Commission versus Fees

01 October 2008 Andre Jacobs, AON Consulting

There is no doubt that most medical scheme brokers render a valuable service to the members of medical schemes. However, some issues need to be clarified regarding whether fees or commission should be charged for this service.

In every profession, fees are based on the complexity, skill level and time spent by the professional. Fees have inherent disadvantages such as when the fee is payable without a quality check. Should the consumer not be satisfied with the work already paid for, he/she needs to pay another advisor for a revised second opinion on the same work.

Commission on the other hand is a guaranteed and usually a regulated, minimum amount. This may lead to complacency on the part of the provider of service and or the rendering of the bare minimum of services.

The golden midway

The ideal would be a hybrid solution where brokers receive a capped commission, and where consumers decide who receives the commission. Consumers should also be able to decide whether additional fees can be charged for value-added services.

The current situation

The existing regulations relating broker remuneration are currently highly sophisticated consumer-driven instruments allowing broker remuneration and fees to be charged. Brokers are remunerated by the ultimate beneficiary of the service, the consumer. The medical scheme merely authorises the administrator to pays the broker.

Broker commission is community-rated as each member of a medical scheme pay the same rate. This community-rated commission level ensures that every member, no matter his or her ability to pay, can receive exactly the same level of advice as members that can possibly pay more for the same advice.

Further, the broker needs to comply with specific accreditation requirements before being able to give advice and be paid for the advice. The broker can also charge, in addition to commission, a fee for value-added services rendered outside the scope of the Medical Schemes Act.

Power to the people?

In the event that the consumer is dissatisfied with the services of a broker, or perceives a competing broker to add more value, the consumer provides an instruction to the medical scheme and the medical scheme is compelled to, with immediate effect, to cancel the existing broker's appointment. This ensures that consumers retain the real power in terms of the service delivery to them. Further, should a broker be found to be acting unethically or not meeting “fit and proper" criteria his license can be withdrawn, resulting in him losing his total income.

What the consumers think

The Financial Planning Institute of Southern Africa commissioned independent research relating the consumers view on remuneration of the medical scheme broker or intermediary. In terms of this research the following emerges clearly:

* Consumers were indecisive about whether fees should be charged or commission paid. The most important aspect was that consumers do not want to pay an additional cost to the existing medical scheme contribution allocated for this purpose.

* Employers do not want to pay additional fees or commission and also do not want their employees to be burdened with additional costs.

Question of value

The issue is therefore not whether brokers or financial advisors charge a fee or receive commission. The question that rather needs to be answered is what value brokers add to the consumer.

It is clear from the Registrar and Council for Medical Schemes Annual Report that more and more consumers make use of medical scheme brokers and derive benefit from them.

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