TO pay or not to pay : the question of warranting
The fee versus commission debate within the financial services industry has been going on for quite some time.
Brokers earn commission and in most cases they also earn an administrative and/or service fee.
Implications for the broker
With the Financial Services Board’s (FSB) review of the current remuneration model underway, the way in which advice is given to clients and how brokers and advisers charge for this advice, will change drastically.
This engenders difficulties as brokers perpetuate to perform the same administration functions and consequently require the same income.
FAnews interviewed a few industry people to get their views on the issue of ‘unjustified fees’.
The honest truth
According to the collective view of Associated Compliance (AC), an unjustified fee is any fee that does not equate to the actual work done.
AC feel that the broker fee is often unjustified because the cost of delivery for the additional work involved is not equivalent to the fees generated, particularly when charged on a monthly basis. Effective broker administrative systems and work practices should enable fees to be avoided or kept to a minimum. For the regulator to cap commission and allow fees to be charged with no controls, defeats the overall objectives of the commission cap in the first place.
“The FSB is not targeting brokers by saying fees are unjustified; the policyholder is being discriminated against. The issue is that nobody seems to be able to provide a compelling argument for the fees and the FSB’s original take was that they may be superfluous. If brokers want to charge fees for services rendered, they should be compelled to invoice the client separately, and not disguise them as part of the insurance cost,” they said.
“The FSB wishes to limit fees charged to policyholders for advice only. Other services should be allowed, such as risk management, valuations etc. However, these should be separated from the insurance premium,” continued AC.
“The burden of increased compliance administration will ultimately be carried by the client and needs to be carried somewhere – we doubt a direct compliance fee per client is the answer though, it will have to be wrapped into sales processes and included in commission (or whatever form of remuneration the broker chooses under the Retail Distribution Review),” said AC.
Spotting real opportunity
When asked if brokers will survive without the admin fee, AC confirmed that brokers will definitely survive. “It’s all about ensuring that your client sees the value. Not all brokers will survive; only those that provide quality advice for the middle/upper income markets or those who develop an appropriate delivery and robo-advice mechanism for the ‘lower’ end of the market.”
“It may entail cutting back on duplicate or unnecessary work and focusing on the real deliverable of advice. The opportunity here is to provide better financial services to current clients and to spend more time with new clients motivating the use of a broker. The implications for those brokers whose service levels do not warrant additional fees levied will be dire, and will force them to merge, sell or reduce the level of service provided to policyholders. For other brokers who are providing a quality advicegiving service, all they have to do is replace it with justified advice fees,” continued AC.
Converting to advice fee
Danny Joffe, Senior Legal Advisor of Hollard Broker Markets believes that the loss of the broker fee (Section 8) post RDR is not going to affect the broker, even if the proposal goes through as an advice fee. A fee will still be permitted and will still be allowed to be charged on top of the premium. The only difference is that the fee is paid specifically for advice as opposed to non-intermediary services that the broker performs for the client.
“The client will now have to formally consent but the cap of the fee is still basically unregulated. The outsourced administration
fee is paid by the insurer out of premium. This will be heavily reduced in terms of the RDR proposals to cut the fee to 2% of gross written premium and with all the other onerous data conditions, it will affect brokers’ income,” he said.
“If a cap fee comes in there is a big danger of an unjustified fee as the cap will be the default fee regardless of what work is being done for it. The fee is justified if the broker is doing genuine administration on the policy which gives the client a better turnaround of service.
No one answer
“In terms of survival, this all depends on how the broker has set up his or her business and how reliant he or she is on the admin fee. There is no one answer here. If a broker has a binder, the binder fee is not affected in the same way and more reasonable caps are being proposed. Many brokers are mainly advice brokers who do not do outsourced functions for insurers. If the broker charges a broker fee which will be converted to an advice fee, they should be ok. Many brokers however stopped charging the broker fee when binder fees and admin fees came in. They may have an issue,” continued Joffe.
When asked if he thinks the FSB is targeting brokers he said, “The FSB is very concerned about the broker’s advice being given to their client being tainted because of the potential conflict of interests that the fee brings. It is not an issue of the fee not being justified. If different insurers pay different fees, the broker may be swayed to support the insurer paying the highest fee. This argument only works if one assumes the broker is doing exactly the same job for all insurers which are not always the case. If the broker incurs higher costs in assisting the one insurer over the other, their net gain is no different.”
The simple intention
Billy Seyffert, Chief Operating Officer of Moonstone feels that the broker fee is only unjustified if no service is being performed in return for such a fee.
“The principle is simply that an intermediary should not be paid for the same thing twice, irrespective of the source, and therefore, a fee should not be charged for something for which commission is being earned,” he said.
“Undoubtedly there has been widespread abuse of these fees which simply gets added on to premium as a means to earn additional income. Also, much of the administration being performed is actually being done on the insurer’s behalf, which policyholders should clearly not be paying for as there is provision for outsourcing of administration to third parties in the insurance regulations,” said Seyffert.
In these instances it clearly is unjustified, but we must not generalise. One must distinguish between an intermediary who on a daily basis services clients and bulk operations which contains no personal service whatsoever. If fees have been agreed on and the intermediary charges a commensurate fee for a service which is being provided, I don’t see it as unjustified. I pay my broker a fee and I am happy to do so for the services they render,” he continued.
Understanding the framework
When asked what the implications are for brokers in terms of the broker fee, Seyffert said: “The impact would be severe if it was simply prohibited, but it is not our understanding that this is the intention. The interim intention is guidelines which will require written consent which the client can opt out of at any time and still subject that there must be a clear service, which is not already being paid for by means of commission, which is in fact being rendered.”
“I do not think brokers are being targeted by the FSB, because I do not agree that the FSB has declared these fees as unjustified in general,” he said.
“As matters currently stand, many intermediaries would face severe income pressure were it simply prohibited. However, as stated above, this is not the intention,” he continued.
It’s all about the value
While there are concerns regarding remuneration, change is imminent. However, a transparent business model may not be a bad thing. Instead of looking at the negative side of it, the focus should be on the real aspect which, is advice. As AC mentioned above, it’s all about ensuring that your client sees the value of advice and focusing on the real deliverable of advice. For brokers and advisers who are providing a quality advice-giving service, the fee is justified.
