Contractual savings

24 April 2006 Angelo Coppola

Dear editor

I have decided to participate in my personal capacity in the discussion paper,(i.e. not as a representative of the views of Liberty Life) as I feel it is critical that we, as both an industry and a country get this next step right! I intend to comment only on those issues which affect me directly, and which I feel I have relevant experience.

To put that in perspective, I have been actively selling long term insurance products as an agent of Liberty Life for a period of nineteen years to date. In that time I have attained various formal qualifications, such as my Diploma in Personal Financial Planning, through Liberty, as well as having attained my Post Graduate Diploma in Financial Planning from the Law Faculty of The Orange Free State - currently known as Certified Financial Planner status (CFP). I am a current member of both the Financial Planning Institute and the Association of Professional Financial Planners (LUASA). I am a past member of the Million Dollar Round Table, having achieved Court of the Table status, and have received six International Quality Awards from the Life Insurance Marketing & Research Association of America.

Excuse me if it appears I am bragging - I merely seek to establish that I view my career and my position in the community with the utmost gravity.

I have highlighted specific parts of the document with what I hope is a clear, succinct comment. I urge you to give these comments your sincerest attention.

Measures to better align the incentive structure of intermediaries with the interests of the client, such as:

requiring that intermediaries must declare themselves to a prospective policyholder as either an insurer agent (i.e. a tied agent or an independent broker), or an independent financial advisor the distinction being that insurer agents are remunerated by the insurer only and independent financial advisors are remunerated by the customer only;

I think that this distinction is largely irrelevant. In my experience having represented only one company exclusively, it is the relationship between the client and the intermediary that counts - very rarely the company or the product. However, since I am used to calling myself a Liberty Agent, I see no hardship in continuing to do so!

10.4.3. independent financial advisors be remunerated by the customer only, by direct payment or authorised deduction from the policy

Authorised deduction from the policy makes a mockery of the intended independence of the advisor idea. Effectively it simply means that the advisor has to get the client to sign one more document in order to earn literally any level of commission he chooses. It must be borne in mind that the client/intermediary relationship is based purely on trust - and as we know, the biggest fraudsters are usually very charming, persuasive people.

If there is any real will to encourage fee-earning, truly independent advisors, then it can only work as a personal payment direct from client to advisor, with no third party involved. Only when the client actually signs the cheque, is it absolutely clear how much he is being charged, and what for. I must say that I think the effort involved in ensuring that he then doesn't get paid a second time by the life office would rule this approach a non-starter. It must be borne in mind that once an intermediary has a signed application in his hand, it immediately becomes a negotiable document which can be shopped around to whichever insurer wants the business most. Hence the current practices of incentive travel, and bonuses etc.

11.12.3. Concern is raised that advice fees expressed as a percentage of the assets under management are not necessarily in the best interests of the client, on the basis that they provide an incentive to the advisor to maximise the assets of the customer without proper regard to investment risk.

Strangely enough, I am inclined to agree with the concern surrounding trail commission, but not for the above reason, which I think misses the mark completely. No intermediary in his right mind would risk a client's money in order to earn a tiny percentage more commission! (He would, of course run the equal risk of earning less commission in a bad year!) My concern at the moment is that the playing fields are so grossly unlevel, with Linked Investment Service Providers (LISPs) being allowed to pay trail commission and long term insurers not, although they are competing for exactly the same business. Many intermediaries currently wouldn't consider placing a Linked Annuity or Preservation policy with an insurer, simply because they will be paid infinitely more by a LISP - at the client's cost, needless to say. In many cases, the equivalent policy placed with a long term insurer would cost the client roughly half what it will through the LISP. Many LISP's also incentivise brokers to place more business with them by paying increasing percentages of trailer commission based on the value of total business that intermediary has placed with them.

On the other hand, trailer commission goes a long way to alleviating the lack of ongoing service to the client, particularly on lump sum business, which would otherwise be paid once off. This creates huge conflict in the case of annuities, where the client makes a decision to place a large lump sum through an intermediary at the end of his career. Commission is paid to the sales intermediary, who then has very little incentive, other than common decency, to continue to service the client throughout his retirement years (which may be 20 - 30 years!). The problem arises when another intermediary gets called in to help (usually by the retirees children) and does huge amounts of work and counselling on a purely charitable basis. In this instance trailer commission would solve this dilemma entirely. the customer retains the right, in all circumstances, to cancel the agreement with the advisor, either transferring the payment of the ongoing advice fee to another advisor, or stopping it altogether. the policyholder should maintain the right to re-direct ongoing commission to an alternative agent or discontinue it completely;

By all means, re-direct a portion of the ongoing commission to whichever intermediary is providing ongoing servicing, but allowing the client to discontinue it altogether promotes the practice of a client making use of an intermediary's time and expertise, over what is often an extended period before the sale (usually involving a lot of 'house-keeping' on existing policies, such as beneficiary changes etc.), then shortly after the policy has been sold, cancelling the commission, to effectively discount the cost!

I also feel there should be a reasonably large proportion of the initial commission which should never be allowed to be switched from the selling intermediary. The adage of insurance being sold, not bought is only a clich because it is true, and the intermediary who convinced the client to take action and actually write a cheque instead of merely thinking about it, deserves his pay. If it were easy to get clients to take action, our industry would be swamped, whereas we know that the failure rate in the first five years is roughly 90%. Therefore let's make sure the the people who have the commitment and the passion to go out there day after day for years on end and convince people to look carefully at their responsibilities and then to do something about it, shouldn't have to carry on fighting to get paid.

11.13.4. Changes to the regime impacting on advice fees and sales commission should be applied in a consistent manner to risk products as well as to savings products, because: the fundamental rationale for the change is to remove principal-agent conflicts this rationale applies equally to risk products and to savings products;

I would like to make it very clear that risk products and investment products have absolutely nothing in common! A risk product is a retail offering. The price is market sensitive and therefore competes as a package. The client is only concerned about what premium he is paying and what he is getting for his money - commission or charges are absolutely irrelevant. The critical issue is disclosure. What we should be concentrating on is how products are marketed - for instance we are seeing thousands of so-called "New Generation" risk-only products, which are essentially renewable term contracts being marketed as whole life contracts, paying whole life commission, replacing older (more valuable) whole life contracts on the simple basis that the initial premium is lower!! This of course has always been the case, as the risk is also lower to the insurer, however this is rarely, if ever, pointed out to the client, even if he is persuaded to sign a Replacement Policy Advice Record (which he usually doesn't understand) The solution once again, is not to cut the commission content (although I firmly believe if these "New Generation" policies only paid commission for the term until the Guarantee Review Date, as the original term contracts did - the churning problem would be stopped overnight), but to force the insurers to issue only ethical, clear contracts. The policies currently in the marketplace are complex to the point that only actuaries fully understand them, the intermediaries are often only trained in the 'highlights' of the contract and sent out to sell them, and some companies, particularly the newer entrants, are buying market share by churning as a strategy.

Once again, commission content for risk products should be considerably higher than for investment products - they are far harder to sell! They are also far more necessary to society. This is the area where a well-trained sales person has to convince a client that, rather than spending his money on a new car, or sound system, or anything else shiny and attractive, he should take his money and spend it on a life insurance policy he can't show to his friends around the braai, and he will as likely as not never see the result of! Surely that deserves to be rewarded? Similarly, long term savings - retirement savings are harder to sell (and more beneficial to society as a whole) than a unit trust, and so should be better remunerated - with the bulk of the commission inalienable from the sales intermediary. establishing a different set of rules for savings and risk products may run the risk of regulatory arbitrage and distort the products offered to consumers.

I disagree.

11.13.5. A consistent approach should be determined for single premium products that avoids undue incentives for insurer agents or independent financial advisors to motivate the sale of one in preference to the other.

I agree. The status quo is that the rate you get from a Linked Investment provider is determined purely by your bargaining power. Therefore tied agents currently face the problem of only being able to place business with one company, who openly admit that they would cut their fees drastically for a broker!

12.13. In the interim, regulations on policy replacements for instance, forbidding commission in cases where a policy is designed to replace another would be difficult to police. There is, however, a role for insurers to exercise greater oversight over their agents in this regard.

If the FAIS act, which demands that any replacement application be noted as such, and a Replacement Policy Policy Advice Record be completed and sent to the original insurer, has any power- then the point above is a sad admission of failure by the authorities!! Of course the insurers can refuse to pay commission on the new policy.They have simply lacked the will to implement it up to now, because brokers simply threaten them with placing the business elsewhere if they do enforce the no-commission rule. If the intermediary was truly doing the replacement "in the best interests of his client" he would in all likelihood be prepared to accept the loss, with a view to building goodwill with client for future business. the nature of our business is that we do a lot of work for no reward as it is! on the one hand, being sufficiently attractive to intermediaries to entice new entrants into the industry, promote access to life assurance products and ensure a sustainable industry;

I've purposely left this one until last! When people say to me "You guys earn a fortune!" I say, "You're right, why don't you come and join us?". So far no-one has ever taken me up on that, and I truly don't understand why. It's true, we do earn well - the good ones - the ones who stay for ten, or twenty, or thirty years and go through whole lifetimes with their clients. Because it takes a long time to make this business profitable, and one bad year can set you back at any time, there are no guarantees and no-one cares if you can't pay your bond one month. It takes a long time to build up the trust of a sceptical client base. You only really get it after the third or fourth policy with a client, and don't forget that very few clients buy more than one policy every three years or so. Having said that, I don't know why there aren't more people joining our business every day, because it is a wonderful, rewarding, fulfilling, character-building career and you get to help some really special people along the way. Unfortunately they aren't the ones who write to the Ombudsman, but I think they are actually the majority.

I think we are paid well for doing an enjoyable job, and I think our business is easy. I also think we play a very valuable role in society. I don't know why everybody doesn't join us and make lots of money, just for chatting to people. But then it seems, looking at the statistics, that perhaps it's not so easy. Perhaps we should nurture the people who are prepared to have no security, other than being able to pick up the phone and ask a stranger to take his responsibilities seriously, to put off buying the new car so he can look after his widow and orphans, simply because he loves them.

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