As and when commission may not be the answer...
Last week we sent out a newsletter titled A Fresh Take on Long-term Insurance Commissions. A number of readers responded to the article, both online and by email, so we thought it would be worthwhile furthering the debate… The respondents fall into three
Last week we sent out a newsletter titled A Fresh Take on Long-term Insurance Commissions. A number of readers responded to the article, both online and by email, so we thought it would be worthwhile furthering the debate… The respondents fall into three camp, those who believe up front commission is the only way a life broker should be remunerated, those who feel “as and when” is a more sensible model (but with certain reservations) and the extremists who believe commissions should be replaced by once-off advice fees.
Up-front is the only way to go!
To begin with, we will say that we were surprised by the number of objection to Altrisk’s “ongoing commission” solution. Truth is their solution merely repackages the existing upfront industry model with the total remuneration spread over a longer period of time – with the broker able to structure an upfront and ongoing “mix” to suit. The reason for dismissing the model out of hand is that many intermediaries rely on upfront commission to make ends meet on a month to month basis. JJ said he preferred upfront commissions before issuing the “if it changes I will leave the industry” ultimatum. And Neels echoed his sentiment: “Upfront commission is the ONLY way that a financial advisor can survive – most would go bankrupt and would have to leave the industry should this be changed, especially under present economic circumstances.”
Gavin was unimpressed with the “provide now / get paid later” model. “I won’t be here in 50 years time to earn a miniscule annual commission for: meeting with the client, gathering information, establishing priorities, preparing an analysis, drawing quotations, meeting the client again, presenting the analysis, advising the client, taking care of the paperwork, submitting the paperwork, arranging the medicals, following up on the case and finally contacting the client when the plan issues,” he said. “All the work for risk business is done upfront, why should we be paid in instalments over half a lifetime?”
Coenie believed that the annuity structure was “total madness” and asked how new brokers would be able to set up shop without a viable upfront income. He was one of many readers who asked how a brokerage could be expected to offset spiralling operating and compliance costs against the trickle of “as and when” commissions it would receive. In fact a number of readers offered up the impact of “as and when” commissions in the savings environment as a proxy for what might happen in the life space. “It is already evident that the sale of investments and retirement annuities has decreased at an alarming pace because of ongoing instead of upfront commission,” writes Johann.
As and when might work, but...
There were quite a few individuals who welcomed Altrisk’s ongoing commission innovation. Nick said it provides for a better ongoing service model as apposed to an initial sales model, while the client gets a further benefit of a reduced premium. He also felt the ongoing commission offer would discourage deliberate churning and enhance needs-based client service. Gerrit said it was a step in the right direction and felt that other life assures would soon follow. “This new fee structure will also help to build equity in the financial planner's practice,” he said.
But Alan was less certain. He wrote that “The idea of a 'fee for service' is a great idea in theory, but in practice it is cloud cuckoo-land!” He warns that a large number of the country’s existing brokers were 55 or older and that these individuals would find no benefit in selling a policy toady and receiving commission over the next 25 to 50 years! And those who argue that the intermediaries’ book can be sold will soon find it is not the “cure all” it is made out to be.
It seems the major concern with the “as and when” type structures is that the insurer will avail of any “event” to halt the ongoing payments. “What happens when a broker dies, becomes too ill to keep its licence [or loses it for another reason]?” asks Johann. He believes in these cases the annuity income would fall away due to the broker contract being cancelled by the product supplier, with the client details simply being handed to another active broker.
Let’s scrap commission and get down to advice fees only
As the commission debate rages more people are asking whether the traditional life remuneration model was appropriate to begin with. They want to know whether it makes more sense to create a system from scratch rather than tampering with the flawed model we have today. “The problem with the entire business model is that brokers, salesmen or advisers are brought into the business with upfront commission as the only option, and therefore base their operations around having the bulk of the commission available immediately,” said Michael, who admitted he still relied heavily on upfront commission to meet the bills.
Another reader, who chose not to disclose their identity, suggested that “the entire notion that brokers should be remunerated on the basis of contributions is deeply flawed because there is a massive disconnect between the service rendered and the remuneration received.” Mr X went on to question what entitlement the broker had to an annuity income stream for what is essentially a once-off transaction with the client. To make matters worse the current system is open to abuse – such as churning – which is widely practiced. Mr X’s conclusion: “Brokers should be paid on the basis of time and service as and when provided, nothing else! That is the way it is going overseas and that is the way it will happen in South Africa.”
Joe, K was equally ruthless. “Up-front commission with a two year claw back only serves to enrich brokers at the expense of clients and insurers,” he said. “If brokers really had their clients’ interest at heart they would charge their clients directly for their time and advice instead of asking insurers to pay up-front commissions! There are benefits to this solution. The insured gets a cheaper “commission free” policy, while the intermediary banks all the monies without the possibility of suffering future claw backs.
Caution is advised
It appears that the regulators will have to tread carefully when they eventually tackle life industry remuneration. As one of our concerned readers point out: “I wonder what the time frame is for the regulator and government to totally destroy this industry! At a time when everybody is striking to receive higher and government officials receive bonuses for managing businesses into the ground – brokers are being forced to make do with less money in an environment where operating costs are sky rocketing!”
Editor’s thoughts: Life intermediary remuneration is an emotive topic. An ill-thought change to the way in which intermediaries are remunerated for their life business will certainly have a negative impact on the consumer as “advice” becomes a scarce commodity. Today’s question is in two parts. Assuming the industry moved to an “advice fee only” environment, how much would the client have to pay (would this fee have to be of the order of the current upfront commission, for example)? And would the average client be able to afford this advice? Please add your comment below, or send it to [email protected]
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