Which is where the problems and perceptions stem from, and why we need regulation of both.

We've seen plenty on the commission discussion and debate, and much of it is rooted in personal experience with commission salespeople outside our industry or from life insurance sales back in the days of whole of life and endowment.

When arms had to be twisted to get people to buy a product they only saw as valuable when they died. By then they are past caring. However, they did care about their families, which is why it worked.

Also, to a lesser extent sales of term life before the 2011 regulation, though the personal engagement with living products reduced the need for arm twisting to the same degree.

Moreover, since regulation the industry, insurers, regulators, dealer groups and adviser groups have all worked hard to move advisers into a more professional space.

On the whole, it is working.

More recently we have had Bruce Cortesi and Darren Franks propose a discussion paper on a different commission model, which is great to see people thinking about alternative approaches.

Looking through the paper, it is still a commission model, not too dissimilar to the model used back in the days of whole of life and endowment, with some subtle changes in the moving parts.

If advisers followed the client profile they presently have it has merit, but nothing happens in isolation and adviser, and human, behaviour is programmed to follow the path of least resistance.

Fundamentally from what I know and understand of insurance policy pricing, this particular model has a propensity to focus advisers on insuring younger lives, because they are easier to sell and underwrite at the expense of older lives who are harder to underwrite.

In the process this substantially increases the costs for the insurance company on these younger lives, pushing the premiums up substantially in this area and leaving the older lives to fend for themselves to an extent.

When I came into the industry, we didn't have aggregator groups which are now our dealer groups on the most part and commission models were commission plus production bonus and other levers.

Back then, the majority of advisers were in the 100-130% of API remuneration rate space. One thing from this that we have lost in the conglomeration of commission and bonuses with the aggregation of the commission is levers that could and did drive behaviours.

One of the more creative and complex models for driving behaviours is Sovereign's commission model of the day which compromised a number of levers:

• Sales commission; 30-87.5% of the annual net of GST premiums.
• Production Bonus (PB); 0-80% of the commission paid, not premium.
• Loyalty Bonus (LB); 10% of commission paid for >85% placement.
• PB on LB; 0-80% in line with PB above
• Quality Bonus QB; 0-20% A function of book persistency and sales volumes
• PB on QB; 0-80% in line with PB above

Now what this did, given Sovereign was also looking to drive new business and retention, was to encourage the desired behaviours they wanted.

• Sales commission and Production Bonus was the incentive to go find clients and sell them something.
• The Production Bonus was about, do enough of it and we'll increase your remuneration, in a simple do more get more equation.
• Loyalty Bonus, place the majority of your business with us, and we'll reward your loyalty with higher income.
• Quality Bonus, not only sell our products but keep them in place and we'll reward you with increased revenue for continuing to build your book of business. The larger the book and the better the persistency, the higher the remuneration.

Now given more recent times and more recent discussions not all of this is necessarily appropriate in our current market.

Sovereign has dropped SovNet and the loyalty bonus side of things, well as far as I am aware.

However, the rest still has a level of merit in the scheme of things. Advisers do have higher levels of compliance and as a result, costs in their businesses.

The commission aspect the Government and media have focused on doesn't reflect the full picture. The percentage of the premium for the commission with the majority of providers doesn't take into account the additional bonuses.

Though the comparison is somewhat moot as foreign insurers pay distribution costs in other ways to commission you can't see from the outside, also to foreign insurers have significantly different products to encourage holding them long term, in a similar way to whole of life worked

Here in NZ advisers run their business solely from the commissions they earn. They aren't funded to pay for their running costs in any other way.

Going forward there is a problem with the optics of the current commission structures, which is likely to see pressure through the regulator or legislation on the insurers to reduce this.

However, don't expect it to reduce premiums, they're still either on par or far cheaper than comparable products in other markets.

The reality in putting pressure on the upfront commission the trail commissions will likely increase. The money required to run a successful advisory practice isn't going to change in a hurry either.

For there to be both a sustainable level of income and incentive to find clients that need advice, this commission level is going to need to be in the 100-130% range.

And yes, I hear the noise this will create on all sides. It is also the reality the current pressure on commission rates is having in the regulator and public perceptions. Also, for them, this is probably still too high.

What the public need to understand is insurance companies in New Zealand typically price their policies over seven years, the typical average length of time a policy remains in place.

So this is not a commission based exclusively on year one premiums, but from the value of the policy over seven years, which is a substantially higher amount of money.

The other aspect is the servicing of policies, and I have talked about some of this in the past.

When I came into the industry in 2000 the trail commission rates were in the region of 2.5-5% of annual premiums, and there will be a significant number of policies that are still on this renewal rate.

However, this, on the whole, has moved substantially in the last premiums 10 years with 10-25% renewals (depending on provider and commission structures selected) so there is room to introduce a servicing model going forward.

Presently we have existing agency contracts that consider trail as deferred commission on the value of the policy, that continues while the policy remains in place.

Under our regulations we have servicing responsibilities, which imply that the remuneration pays for this, however, contractually it's not linked in any way. The contract with the client for servicing is where this technically sits. Which historically is the defined servicing advised listed on the policy with the insurer as a basic minimum indicator.

Tinkering with what has happened in the past has its challenges for the government to legislate, as it will likely be in the too hard basket as Murray Weatherston put it recently in a comment on another article, as it impinges on private contract law, which opens a can of worms outside just financial services.

However, going forward there is room to move here. An approach to a 50/50% split going forward, half for asset trail and a half for service, would reduce the pressure to move covers for ongoing remuneration for the servicing adviser.

It would protect the value of adviser businesses somewhat; it would also focus advisers more on their servicing if they were to lose a portion of their income by not servicing.

It would assist those advisers who like to find and help clients get covered but are not great on the ongoing servicing piece. They could work with advisers who aren't so great on the hunting but do very well with the servicing.

This would also then tie in the remuneration to servicing expectations from the regulations, and it potentially would reduce some of the movement of business unnecessarily that does happen.

So the increased commentary from providers about persistency components of their agency measurements could enable remuneration for the right sorts of behaviours too.

There's a lot that can be unpacked with our current commission system that can be tailored to drive the desired behaviours; we need to be open to talking about them.

We need to come up with a solution that works for all involved, before we find ourselves saddled with, something that doesn't work for everyone, government, regulator, insures, advisers and consumers.

At the end of the day, it is us, Financial Advisers, who keep insurers and banks on their toes. We do this by advising clients on the best solutions for them; which is the market at work.

It drives competition to be the provider of choice. Which drives providers to enhance and provide better offerings, it has also included increasing commissions, but that can only be pushed so far too.

As advisers today, and historically, we have done this well with this.

So much so that the institutions, particularly the direct providers and banks, have convinced regulators to throw us under the bus, because we get in the way of them sitting back and taking profits without thinking about consumers.