Seems defending ourselves is becoming the default position across most industries.
Where we have the misaligned, aggrieved and just plain biased, coming out of the woodwork.
While I get that there is an opportunity for people to have their say with the upcoming changes in the financial services legislation, some of what is coming out is so left field as to be based back in the ‘70’s when they last interacted with a life insurance adviser. Things have changed.
No, I’m not sitting here whining, that doesn’t help anyone. Though I am a life insurance adviser, so people automatically have a self-interest bias toward anything I say that remotely defends the industry.
Yup, I understand that. What I would like you to understand is I do what I do to help people. Drive the outcomes for them in a far better way.
My motivation for this comes from two places:
- After seeing what my mother went through with her breast cancer journey and her subsequent passing at age 57, with no insurance support.
- My own experience with the positive outcomes for clients driven by insurance benefits over the last 18 years
So please take what I say not so much as self-interest hyperbole but as a critical analysis of the reality as an insider.
Three things continue to hit the headlines negatively without balance.
- Non-disclosure and access to medical notes, which I talk at some length here with the recent FairGo articles
- Commission as an evil thing that should be banned
- Soft-dollar incentives, which I talk about here with my industry article on good returns
What I want to tackle is the fee vs commission discussion.
Yes, In life insurance, like many occupations, we’re paid by commissions.
Personally, as a business person, I’m not a great fan of them as they come with the uncertainty that you have to pay them back for a period of 2 years if things don’t turn out as planned.
However, in the New Zealand market, the alternative of charging fees for advice is not realistic. Having offered clients the choice of fees for discounted premiums as the alternative for 18 months, no one has selected fees over commission for my payments.
Commission has had a bit of a beating in the media, with focus on the high % of the annual premium as the commission. And yes with a narrow focus on that one sale, it does look very high.
- What people outside the industry don’t realise and appreciate is that commission isn’t just about that one sale. It’s there to cover all costs associated with that policy.
- The marketing to discover that one success.
- The many people you speak to before you find the right one at the right stage that needs that advice, with some people that can take years.
- The time taken to get all of the advice and paperwork done on the many people that you can’t help for one reason or other
- The people who you take on who have ‘lost’ their adviser but still need service and support even though they don’t produce and direct revenue for the business
- The ongoing servicing of that policy once in place
- And ultimately the claim management along the way and at the end.
It’s been said if you are to fund this from commissions there’s some argument they should be higher.
For the typical life insurance adviser starting out it takes about five years before they get their business to a point where it’s paying them more than minimum wage if they are establishing a business as I outlined above.
If they’re just flogging polices as a salesperson, then that’s different, they don’t do much of the extra work, but they also don’t last too long in the industry, as the reputation for sales and no service bites them in the arse fairly quickly. My point about commissions being subject to clawback for two years.
This distinction between adviser and salesperson is a good part of the focus of the FSLAB legislation current working through the parliamentary process.
Honestly, I’m looking forward to these changes, as I have built Willowgrove Consulting to work to and exceed these changes and expectations on financial advisers.
It’s going to mean we have a competitive advantage from day one in being a license holder and it should be relatively business as usual for us when it all comes into effect. For many others it’s going to be a lot of hard work, we’ve already done those hard yards.
Back to the commission situation.
We used to have an industry that ran with tied advisers, they worked for and sold that company’s products as got paid a commission.
Then we had demutualisation, and the Independent adviser was born, they could work with many companies and get paid on commission.
The advantage of the independent adviser is you as a consumer got access to a broader range of policies with the one provider.
However, this had its ethical challenges that we have today and the FAA, and FSLAB legislation is looking to address. And that was the movement of your policy every two years to another provider to clip the ticket with commissions again.
Fast forward to today, and the debate is about bias and incentives from commissions. I agree there is the potential for this to be a problem, and with some adviser it is.
The reality is this behaviour doesn’t last long. Insurers are hot to trot on any adviser behaviour where their book is getting moved on a regular basis. The adviser is also usually picked up by the harm for clients that is created too.
The insurers deal with these advisers by cancelling agencies and kicking them out, though more could be done here with all companies responding in kind. There needs to be a process for this managed through an independent body as it does have the opportunity for malicious abuse by an insurer where there has been disagreement. But that’s a discussion for another article.
When we look at commissions vs fees across the industry one model doesn’t suit every discipline.
- For investment advice, I agree fees are the most appropriate approach; there has been a demonstrated bias of advice with provider commissions in the finance company crash. Though 90% of that debacle and loss to investors did not have a financial adviser involved.
The problem was the stuff that did have adviser involvement had a commission bias to the advice; it paid more than more appropriate products.
The advantage of investment advice is you are talking to clients who have money, usually a considerable sum, and can afford to pay professional fees.
- General insurance, this has traditionally been a flat rated commission product as it has a life expectancy of 12 months between reviews and has a higher propensity to be changed as physical risk situations change quite quickly, much quicker than that of peoples health.
Fee for service is a possibility here, however as the commission rates of general insurance is pretty static and consistent, there isn’t a bias from commissions in this area.
Add to that the reason people need insurance is because they don’t have the resources to cover the risk; fees become a barrier to access. As we have seen in many natural disasters with people not having the cover that they should, fees would make this worse.
- Mortgage finance, typically this is commission based remuneration with no discounts for charging fees instead of commissions.
There is a preference as a result for providers that pay commissions as they provide the lowest cost to the client when financing, new or refinance.
This part of the industry does charge fees when dealing with a provider that doesn’t pay commissions. However, this is usually loaded onto the lending and is effectively financed. Which has a perspective when looking at life insurance.
Then we have life insurance:
This is a product that is typically sold rather than bought.
Those seeking life insurance usually have an event or problem that has driven them to ask, which generally makes placing cover a challenge. So finding people to be ‘sold’ is the typical approach to ensure people have cover before they develop conditions and become uninsurable.
With life insurance, the pricing of the cover by the insurers is done over a seven-year term, about where the average age of policies sits.
While the commission rate on a life insurance sale looks high as an upfront, there are many ways this can be paid, from an all upfront basis to a level commission spread over the term of the policy, in a similar way and level to general insurance.
We’re about to go down the path of having to disclose commissions. The submission from Financial Advice New Zealand on this makes a lot of sense. How I take commission has little to do with the premium you pay as a consumer, you still pay the same premium if I take it upfront or spread out.
Looking at the various providers in the market, the commission component in your premium makes up somewhere between 10%-20% of your premiums. That’s the insurance company’s distribution cost.
In the same way, Briscoes buys a toaster for $50 and sells it for $100, that $50 pays for all of their business operations costs.
With insurance companies, that commission cost at 10-20% of the premium is their sales and marketing cost to move that product.The other 30% is their operating costs for staff and premises etc. The insurer still has a purchase cost to your insurance cover in the form of reinsurance that happens in the background.
The reality for many clients taking life insurance is they don’t have the financial resources to pay fees, that’s why they need life insurance.
With the typical professional adviser spending 12-14 hours per client from enquiry to completion, the associated professional fees add up quickly.
People look at the commissions and say that’s high, yes on a $3-4-500/month policy they can be, however by the same token when you’re doing the same amount of work for a $5/month policy it balances out quickly.
Ok got that?
Let’s talk about the core issue; a commission is evil and bad for life insurance.
In the context of the above, it’s actually the better option to the rest.
When people talk commissions, they overlook the reality of other distribution approaches.
If you step back and look around, with banks and direct insurers they too have a commission model, you don’t see it in the same way.
The person you’re talking to at the bank or direct insurer gets paid a wage or salary, that’s reward for doing their job. Selling you their product.
Sitting behind that is likely a bonus or commission structure too. If they hit sales targets, they get paid a bonus. If they don’t sell you products, they lose their job.
Frankly no different to the pure commission salesperson. For some reason, people seem to think because there’s no commission there’s no bias.
I’m calling that bullshit.
The reality of the vertically integrated sales channel is they can only sell you their product. They have even more incentive to sell you their product and move you away from your current situation as they only have access to their product.
I know I used to run a national risk operation that had only one life insurance provider. I’m very well versed in how this works.
As a caveat on my comment about running the national insurance operation, they now have more than one provider and do a great deal of good in how they operate.
However, the vertically integrated operations don’t do the comparison work and usually don’t have the research to support their advice, because they’re often inferior products. So they don’t want to show you that.
Frankly, these organisations have a higher propensity for harm than commission based sales. They don’t explain to you the risks of their advice. It would kill their sale.
When you look into the history of life insurance advise in New Zealand and look at the cycles of business, it has a telling reality we need to coinsider. If we were to ban life insurance commissions, you wouldn’t see a sudden move to fee-based advice.
Sure some operators would. Most, however, will shut their doors and end up working for newly established sales and distribution arms of the insurers.
This would result in us returning to the bad old days of the mutual company tied adviser sales. Taking us back to the dark ages and reducing the quality of advice in the market.
The likes of the online sales companies with multiple providers would disappear, you’d be left to do your own legwork on which provider was best.
The reality of banning commissions would be to make life insurance sales a pure sales industry and not an advice one.
The salespeople would be paid a salary and a bonus based on performance, and they would be shown the door quickly for lack of performance.
I know this for a fact, in the last ten years I have seen several operations take this approach and they have not worked.
So, is commission evil?
- In the eyes of the vertically integrated providers, yes. It creates significant competition for their business.
- From the consumer perspective, the perception is yes, as people don’t like being sold to. Which is why we take the education and advice approach we do here at Willowgrove Consulting.
That perception is driven by those with deep pockets and vested interests. Yes, salespeople have had a shocking reputation, and life insurance has been maligned for a long time. It shouldn’t be, but it is.
It is time those perceptions should be challenged.
- Independent life insurance advisers able to provide anyone product ensure you as the consumer have choice.
- It ensures there is a range of competitive products that are of good quality at reasonable premiums.
- It gives you access to products that suit your needs. No square peg in a round hole that you get with the bank and direct providers.
Yes, there is the advice bias that comes from the incentive to move your cover from one provider to another, because they’ll get paid. That doesn’t change in any remuneration model, and it's not unique to commission.
However, there are a couple of things that you can do to manage this last point.
And yes, it makes my job harder, however, if I can’t explain it as your adviser, you shouldn’t take it.
- Ask for the research on why the change/move/advice is better, written not verbal.
- Ask for the adviser justification, again written not verbal.
Additionally with the FSLAB changes coming there will be more requirements for advisers to disclose certain aspects of the advice they give:
- Commissions and incentives
- Written advice and justification for the advice
- Adherence to the financial adviser code of conduct
- Licensing and compliant advice processes
- The requirement to put the client first. We operate like this already; however, there are only about 600 Authorised Financial Advisers out there who have to put your interests first
Everyone else, including banks and insurers, only have to comply with advice given with due care, competence and skill.
I've raised and covered many contentious issues with this. Hopefully, you now have a better understanding of why commission remuneration for life insurance is actually a good thing for you as the consumer.
Vertical integration and tied advice models only drive outcomes for the corporates.
Don't let their deep pockets usurp your rights to access good appropriate advice for your personal situation.
Please make a submission to the FSLAB and disclosure reviews. Consumer views are needed to give balance to the industry submissions.