Better rewarding advisers

Commissions primarily reward production with upfront commissions well in excess of renewal and/or persistency rewards. Unless an adviser has a very large book of existing clients, to generate large cash flows he must continuously write large volumes of new business.

To qualify for incentives etc.., sales volume is again the key driver. To drive these required sales, advisers are looking for the best combination of product features and benefits, policy definitions, underwriting leniency, competitive price and maximum commissions putting increasing pressure on life companies to keep up or miss out.

For life companies value is driven by a combination of sales volume and persistency and expenses management and claims experience.

There is a constant battle between the requirements that advisers have to allow them to write increasing sales volumes and the negative impact these requirements can have on persistency, claims experience and expense management.

Effectively the manufacturer of the product has a completely different vision for the product than the seller, leading to predictable conflict.

These conflicting visions have seen major dissatisfaction amongst advisers when life companies have tried to adjust commissions, prices and underwriting processes to counter falling profits.

Often, maybe fearing negative reaction from advisers, companies have deliberately avoided involving them in the decision-making process and have delivered news about negative changes in a ‘dictatorial’ way.

The consequence of this approach is that advisers believe companies make one-sided, arrogant decisions which have far reaching impacts for them but which they have no influence over.

The key to a more successful business model is to ensure the drivers of value to both parties are aligned.

If it is a combination of production, claims experience, expense management and persistency that drives profits for a life company then why not more equitably remunerate advisers for each of these areas?

A common misconception is that the adviser really only has influence over the sales process and cannot be expected to help drive persistency, claims or expenses to the same extent.

This is similar to the theory that espouses that the chicken came before the egg! If we look at it the other way we can equally say advisers have never been significantly rewarded for focussing on these other areas, therefore they have been forced to only focus on sales.

Quality advisers manage the long-term relationship with each client. They find the client, help them understand their needs, provide the right solution to these needs, answer ongoing questions, regularly review the client’s needs and portfolio and assist with claims.

As commission structures largely reward only the first part of client management, advisers do not get adequately remunerated for the balance of the job they do.

Hence the reason for constant pressure on upfront commission levels.

Where both the life company and its advisers are effected by the same behaviour, either positively or negatively, then the path is opened for these parties to work closely together to make decisions that will drive the right outcomes for all.

Open and frank communication about issues which have shared impacts for all stakeholder’s creates an environment where the collective brain-power and energy of the team can be pooled – leading to the development of more effective strategies.

Internationally there are some examples of profit share arrangements between life companies and advisers and even adviser-owned reinsurance companies, which offer reinsurance services to the life company – interestingly these reinsurance companies have been proven to drive considerably better underwriting and claims management performance.

The major key to the success of all of these schemes is the degree to which the behaviour of the life company and its advisers are linked together for mutual benefit.

Clearly a structure, which is clear, easily understood and transparent, is important in gaining the trust of all parties and trust is an important element in the success of these schemes.

It is time for the New Zealand industry to accept that quality advisers can and do have a huge impact on not only sales, but also persistency and claims experience and that the reward mechanisms offered to these advisers must more accurately reflect the many roles that they play in driving value to all stakeholders.