The financial advice industry “has its head in the clouds” if it thinks a fee-for-service model is better than commissions when selling life insurance, Synchron director Don Trapnell says.

“For the life of me, I can’t understand how charging a fee is viewed by some as a hallmark of professionalism,” the industry veteran said. “And I can’t understand the argument that says receiving a commission translates to being less professional.”

Mr Trapnell says advisers are paid a commission only if they arrange cover, but under a fee-for-service model they can charge regardless.

“Would clients be happy to pay a fee for service then find out they don’t actually get cover because they haven’t been accepted, or because the premiums were too high and they couldn’t afford to pay them?”  

He says international experience shows fee-for-service life advice does not work. 

“In the UK there was recognition that life insurance is a grudge purchase, so while commissions on investment products were removed, commissions on life insurance were not.

“In the Netherlands commissions were removed on life insurance products with devastating effect. Within 18 months every offshore life insurance company left the Dutch market.”

Mr Trapnell says commissions should be disclosed to clients, and he wants the true cost of selling life cover examined to see if proposed commission caps work.

“It’s four years before the 60% cap on upfront commissions comes in. Maybe we can look at reviewing the cap in line with what it actually costs to run a life advice business.”