News Article : Letter to the Editor - some form of reform is needed
|Category:|| Advisers & Brokers : Commission & Fees|
|Posted:||20 Mar 2006|
Proactive engagement with the LOA, FSB and National Treasury is needed
I read with interest the article by Jackie Cameron. Firstly let me say that I am not a financial advisor. I have, however, had 15+ years experience in the life assurance and banking industry – predominately in the actuarial fields.
I am now an independent business consultant and am currently assisting a corporate brokerage making sense of how they should take their business going forward in the light of the proposed changes to commissions.
Let me state up front that I am totally in favour of a change to the way in which intermediaries are rewarded for the services they provide. For too long intermediaries have been paid to sell a policy instead of providing financial advice. This has and continues to be (inadvertently) driven by the life companies whose main aim is to maximize policy count.
Lapses and other terminations are not as critical an issue for the life companies as outsiders may intuitively think. This because the cost of lapses and other terminations is factored into the overall pricing of the product the companies are marketing. And since their business is based on the principal of averaging, so long as lapses and other terminations are not higher than what they have factored into their pricing, they continue to make their profits.
Having said that, I find it impossible to argue against any individual earning a fair reward for services at the time those services are provided. If I could, then why not also argue a case for doctors, accountants, etc to also receive their fees in installments!!
However, there is one very important fact acting against this thinking when it comes to financial advice - the main-stream life assurance customer has never had to pay for this service explicitly up-front.
This because these costs were disguised and charged for via ongoing policy fees and investment management fees, etc. In the customers’ mind it was only if he cancelled his contract prematurely did he have to “pay”. Even when the disclosure rules came into effect, the client was still often left in the dark due to the complex way in which these charges were presented.
The issue now is that with low interest rates and increased disclosure customers are seeing the full impact of these charges on their savings and don’t like it. The industry (life companies/LOA) is looking for a solution to make the problem go away and the easy option is to cut commissions.
This they justify by arguing that commission is the biggest contributor to costs, something few have argued against. There are, however, significant flaws in their calculations – something I won’t go into now.
Notwithstanding this, I am of the opinion that there is a need for a significant change to the way in which life assurance policies (and not just savings policies) are priced. I also believe that there are occasions when the ‘commission’ paid is excessive (and other occasions when it is insufficient). In my view the intermediary bodies such as LUASA need to reconsider how they position their arguments for an up-front fee.
For example, consider (if they haven’t already) positioning the up-front component of the intermediary’s fee purely as a payment for providing financial advice to the client. This fee could be calculated as a percentage of the premium multiplied by the number of hours spent with the client (i.e. not the term of the policy).
In accepting the application, the life company must be seen to be endorsing the financial advice provided by the intermediary and accordingly would not be allowed to reverse any of the advice fees in the event of an early termination of the policy contract. Instead it would have to recover this cost in part from the policyholder and the remainder from shareholders.
The balance of the intermediary’s fees (the commission) can be paid as-and-when for as long as premiums are being paid and the intermediary is servicing the client. To minimize any fall in earnings for the intermediary, this component could be financed via a loan from the life company (financed by shareholders) or other discount house with the loan repayments set equal to the amount of the monthly as-and-when commission.
In the event of early termination the intermediary would be required to repay a pro-rate proportion of the outstanding “loan”.
It may be difficult to imagine right now how we are going to find a win-win solution to this issue. However, if we can find a way to think out of the box and accept that some form of reform is needed – and proactively engage with the LOA and other bodies, I’m sure we can.
Patrick Sheehy may be contacted on the following numbers:
Tel: +27 (0)21 794-6878
Fax: +27 (0)21 794-4613
E-mail: [email protected]