Altrisk’s Ongoing Commission Provides Financial Advisors with Remuneration Flexibility

There have long been pressures within international markets to move away from front-end loaded remuneration, towards a solution that encourages the development of long-term client relationships. With South African regulators investigating a similar move,

In deciding on the right mix of remuneration models, it is important that advisors consider the costs and value associated with initial advice, recommendation and implementation; versus the regular maintenance needs of their client’s portfolio. Different client profiles and brokerage practices each have unique considerations which need to be taken into account. To effectively manage these, financial advisors need to be provided with choices regarding commission structures.

In addition, for an advisor to increase the long term value in an advice business, one needs annuity revenue streams. This is currently the topic of much discussion and debate within the South African market. Local brokerages need to prepare for potential regulatory changes, while ensuring that their businesses remain solvent and profitable.

To provide brokers with the choice necessary to manage such industry changes, Altrisk’s market-first launch of ongoing commission for brokers in June 2011 allows brokers the flexibility of choosing between ongoing commission at up to 15% of every premium, standard upfront commission and a combination of the two. In meeting the demand for better remuneration structures for financial advisors, Altrisk offers brokers a choice between commission structures; as well as a combination or hybrid model – rather than a single scenario.

“This alternative to traditional commission structures gives the financial advisor the freedom to manage their revenue in the way that best meets their individual needs. Ongoing commission allows advisors to build an annuity-based risk product business that has a saleable value, enables them to better manage claw-back risks, and provides for enhanced financial management in areas such as cash flow. They now have the ability to structure remuneration in a way that meets the unique needs of their business. This is a model that has been very successful in the investment arena and could prove to be as successful when applies to long-term insurance products,” explains Ryno de Kock, Head of Distribution at Altrisk, voted Long Term Insurer of the Year – Risk Products at the annual Financial Intermediary Association (FIA) awards

Mauro Forlin, general manager of Global & Local Financial Consultants and one of the front runners in adopting Altrisk’s ongoing commission adds: “About two years ago we realised that, when providing our clients with life assurance products where the commission was paid up front, we would be indebted to that particular product provider for a period of two years. With a rapidly growing investment advisory side to our business, this arrangement no longer suited us and we started investigating how the various life product providers manage broker remuneration.

“We soon found that the ’as and when’ commission structure offered by some insurers was not what it purported to be, but simply an upfront commission paid over the first two years of the policy. In addition, this structure offers no benefit to the client in the form of reduced monthly policy premiums.”

According to Mauro, Global & Local Financial Consultants converted to Altrisk’s ongoing commission structure when it became available in 2011 and will continue on this basis for a number of reasons. The first of these is that that the company’s clients get a more affordable premium. The cash flow benefit of earning commission over the full period that the client holds the policy also benefits the company. In addition, Global & Local Financial Consultants no longer needs to be concerned about claw-back risks, should a client need to cancel a policy. Lastly, Altrisk’s ongoing commission makes the business’s future earnings more predictable, which is critical for long-term planning purposes.

Altrisk’s ongoing commission is based on the following principles:

· Commission is paid within legislative limits.

· The premium paid by the consumer will never exceed the premium that would have been offered, had 100% upfront commission been applied.

· Any savings arising from ongoing commission will be passed onto the consumer.

The extent of any savings, will depend on the:

· age of the client at inception of the policy,

· premium pattern applied - increasing or level,

· nature of benefits – for example, benefits may have varying terms, and

· rate and combination of commission chosen by the advisor.

Brokers face multiple headwinds

Altrisk’s Ryno adds: “Unfortunately, there are only a limited number of small brokerages that have the financial liquidity to go entirely with ongoing commission right away. Although it provides many benefits to the business and is an excellent way to build revenue streams in the long term, it’s a conversion process that needs to be managed over time.”

The reality is that brokers face a number of headwinds. It is expensive to run a small brokerage in line with the legislative changes that have added to the cost of compliance, while adhering to the guidelines promoted by the Financial Planning Institute. In addition, the current competitive environment and tough economic conditions are further key drivers of cost. Brokers are up against diminishing consumer disposable income and, as a result of this, the competition for new business between brokers, agents and product providers has reached unprecedented levels.

The growing sophistication of clients is also an often-overlooked aspect and has led to a more protracted sales cycle. It is now more common than ever for the intermediary to conduct as many as six sales calls spread over a number of months, before the client agrees to the recommendation - and only after reviewing multiple recommendations by various brokers. The direct and indirect costs involved in protecting client databases have become more demanding than ever.

Thus, in reviewing their remuneration structures, brokers need to look at the short-term and ongoing costs for their business within the context of this environment.

Legislative environment is changing

There is a possibility of the Financial Services Board (FSB) moving to enforce a system that eliminates upfront commission as the standard remuneration structure. Altrisk believes that it is essential to provide tools that allow financial advisors to begin preparing in a gradual and controlled manner, since a sudden change could have serious implications for many smaller practices in terms of cash flow and liquidity.

“Offering advisors a choice and the means to create a hybrid commission model allows them to structure their income strategically over a period of time, rather than face a sudden need to change models should the FSB move to fee based remuneration as the standard. This could affect the liquidity of a brokerage, so – in providing choice – Altrisk is offering the means to pre-empt such a challenge,” concludes Ryno.