some important findings.  For example: a couple aged 40 with children could require the following insurance to maintain their family’s standard of living in full:

  • Life Insurance of up to 15 times annual family income
  • Total and Permanent Disability Insurance of up to 15 times annual family income
  • Income protection to provide an important aspect of insurance needs for a family

It is estimated that the total cost to Government as a result of underinsurance is:

  • $47 Million per annum due to Life Insurance underinsurance
  • $1.26 Billion per annum due to Total and Permanent Disability underinsurance
  • $247 Million per annum due to Income Protection underinsurance

Everyone needs to think carefully about their insurance needs and those of their family, and should get some sound advice to make sure they have appropriate insurance in place.

The right advice in this area is very important but the rewards for the adviser are also very lucrative, particularly if they never see the client again.  If the Financial Adviser dials down their commission the annual premiums for the insured can reduce by 25% of more.

In the new world of Fee For Service for Financial Advice, it is likely that consumers will progressively demand a Fee For Service approach to insurance with a fee that is fixed or included in their total Financial Advice fee.

Rebating commissions or offering fixed fees for Financial Advice and insurance may mean lower total insurance costs for clients, and this may encourage higher rates of insurance participation?

Are We Witnessing A Massive Missed Opportunity With The Possible Winding Back Of Superannuation Commission Laws?

A recent Rice Warner report has confirmed what everyone already knows…..commissions cost investors money! The report suggests it could cost consumers $530 million dollars a year if the Government backs plans to reintroduce commissions.

Why the Government would be thinking about reopening the gate on commissions after they were so close to being made history makes no sense to me.

Consumers have never had two clearer choices……do nothing or do something. The future of Australia is not with high cost investments that pay commissions: it is with financial advice, low cost investments and agreed advice fees.

TIP OF THE DAY…..Join the revolution and take an interest in your financial affairs! Find out if your investments are expensive and pay commissions. Not happy with your research……do something about it.

Is Investment Fund Manager Selection A Waste Of Time?

A lot of investors and advisers believe very strongly that by selecting a portfolio of the best investment managers in all asset classes, you have the very best chance of high investment returns. There are however many studies that suggest selecting the right asset allocation is the major driver of investment returns and not the investment manager selection.

If you do your research and accept the proposition that asset allocation is the major driver of investment returns, then you must ask yourself what is the point of paying high investment manager fees?

Spending money to get the best asset allocation advice and investing through low cost investment options such as Index Funds might be more beneficial. It might also surprise you that most Active Investment Fund managers fail to outperform the Index over the long term.

Investment manager and advice fees in Australia for many investors are still very high so make sure you satisfy yourself that the fees you are paying are justified. If you are expecting an 8-10% p.a. return from your portfolio and you are losing 2-3% p.a. in investment fees and commissions, it might be time to reassess your options.

If you have a reasonable investment balance, 1-1.5% p.a. in investment and advice fees might be a better benchmark to aspire to. For larger investment balances the benchmark for total investment and advice costs could be well below 1% p.a..

TIP OF THE DAY..….Use your most recent annual investment statement to calculate your total investment costs and if required, move to a lower cost investment structure and negotiate a fixed fee for your ongoing financial advice.

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