Terms such as up-front commission and hidden charges tend to fill consumers – and the media – with fear. They imply a scandal in the making or at least a little consumer detriment, often in the name of sales targets and profitability.
But our industry must think twice before being led to believe that commission can only fail everyone because it isnot true.
In the days when salesmen knocked on doors for a living, consumers did not pay an up-front fee before they heard what he had to say. His replacement these days is specialist telephone and internet advice, for which consumers also will not pay an up-front fee.
Given the right information at the right time, consumers are quite capable of making up their own minds. Most important, there is danger in tarring all financial services products with the same brush as they can become guilty by association.
Protection is the bedrock of financial planning and is more important than any asset allocation model for pensions. It is quite different from other sectors as the deal the customer receives is in the premium and the product – and nothing else.
There are two main areas of potential detriment where commission is concerned, namely, the impact on fund growth and product bias. In these respects, any move towards other remuneration methods, such as fees, should generally be welcomed.
These concerns need not apply in pure protection. There is no fund growth to eat into and, as the commission calculation for products such as life cover, critical-illness cover and income protection is the same, any product bias is not driven by commission. As long as the customer gets the right product at the best price, there are no other issues to consider.
Not only does commission serve the protection-buying consumer relatively well, there are concerns that charging fees for sales of pure protection products is potentially discriminatory. This is because the advice process for protection often involves a significant amount of underwriting which can vary greatly from client to client and cost the adviser significant time and money.
As the table shows, it can take many months of additional administration, chasing around and updating clients before cover can be started. A client who has underwriting issues, such as diabetes and a mother with breast cancer, would follow a very different process, receive different advice and take significantly more hours of work to arrange cover than a healthy client. Using an hourly fee is simply unfair. How can we expect a client with health issues to pay more than someone who is healthy?
Even if a flat rate is charged for all clients, this would need to take into account the underwriting of non-standard cases, which also is not fair.
By the same logic, because the underwriting for older lives is typically more than that for younger lives, age is a factor and charging fees based on this is also potentially discriminatory.
Where protection is part of an holistic sale including savings and investments, a fee structure can clearly accommodate this. However, what the protection buyer wants and needs to know is what the product does and how much it costs. As long as they get the right product at the best price, it frankly does not matter if the commission is £2.50 or £25,000.
Looking at a dictionary, the definition of commission is to “serve as full or partial recompense for work done”. As the vast majority of the work in protection is up-front, I would say that was spot on.
We would not want to create a market where consumers were stuck without any protection or with the wrong product, when something more suitable was available, just because they could not afford fees. Once consumers understand the value of advice, some might consider paying a fee over the policy term, rather than up-front, but that is effectively what the existing commission structure already achieves.
There are other reasons why commission serves consumers well in this market:
l Client needs change and rebroking is the norm, which means fees could cost the client more than necessary.
l Up-front commission fuels competition because sellers have the choice of sacrificing commission to beat other quotes. Rightly or wrongly, this is how many of the direct, supermarket and web deals work and without it many consumers would end up paying higher premiums.
l With up-front commission, there is a vested interest for the adviser to give the best advice at outset because commission is clawed back if the policy is cancelled in the earlier years. As fees cannot be clawed back, once the advice is given, the adviser’s money is earned regardless of how suitable the recommendation or how competitive the premium.
If an adviser sells a policy and prices rise while the cover available becomes inferior – as has been the case with critical-illness cover for several years – churning is not an option. But a fee-based adviser could charge a fee for reviewing the market, despite the fact that the customer already has the best product.
Looking at term cover, where prices have been falling, if we switch a customer to a new policy after two years, is that churning or just good service? Churning is when consumer detriment is caused but rebroking is good customer service.
Instead of polarising the issue into fees good, commission bad, we need more flexible options to be made available from product providers. We need the regulator to understand that there is significant time and administration cost involved in protection and with cheaper pricing often comes harsher underwriting.
Life offices might be keen to move away from initial commission but those same offices are keen to win business on price alone. But winning business on price alone will lose you business on price alone. Insurers cannot have it both ways.