Missionb4Commission

Mission before Commission. Or have insurance practitioners forgotten about that?

MAS called for a review of the commission structure for life insurance advisers, stating concerns that the prevailing front-loading structure may not serve the best interest of consumers.

The impact of a “restructuring” could see commissions stretched out over many more years than traditionally 4-6 years for regular premium life products.  While that could significantly impact on the ability of the career to attract advisers solely based on a full-commissions structure, it seems that some form of adjustment may eventually be inevitable.

An example of such a commission structure is NTUC’s product commission structure. Some of it’s products spreads the commission over the life-time of the policy. While that may not be attractive for “myopic” insurance advisors, it’s actually a good long-term income building prospect for those who stay long in the business.

So far the regulator has taken a “self-regulation” approach rather than going straight ahead to lay the parameters. This would mean the implementations may take a while before materializing. Mr. Stanley Jeremiah of the Singapore Insurance Institute explained that there is an inherent conflict of interest if the industry were to tweak their incentive schemes, instead of the regulator taking the lead.

The implication for practitioners and financial advisory companies is to expect some changes to eventually take place and be ready to adapt to changes. I see three possibilities emerging from this:

1)      The adoption of fee-based or partial fee-based advice

2)      Embracing an assets (premiums) under management model of advice with trailers instead of front-loaded insurance commissions

3)      Partial fixed pay component to offset removal of front-loaded incentives

By implementing a combination of the three, we may resolve the issue of too much front-loading, and yet provide a viable means of attracting competent and enterprising individuals that can put clients’ interest first to take up the career.

A total fee-based advisory mode may not be viable for the mass affluent market (which is where the problem of conflict of interest usually lies), as the annual fee required may be too costly for most people. A poll of majority fee-based models indicate a fee of $1,000 to $3,000 for an initial plan, and $500 to $2,000 for on-going annual fees.

The assets or premiums under management model would require a gradual revamp of the current insurance industry retain a larger portion of distribution profit, spreading it over more years or on a trailer basis. Likely this may occur over certain class of products, moving gradually to others. Challenges however remain to design win-win-win (company, adviser, consumer) compensation plans.

Financial Advisory Companies (non-tied) typically do not have deep pockets like banks or insurance companies to adopt a higher fixed income component, may have to build up reserves in the coming years to adopt a partial fixed income model.

Perhaps, the regulator should look at the giving of appropriate advice and focusing on customer-service standards instead of going along this route. I know of many well-respected insurance advisers that give excellent advice regardless of commissions, especially when they have the choice of many companies’ products to choose from and yet did not choose products with higher compensation.

I believe the conflict of interest in insurance advice resulting in high commissions but not meeting the needs comes from, but not exhaustively from:

1)      Quota, performance and incentive systems stemming from financial institutions and managers driving profitability.

2)      Using of needs analysis superficially, not meeting protection needs as a priority: example implementing an endowment policy when obviously a term policy would have ensured sufficient protection with limited budget.

3)      Reluctance of consumers to adopt a fee-based retainer model.

Why not consider also addressing some of these issues?

The first two could be achieved by increasing the scope of the independent audit team to best practice advice for compensation alignment as well as a myriad of other issues like compliance and appropriate advice.

The last could be enforced with education of consumers to receive fee-based advice as a means to reduce conflict of interest issues. Coming from an independent bodies like MONEYSENSE and SAS, that could be more effective.

As for practitioners, we’ll need to be aware of the implications, up our professional and service standards and get ready to adapt to a change of business model in time to come.



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