'Cheap shot' at upfront commission

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Ever-savvy customers are shopping around for the best life insurance deals and advisers are getting “blamed” for being greedy with upfront commissions.

Last week, Suncorp managing director Patrick Snowball told a business lunch in Sydney that adviser business models have become reliant on high upfront commissions and this is unsustainable.

But Suggars & Associates risk adviser Meike Suggars, who has been in the risk industry for four years, told Wealth Professional if she had not been able to take upfront commissions she would not have been able to start up her business.

She disagrees upfront commissions are too high, and says although it is easy to blame advisers, the issue of insurance sustainability is much bigger than just commissions.

“It’s obviously in the adviser’s interest that insurance companies are sustainable. If my insurance companies go out of business then I go out of business, so it’s really important to me that the industry is sustainable.

“But I think just focusing on commissions is kind of a cheap shot. At the end of the day, the insurance companies have a product that becomes obsolete before it becomes profitable and that’s not just because of commissions, that’s because of their whole business model.”

It is an adviser’s legal duty to act in the best interest of the client, so the best insurance product will be recommended regardless of any commission, said Suggars.

“Maybe upfront commissions are part of the puzzle, but I don’t think canning upfront commissions is going to magically solve all of the sustainability issues in the industry.”

Suggars feels advisers are getting blamed instead of the real problems being sorted.

She points to Asteron Life, which is promoting a hybrid step commission structure instead of upfront called ‘2 for 10’. “I don’t think that’s going to solve the problem of sustainability. I think that’s a short-sighted move.”

Instead, insurance companies need to look at underlying issues for lapse rates, by asking new clients why they are changing policy and then analysing the response across the industry, she said.

 “And then we can sit down together as an industry and work out how we can make the industry sustainable, because it’s in everyone’s best interests to do so.

“It shouldn’t be advisers versus insurance companies; we should be doing this together.”

Asteron Life adviser distribution executive general manager Jordan Hawke agrees.

“Upfront commissions are only part of the conversation. It’s become very clear that there are some structural challenges that the whole industry faces and as a business we’re looking at what are the drivers of that and we want to work with advisers to create a sustainable model in future.”

However, he does recommend advisers move from upfront commissions to an alternative remuneration model which will give greater long-term value.

“We said [to advisers] if you’re prepared to change your behaviour then we’re prepared to give away some margin to help you do that. I think upfront commissions will ultimately come under pressure but whether that’s driven by industry or regulators is still yet to be seen…The best option we have is to self-regulate.”

But Hawke says the main industry problems lie around how products are being designed and cost of acquisition recovered.

“I think as an industry we constantly turn to advisers to solve problems, and that is totally the wrong approach. What we need to do as an industry is look at ourselves first, and understand what the drivers of where we’re at.

“Product development where we constantly leapfrog each other for best definition cheapest premium is not sustainable.”

Last month, assistant treasurer Arthur Sinodinos told an Association of Financial Advisers conference he did not support the banning of payment on the sale of risk products.

"Recent experience in the UK indicates that banning commissions on risk insurance just doesn't work," he said, adding the ban had been revoked.

MORE:

How ASIC will fight churn
Churning rules divide planners


 
  • James Howarth on 27/11/2013 3:03:24 PM

    If there is no commission, there is no pay. Why would anyone expect an adviser to work for free. Every direct insurer ie on TV sells over priced policies.

    No pay = no one selling it.

    Why should doctors get paid?
    Why should lawyers get paid?
    Why should politicians?

    Wake up, commission is why it gets sold.

    It doesn't matter what one calls it, it is pay for doing a job.

  • gh on 27/11/2013 3:04:58 PM

    YOU DON'T SUPPOSE THAT THE MASSIVE AMOUNT OF COVER THAT'S GRANTED, DISCOUNTED AND WITHOUT UNDERWRITING ,TO GROUPS AND SUPERANNUATION FUNDS, AND THE HUGE LAPSE RATES OF ONLINE INSURANCE HAS ANYTHING TO DO WITH POOR PROFITABILITY, DO YOU?
    AND I'VE YET TO SEE ANY CONSIDERED DEFINITION OF WHAT CONSTITUTES A "LAPSE" - CHANGE OF INSURERS, CONSUMER DRIVEN PROBLEMS LIKE UNABLE TO PAY PREMIUMS, CLAIMS, REDUCTIONS IN COVER, CANCELLATIONS WHEN COVER NO LONGER NEEDED OR REQUIRED?
    LET'S GET SOME DEFINITIONS IN THE OPEN SO WE CAN SEE WHO "CAUSES" LAPSES AND UNSUSTAINABLILITY...gh

  • Daniel Boce on 27/11/2013 3:05:05 PM

    Well said Meike

  • Mervin C Reed FChFP on 27/11/2013 3:07:59 PM

    I think Suncorp should take the plunge and watch the board sack the CEO and all those involved in trying to stop upfront commissions. When the Suncorp cashflow crashes so will the CEO. What a stupid bunch of comments driven by a lack of understanding of where his long standing profitable business comes from. I do not think Patrick Snowball is going to be with us very long.

  • Dacian Moses on 27/11/2013 3:10:28 PM

    The structural problem is that insurers have been competing for the business of the adviser. This has meant the development of unnecessarily complex products and volume bonus arrangements loaded heavily with upfront rewards for a successful sale. The data available on 'lapse' rates is just laughable. Now that it is possible to purchase insurance products in 'unbundled' form (ie without the commission built into the price) we are seeing a natural evolution underway that will hopefully result in a competitive (from the consumer perspective) and sustainable industry. Commission will still be a valid form of remuneration, but it is unlikely to be 120% upfront.

  • Observer101 on 27/11/2013 3:18:20 PM

    Ok Meike I agree you needed to establish a business, but so do new accountants and new lawyers and new engineers and architects , they do not get commissions, they have to "add value" and then invoice the client. Would it be true to say that if we dropped commissions to 15% of Premium like in General Insurance that advisors would still recommend that product if it were best of breed?
    What actuarial calculations are telling Mr Snowball is that a combination of 110% of premium commission+ low rates of continuance( retention) + claims + incentivising advisors to gain market share is making that distribution channel a lot more expensive than it should be.
    Charge a client a flat fee and maybe take a small trail commission to keep it on the books and service service and service your existing clients that is the secret to success !!!

  • Meike on 27/11/2013 3:53:17 PM

    hg - I absolutely agree.
    Group is a big problem.

    One topic i didn't raise was the 'easy' underwriting standards we have now in the name of competitiveness. For example, a BMI of 30 is considered excessively obese by the medical profession, and yet I can still get a client standard rates up to 35!

    The direct insurance market is also an interesting one. I wonder what profitability that adds?

    Observer101 thanks for sharing your secret of success.

  • alleycat on 27/11/2013 4:00:00 PM

    Dear Observer 101 and others,
    I'm not sure how much your fee should be but to see a client from start to finish can involve 9 -10 hours work. Even at $100 per hour, are you saying the client should write a cheque for $900 ? If the premium was say $2000, even with a full commission rebate the premium would initially reduce by 30.0% ($600) which leaves the insurer asking for $1400. If you and people like you think any client is going to want to pay $2300 for something which would have cost $2000, please direct me and others to your clients, and we will happily give them a better deal.

    When the client has a claim and if you have ever been involved in one, your so called fee for service is going to outstrip my normal annual 10.0% renewal commission.
    When you find out that insurance is never bought but sold, you will find the industry has survived for over 100 years based on commission sales.
    It's not the commission that dictates which company gets the business because most companies offer similar commission payments.
    If you are not aligned to any institution, and you've been around a while, you should know which companies have the better contracts, which companies pay claims willingly and which ones don't.

    The upfront commission is also designed to cover adviser costs in doing work for clients who do not proceed with the insurance for a variety of reasons, such as adverse underwriting decisions or increased costs.
    I would not like your chances of recovering your costs from those who took up your time and didn't proceed.
    Unless you're one of those super salesman, not every client you see will take up the insurance even if there is a need. Unfortunately good health and capacity to pay, play a part in that client's decision.

  • TC on 27/11/2013 4:09:59 PM

    If Suncorp thinks upfront commission is bad for the business maybe they should come up with a commission free product and stop paying any commission.
    The difference between General Insurance and Life Insurance is that one is a tangible product the other one is semi-intangible one. If upfront commission is banned I think most advisers will stop advising it, as unless the client has a clean record it is a very time consuming job.

  • Frank Smith on 27/11/2013 4:16:57 PM

    What's rarely mentioned is the high up front commissions paid to the life company by the reinsurer. (sorry - first year discount)

  • Brian Harris on 27/11/2013 4:17:40 PM

    No surprise that a CEO from Suncorp should say that since they are going gangbusters with pushing and expanding their call centers where an army of call center staff and not financial planners are fielding call-ins from the public and the whole climate there is one of sell sell sell. No doubt it is cheap and profitable, but is it in the customers best interest not to have comparisons and advice, or is it like the CEO's comments just in Suncorp's best interest???

  • PETER CORRIE on 28/11/2013 10:32:40 AM

    I agree with Meike Suggars entirely.
    Up front commissions pay us for all the work involved ,cover the overheads, compliance and incentive to acquire new business.
    We need this incentive because it is not only a professional occupation financial advising but it involves professional selling skills as well to be successful. On a continual basis we have to prospect for new clients which is not only costly moneywise but very time consuming. In fact as a sales professional adviser we have to convince the client of our worth by selling the client on our advice and services, selling the appropriate needs, selling companies and their products and selling ongoing services to maintain the business. Like any other industry nothing happens without sales.
    All these activities cannot be paid for fees alone as they are totally inadequate to sustain us in this type of business. On the other hand already Hybrid commissions can be sustainable income as a choice for the individual adviser .
    The profitability and sustainability of some life companies is another issue which obviously has to be addressed but reducing commission by a small fraction is not going to be the solution. Whatever the problems are for these Life companies they can only be solved by management direction, planning, internal efficiency and increased productivity.
    As Joe Hockey said the Labor/Socialists "trashed the joint" financially to the tune of $400 Billion plus debt and rising for this country which has to be contained. As we know Labor did their best to trash Financial Advisers/planners and the industry itself, but hopefully the Liberal Party can reverse the negative and regressive FOFA legislation and ASIC,s insidious surveillance activities in the next 12 month,s. Fingers crossed.

    cc Joe Hockey, Arthur Sinnodinos and Bronwyn Bishop

  • Wf1 on 28/11/2013 4:44:05 PM

    Who cares. If they dont want to pay find some other clients that value advice and charge for the advice. and leave the uneducated masses to use google to choose what they need based on nothing other than price.

  • Innocent Observer on 29/11/2013 7:44:27 AM

    Move along people, we've seen this all before.

    We have in one corner a manufacturer (in this case the insurer) acknowledging that their distribution costs (commissions) are a major cost to their business, but the cost of distribution (sales) is their distributor's (advisers') fault.... Fair enough, but you set the distribution cost, not the distributor.

    If you think you're paying too much, pay less then see what happens.

    Simple really.

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