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Ongoing commission… an adviser’s concerns

01 April 2014 Rianet Whitehead, FAnews

We often receive comments from our readers when we send out newsletters, some in the comments section under the newsletter and others in our inboxes.

After a newsletter about the fees vs commission debate, a disturbed reader sent the following comment, and although the reader gave the company name, we decided to keep it out of the discussion for now.

Our aim is to discuss the issue and not the company alledgedly at fault.

The concern

Historically ***** did not pay ongoing commission on their risk products. A few years ago, they started paying a percentage of the ‘premiums under advice’. This was only paid to advisers who met certain sales criteria. As from 2014, XXXX will continue to pay ongoing commission on their life insurance products, but this will also be based on the monthly ‘premiums under advice’. This new commission structure was communicated to advisers in August 2013.

I have no problem with this commission structure. However, to qualify for this ongoing commission, we need to attain a certain amount of points. There are different tiers and the more points you earn, the higher the percentage of ongoing commission. The points are based on sales for the year - no other criteria, like retention rate, existing client base loyalty or anything else. Just new business!

If you do not attain the minimum points, you do not qualify for the ongoing commission. My concern is that after 18 years of selling the ***** product, I no longer need to, or want to, look for new business. I service my clients regularly and advise them on more than one product. However, I will not be paid any ongoing commission because I am not selling any products to them.

The minimum criteria are not easy to attain. You have to attain this level on a yearly basis to maintain the ongoing commission. It is unsustainable for anyone that advises on more than one insurance company’s products. Advisors may choose to sell ***** over other products, just to maintain their ongoing commission and not consider their client’s real needs. Does this not break the rules of perverse incentives? Is the advisor going to compare other products when he has to attain a certain level of sales at *****?

No other insurer offers a commission structure like this. How does ***** manage to bypass the system and offer this to advisors, without the FSB querying this? It seems like an incentive that breaks the rules of the FSB.

Since the launch of this incentive program, I have been very de-motivated. You may say that I have a choice and that I can sell other companies’ products, but I already have a fair size client base and still need to service them. Many of them do not need any more risk cover as they are sufficiently covered. I am not in the habit of cancelling one company’s policy to replace it with another, so that is not an option either.

A fair chance to answer

The company concerned was approached for comment, and although some of it makes sense, I am not convinced that the answers will be enough to convince the reader that this practice is fair.

The XXXX factor comments

An intermediary must achieve certain quality measures to receive ongoing commission, and the company expect intermediaries to apply their professional company knowledge and demonstrate that by servicing their whole client base during a three year cycle. This measure has been an integral part of the company’s dispensation since 2006. Maintaining a loyal client base is one of most important pillars of the company’s model and according to them the erosion of this base will immediately reflect in lower commission.

Legislation requires regular reviews of clients’ needs, and advisers reviewing needs in a three year cycle, writes new and/or additional business when giving appropriate advice. The minimum points required by the company are aimed at identifying that an accredited intermediary can demonstrate appropriate levels of knowledge of the company’s products.

The company believes that an intermediary doing regular reviews of clients in his/her client base will be writing new or additional business when giving appropriate advice. An intermediary can qualify for enough points annually by issuing nine policies of a R1 000 per month.

The commission structure was approved by the FSB in 2011 and the 2013 enhancements were ratified in 2014. The company is of the opinion that they are not in breach of any legislation, regulation or industry rule, and firmly believe that what they offer is aligned to TCF as they do not remunerate based on industry practice, but rather on the best service of clients.

As a general rule, XXXX does not pay ongoing fees in respect of annual premiums without proof of servicing, and they intermediaries commission for regular advice and servicing of clients instead of simply paying ongoing commission. The industry pays intermediaries ongoing commission for premium updates even if that individual is no longer the intermediary on record and is providing no service to the client. This has been a problem for many years and as a company they are trying to fix this.

Industry bodies comments

On the question if this is fair practice, Peter Atkinson, National Technical Portfolio Manager, Financial Intermediaries Association of Southern Africa (FIA) answers that unfair does not mean illegal. “The FIA believes that financial advisers should not be unduly pressured to favour one product over another because the value of good financial advice is built on the freedom to choose whichever product is most appropriate for the client’s needs. An independent financial adviser who has contracts with half-a-dozen product providers has enough freedom to exercise this choice and – although still exposed to conflicts and undue product provider influence – is as close to optimum for consumers as the current dispensation allows,” Atkinson says.

Atkinson added that another point worth considering is that fairness is not a major issue in the business environment because the thrust is to gain an (unfair) advantage wherever possible. All financial adviser contracts are inherently geared against the adviser and for the insurer. This could threaten the status of both tied and independent intermediaries over time.

In his response, Atkinson also commented on what FAIS is about and that the comments made by the reader, are not in line with what FAIS expects from advisers. “FAIS does not address the issue of client retention other than as a logical progression from the rigorous processes that the intermediary must undertake to the clients’ needs and address these needs suitably. But FAIS is clear on conflict of interest. Any system that ‘forces’ an intermediary to sell particular products more so than others presents a potential conflict of interest for the intermediary which could disadvantage the consumer. The FIA has raised the question of targets and the threatened cancellation of broker contracts with the regulator as the practise is contrary to the principle of putting the clients’ interests first. It seems at this stage that the regulator views this as a contractual issue between the product provider and the intermediary and is not likely to take any action to prevent it,” Atkinson added.

The competition comments…

…on fairness

Some other insurer’s asked to comment do not believe that this practice is fair. According to a few of them, it contravenes the spirit of Conflict of Interest regulations and it is also potentially contra the intention of TCF. The arrangement seems to force intermediaries into a position where their personal interests (earning a living) come into conflict with the interests of clients (advice appropriate to their needs and circumstances).

The question was raised if the company in question is offering as-and-when commission as an alternative to up-front commission. If yes, then this is perfectly fair and may be in the best interests of the client in the long term. If this is not the case, then it is definitely unfair that these on-going payments are contingent of new business production. What seems more likely from the comment, however, is that this is an additional payment over and above the standard life commission payable on risk products to incentivise new business production. If so, then this is illegal, and definitely not in the best interests of clients – advisors are earning more for placing their new business with the company in question which must distort the quality of advice provided to those clients. It is also unfair to other providers in the industry who are playing by the rules and limiting advisor remuneration to the maximum prescribed by law.

…on client retention

In terms of importance, client retention is right up-there for most companies. Given the skewed distribution between initial acquisition expenses and the revenue inflow of a life policy, it is vital for insurers to retain customers for their expected lifetime. The general feel from the company’s who commented is that these days there seems to be a much better balance between client retention and new business than in the past.

…in their defense

As the industry becomes more regulated and advisors become more professional we are (probably) seeing less commission driven churning. In a churned market, one provider’s lapse is another provider’s new business. And although this is true, it would make it more important to retain the clients that an underwriter has on-book as there is less ‘new’ business in the market. However, it would not make strategic sense for an insurer to prioritise client retention at the expense of new client acquisition. Policies will inevitably lapse or terminate at some point due to changing needs, claims, affordability etc. so it’s important that new clients are acquired to replace the lapsed revenues.

A fine line

Although it is clear that targets set by some insurers are getting tougher to reach, one can understand that selling is critical to the sustainability of these businesses. The question remains: why does the adviser feel that client retention is totally irrelevant in XXXX’s business model? Is this only a perception, or is the line just too fine to be clear? The debate on this issue will continue online.

 

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