Scott Hoger, National Technical Manager
The industry-wide change program around Income Protection left many financial advisers considering how the new product constructs fit with providing advice that is in the best interests of the client. With APRA’s intervention to evolve products, so that they are more appropriately based on client needs and claims experience, advisers are reconsidering what their best interests duty looks like.
In a perfect world, risk mitigation would seek to eliminate all identifiable risks. At its core, Income Protection mitigates the risk of the client losing their regular income due to sickness or injury. It can help to maintain lifestyle and can provide a retirement savings safety net through a regular contribution to superannuation whilst on claim. Though desirable, complete risk elimination is generally not possible, as any increase in risk elimination can lead to an increase in cost now and in the future.
Through the TAL Risk Academy, we have seen a consensus from advisers that in order to meet their best interests duty, they need to provide advice that eliminates as much risk as possible by providing comprehensive advice and products. Planning for this worst-case scenario is in theory logical, but this logic needs to be balanced against other equally important considerations, including an insurers actual claims experience and affordability of the strategy.
Take for example the benefit period; planning for the worst-case scenario would dictate advising an age 65 benefit. TAL’s portfolio experience shows that 92% of Income Protection claims are completed within two years of commencing, with only 8% continuing beyond two years. TAL’s statistics also show that a five-year benefit period would provide adequate protection for more than 95% of claimants. This may result in a material long term cost saving compared with a ‘to age 65’ benefit period, but does carry a risk to some clients if the claim goes beyond five years.
Advisers acting in their client’s best interests requires a deep understanding as to whether or not that risk is palatable when balanced against other factors, including cost and long-term affordability. The client’s risk profile and concept of value will help to determine a risk mitigation solution and ensure that advisers are providing appropriate advice based on their client’s unique circumstances.
Understanding a client’s concept of risk and value
Every individual client will have a different perception of how they view risk, and consequently how much risk they are willing to accept in relation to their unique circumstances.
Personal advice requires advisers to have a complete picture of the client’s goals and motivation to mitigate risk, an understanding of their risk appetite and their ability to fund any advised solution.
Risk mitigation is a delicate balancing act that requires client input to ensure that any advice and recommendation is appropriate. Advice is provided on a spectrum, with consideration that some clients have a higher risk tolerance (when considering benefit periods for example) in return for a lower cost policy premium, compared with other clients who would prefer to cover the worst-case scenario and will be willing to pay for that additional coverage.
Using a thorough cost-benefit analysis, advisers can empower their clients with the right information so that their clients can consider how much risk they are prepared to accept as it relates to their own risk appetite. An adviser’s best interests duty is focused on the advice given based on the client’s circumstances, and the product simply facilitates this advice.
Building greater client engagement
When we consider that an adviser’s best interests duty is intrinsically linked with the requirement to provide appropriate advice, we can begin to shift the ‘best interests’ narrative.
By embracing a client’s goals, needs, financial situation and objectives to create greater transparency and engagement, advisers will be better positioned to fulfill their best interests duty; and will be able to continue to support their clients in choosing products that best meet their individual needs and circumstances.
For further support visit the TAL Risk Academy at adviser.tal.com.au/risk-academy