Charging fees in risk advice
Russell Hutchinson looks at the times when an insurance adviser could consider charging clients fees rather taking commission.
Monday, December 17th 2012, 12:02PM 
7 Comments
by Russell Hutchinson
Commission has been, and probably will continue to be, the main way that sales of insurance are rewarded. Adequately disclosed that should pose no great risk to consumers. But two forces argue for a broader approach, where fee charging at least becomes part of the mix.
One is considering a future where fees might have to play a bigger part. The other is more immediate. It is the principle of cost recovery – each service should cover its own costs. You don’t mind going the extra mile for a client where you will be receiving a commission, but there are plenty of situations where you won’t.
For example: consider a client that asks you to review an old policy and see whether it is still suitable and should be maintained. What if you know this client has a health condition which will prevent obtaining a replacement cover? Your investigations into the old policy might be very useful to the client, there may even be a possible claim, but will certainly not create any commissionable activity.
Without a fee option, you may either you decline to help, or you do some work out of the goodness of your heart.
Bear in mind that what is at stake here isn’t merely a couple of hours digging around. The act of reviewing the policy and expressing a view on retaining or disposing of it means that you have given advice.
That means that you could be liable in the event of a dispute about your advice. So you have stepped into a potential liability. You should not undervalue what that means. More than that, you should make sure the client understands the value as well. A fee would seem to be in order.
Other, similar, circumstances abound: reviewing overseas policies, considering how cover should be connected to trusts, or companies, and other legal structures, or taking on the challenge of placing a substantially sub-standard risk.
A little work has to go into setting up the necessary structures to charge fees. You may have to consider the list of possible services fees will cover so that when you come across them you can give clients a fair estimate in advance of what the fee will be.
Fees will need to be set by a looking at both the time and risk costs involved, and what will be acceptable to the client. Your hourly rate component of the calculation should be established using an opportunity cost basis. It is easy if you are a sole trader: take last year’s revenue and divide it by hours worked. It is more complex if you are part of a larger business, and will use the expertise of others. You will need to decide how you will quote and explain the fees to clients.
A system to track billable time, issue invoices, and follow up unpaid fees will need to be managed. The necessary investment creates a thresh-hold: it may not be economic to charge fees if you would only collect a couple of thousand a year from them. But you might be wise to consider it.
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Comments from our readers
I agree with Russell’s article but the cold hard reality is that “most” Kiwis simply won’t pay to talk to an adviser when the subject is life insurance.
Whilst you may not earn anything from this particular transaction if you have earnt from them in the past how can you justify charging them again?
Surely if they are 'clients' you should either take the fee model from outset or the commission model from outset; to want to take commission and then charge a fee does not sit well with me.
I have had people who are not clients (ie I have never earnt from them) in the past come to me for an opinion on some aspect of their insurance and I have charged them a fee for doing that and told them before I commence the work what it will cost them as an hourly rate.
But when there is commission from the Insurer there is a fiduciary duty to the party that is doing the paying. So if you are paid by the insurer, and you have a fiduciary duty to them, how can you be working for the client.
You can't. Stop fooling yourselves. If you work for the client then that is who should pay you. Would you engage an Aocountant who was being paid by the IRD?
If you need to advice a client on an old policy and end up getting nothing, you need to take it on the chin! Isn't that what service paymenmts are for!!! If you dont make a "new" sale, ask for some refferals!!
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My thoughts are that as the industry begins to gain more momentum, and the public begin to understand the role of an adviser (rather than simply a broker) - clients will expect to pay fees for the above-mentioned services.