Pension misselling and endowment misselling – what went wrong? The problem is that, unfortunately, our industry is sales-driven. Yes, we can give euphemistic titles to salesforces but nonetheless they are salespeople.
If you look at any industry which is sales-driven, it equates to high commission, inappropriate and complicated products and no after-sales service. Double-glazing, timeshare, Arthur Daly – need I say more?
The problem with financial products is that all the money is in selling it and no money is in servicing it. If all those endowments had been properly serviced, the expected shortfalls would have been explained years ago and appropriate suggestions made.
It is amazing that the salesperson has lasted so long in the life insurance industry because salespeople always complicate products. Indeed, they thrive on complicated products. This is simply because the manufacturers listen to what salespeople say.
“If only it had this particular feature or that facility, I would be able to sell it.” Do manufacturers not realise that the best product redesigner is the one who was not going to sell it whatever bells and whistles were added?
Just look at the results – pension application forms of 26 pages. Well, salespeople have certainly perpetuated their jobs because no investor would fill that in.
But the fact that financial products are complicated is not the real issue. Salespeople are expensive and none of them are known for their after-sales service. So what does the industry do? It panders to them and pays everything up front in terms known as indemnity commission.
The industry is now desperate to get away from initial commission and has produced products which have generous trail or fund-based commission. The trouble is that the salespeople wanted an interim measure so the life companies pay 10 years' trail commission up-front. (Am I missing something or is that not indemnity?) Of course, the salespeople love it because if it is a stakeholder pension they are selling, they can churn it after two years and take the 10 years' trail commission again. The only advantage is that at least the client gets “serviced” every two years.
Mature industries eventually change to a marketing-based proposition. Just look what happened to the motor industry. Around 25 years ago, the main dealer used to get 19 per cent commission. Where was the incentive for him to service that vehicle afterwards?
The motor manufacturers cut the initial commission and did something even more clever – they reduced the amount of servicing that their products required. Now, key dealers for major manufacturers do not make much money out of selling new cars, they have to make their money out of servicing the product.
Would that not be a breath of fresh air in our industry? It is high time that our industry changed its tack to a marketing one, creating a desire and then supplying the product.
It should be the job of the people at the front end – the bodies on the ground – to ensure that those products are serviced. If the salesperson who sold Mrs Jones her endowment mortgage had been remunerated only by contacting her once a year, I think he might have suggested what to do when interest rates came down or he might not have sold it to her.
Yes, she should use the amount saved either to pay off her mortgage earlier or perhaps top up her endowment.
I leave you with one final thought. Was not the debacle at Equitable Life caused by the company's requirement to add bells and whistles for its salespeople – guaranteed annuities, so-called single-premium costing and, of course, the untenable bonuses? Flexible contribution and retirement dates were wonderful as selling points but stuffed the life fund.
The life companies just really have to stop paying indemnity commission. The interim measures will never work. The broker market has to be remunerated in the same way as its product suppliers and then the broker market will be forced into servicing the client to protect those fees.
The investment groups call them management fees and they are a lot easier to collect than an hourly rate.
Peter Hargreaves is managing director at Hargreaves Lansdown