Commission - efficient distribution or endless distortion?
The old chestnut of commission in financial service products has been given some air again recently, and last time I commented on the impact of commission on investment products, and the need to keep commission on life insurance and related risk products. The retention of commissions on investment products is hard to defend or justify - the model however, for risk insurance products is more complex and requires closer attention.
Certain sectors of the media seem to believe that financial advisers are taking advantage of a gullible public which continues to be drawn in by glib sales talk and suspect techniques aimed at conning the customer into signing away their lives and hard-earned savings. In my experience, there are a small number of advisers who would fall into this category - and that stretches across three countries and as many decades of experience. Of course, those dishonest perpetrators attract headline news - and deservedly so. But there seems to be little or no counter-balancing viewpoint, which records among other things, the volume of life and life-related claims transacted in NZ in any given period.
In 2011, the industry topped $1bn in claims - but how many of the mainstream newspapers, journals, or publications carried this story?
The truth is that advisers cannot afford to work for free, and, in many instances, clients may decide not to proceed - even after signing all the relevant documentation.
Adviser earnings in this instance ? Zero. How many lawyers and accountants do you know who would accept a 'no fees' situation after having becoming this involved with a client to this stage?
Of course, the old journo's maxim "if it doesn't bleed, it doesn't lead" applies to the vast majority of ordinary and/or 'normal' claims transactions successfully concluded, but as they're rather dull and mundane affairs, scant attention is paid by the media.
And that's the great shame of it all - if the media were aware of - or at least acknowledged the instances when a life insurance company, and the adviser involved, has effectively saved individuals from financial disaster and/or destitution, the journalists may be less inclined to focus at the front-end of the equation and concentrate on why people purchase life insurance (or why they don't, as the case may be) and less on the earnings achieved by intermediaries.
The fact that a comprehensive life risk plan is as necessary a part of financial planning as any investment strategy, seems to have escaped the media attention thus far. But in both instances, there is a cost of access, and it matters little whether the client pays directly by fees, or via a commission mechanism. The outcome is the same - but there will be some who believe that this commission aspect is critical, some who believe it to be part of the deal, and others who will be indifferent to the subject of adviser compensation.
But given the media attention on commission as a remuneration strategy, it is preferable that advisers respond.
While it's true that NZ has some of the highest life insurance commission levels in the OECD, it's also true the that the penetration level for the product remains woefully low. Removing the distribution reward structure would herald a significant reduction in distributor numbers, and the under-insurance malaise would just get so much worse.
And few, if any of the commentators appear to be aware that all adviser expenses have to be met from the commission structure, just the same as the lawyer, the doctor, or any other retailer's product with a margin. There appears to be no suggestion that in the latter cases cited, that there is a distorting effect on having a margin included in the product or service provided.
Why should the margin included in life insurance be any different?
Slàinte mhòr agad
The Laird of Albany