Advisers must cut their expenses by 20% to 25% to stay financially viable when upfront commissions are further cut to 60% next year, an MLC Life-commissioned white paper says.

The other option would be to start charging clients a fee for advice if the cost base is not overhauled.

Commissions for new policies have gradually been lowered as part of the Life Insurance Framework reforms. The next phase of reforms will see commissions fall from 70% to 60% from January 1.

Apart from shrinking commissions, advisers have also had to grapple with declining sales, which have fallen to $850 million in 2017 from $1.05 billion in 2012.

The challenging environment means advisers have to review their cost base or they may find it hard to survive financially as commissions fall further, the white paper says.

About 67% of advisers say profits have declined since the commission reforms started.

“With upfront commissions being reduced…many advisers are grappling with the profitability and sustainability of their businesses,” MLC Life Chief of Group and Retail Partners Sean McCormack said.

“What is clear from the research is that there is a need for more detailed knowledge of the true operating costs associated with providing advice and how each facet of the process such as marketing, administration, client servicing and compliance, can impact overall profitability.”

The life insurer’s white paper says that with upfront commissions reducing further next year, it is imperative that advisers act.

“Combined, these headwinds are creating a ‘perfect storm’ for the adviser and licensee community,” the paper says.

The white paper was prepared from responses to an online survey of 161 advisers and face-to-face interviews with another 19.

It finds 42% of advisers have stuck to the same operating model despite the many changes in the business environment, including declining commissions. Only 48% said they are ready for the next phase of remuneration reforms.

When commissions are capped at 60%, preparing and setting up a simple policy of $1500 in annual premiums will put advisers in a $100 deficit. Under a complex $5500 policy scenario, the cost gap will rise to $1700.

“To return to profitability, advisers dealing with clients with complex needs will have to either reduce expenses by as much as 20% to 25%, or alternatively charge a full fee or have a combination of fees plus commissions,” the white paper says.