Trail commission rules blamed for churn
Churn rates could be reduced if trail commissions followed a client when they switched risk adviser, it has been suggested.
Wednesday, July 15th 2015, 6:00AM 
8 Comments
by Susan Edmunds
Adviser Allan Rickerby, who works in Australia and New Zealand, said he was not surprised by the recent Australian moves to a new, hybrid remuneration model.
Upfront commissions will be set at 60% of annual premiums and include a maximum ongoing or trail commission of 20% in all subsequent years.
“This probably won’t flow quickly into New Zealand but things will change from where and how business is currently being done here in New Zealand. Ultimately it will be right for the consumer and right for the professional adviser.”
He said New Zealand’s system of ongoing commission remaining with the adviser who sold the policy, even if their client switched to a new broker, needed to change and was an anomaly internationally.
“What it does do is encourages people to rewrite to different insurers.”
He said if there was a 20% ongoing commission that was transferred to the adviser who serviced the client, there would be no need to rewrite business in many cases.
Industry commentator David Whyte, who is a former managing director of AIG Life Australia and general manager of AIA, agreed the situation was “past its sell-by date”.
He said it just encouraged advisers to cancel the existing contract and replace it. He said the adviser and client should be free to negotiate remuneration terms.
Milton Jennings, of Fidelity Life, said his firm encouraged advisers to purchase the renewal from the adviser they were replacing. He agreed the existing situation encouraged churn. “We need to find answers to that.”
He said it was not clear whether New Zealand would follow Australia’s example. There, it has been industry bodies that have driven the agreement on the new structure.
He said insurers had to be careful to avoid any suggestion of collusion with their remuneration structures.
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Comments from our readers
On 15 July 2015 at 2:30 pm Majella said:
Okay, so THIS solution is to absolutely eliminate any value in an adviser's book. If the transfer from adviser to adviser can be done simply at the client's instruction, what does an adviser have to sell?
Besides that, how would it reduce 'churn'?
Picture a situation in which the new adviser (appointed by the client under no measure of duress or silver-tongued persuasion at all!) makes changes to the existing policy or improves it by taking it to a new company with preferred conditions & wordings, and the only remuneration that new adviser can receive is a continuation of the previous renewal %age (say 20%).
I'm wondering where all these huge commission savings are going to wind up - in lower premiums? Pluuuuuuuze!
On 16 July 2015 at 7:25 pm Zak said:
Churn is an ugly word used by Underwriters to freely and liberally to cover over things they do not want to address or acknowledge. Churn is an appropriate word to use where advisors move clients they placed with an underwriter several years prior to a new underwriter for benefits barely better than the client enjoyed prior. Defining the hurdle where moving is in the best interests of the client is what the FMA should be focusing on.
Churn is not the process where an advisor challenges a consumer’s life insurance portfolio purchased through another provider ‘bank, direct or advisor’ with a better option - this competition. After all who would ever suggest to a consumer that because you purchased a Ford at 25 that you must always own a Ford!
The FMA has no right to regulate a competitive market that bears no scale market failure ‘inflated premiums, rampant non-disclosure driven by advisors and failed claims due to advisor behaviour to name a few’. Sure there are issues that need fixing but these are well within the industry’s abilities to sort – as recognised by Fidelity recently in their comments.
I fear the FMA is being used by some underwriters under the banner of churn to help them improve their return on capital through regulation. The life insurance market in NZ has 10 plus quality underwriters and several thousand advisors competing freely for business – we enjoy a truly competitive market which ensures the consumer has all manner of product choices.
This competition is keeping premiums down for consumers, driving product innovation and making it very difficult for underwriters to decline claims that fall in grey areas of policy wording. Consumer value is at risk if the FMA squeezes unnecessary regulation aimed to protect against things that largely do not exist. The FMA is acting unwittingly I believe on behalf of a few underwriters who have privately lobbied them with submissions and now will make no comment.
On 17 July 2015 at 11:26 am Dirty Harry said:
Majella the old 3X trail model is dead. Has been for ages. What you have to sell is the value of the business, based on the business's own persistency. Book persistency tells one story, strong recurring trail flows tell another. A quality book, with regular contact, high compliance, loyal clients. Not an unserviced list of clients and lots of golf days.
Switching trail to the new adviser will help solve some of the 'conflicted remuneration' issues that contribute to "churn" (accepting that word as it is frequently used; I prefer 'replacement business that could be avoided').
Good advisers who are acting in their client's best interests will understand the frustration of providing advice to keep, repurpose and modify old policies for no payment (other than introducing fees), while the previous adviser keeps the trail they haven't earned, or worse has the outright temerity to send a bill!
On 18 July 2015 at 9:42 am billy the broker said:
Why does this churn issue always come back on the broker!!! When in fact its the companies who push it and have done so since Adam was a baby!!
On 20 July 2015 at 2:34 pm Another AFA said:
The problem with commission, soft dollar rewards, lack of ability to transfer, and the issues raised in the article, is that certain rewards, monetary or otherwise, create the wrong type of behavior. How would the advice change if there was no commission for a new policy, but paid a fee for the advice instead? Would the number of 'churned' policies decrease/increase/stay the same??
Companies meanwhile do have a lot to answer for. Looks like Fidelity have their head in the sand acknowledging there is a problem but not willing to fix it (Which overseas destination is the company trip this year, Fidelity??). There are other companies making strange decisions - just days after the Australian announcement (lowering of upfront commissions) a life insurance company here in NZ decided to INCREASE upfront commissions to over 200%. Bizarre.
In Australia, the companies were forced to come to an agreeable solution before the Regulators stepped in. The companies here in NZ need to do the same - and if Advisers want a suitable outcome, Advisers should be knocking down the companies doors before the FMA do.
Dirty Harry, good post. I would suggest that collecting trail without servicing is (likely) a breach of the Fair Trading Act. A friendly warning from the FMA on this topic could reasonably quickly see some action.
My personal recommendations for companies to implement:
- Make available 'No-Load' policies so that advisers, consumers and Regulators can see the difference in pricing
- Ability to transfer polices between advisers
- Immediate ban on all soft dollar commissions and rewards. We all know they are inappropriate, lets just get on with it!
- Annual Confirmation from adviser to the Company that they have serviced the client in the last 12 months (or deemed time period)
- Start the discussion with advisers about lower trail rates, what needs to happen to earn and keep those rates.
- Clearly disclosure the amount payable in commission upfront and annually in dollar terms to the consumer.
It's going to happen, who is going to lead the way?
On 23 July 2015 at 9:55 am RiskAdviser said:
Interesting to see an idea I posted some weeks ago get some traction. Let's put the rhetoric and agendas aside for a moment and look at the market.
Insurers pay commission, upfront and trail, to acquire business and have it looked after. Yes insurers factor in drop off into the profit mix as dropped policies with no claims improve the bottom line, after 5 years on the books, but this is also muted with the persistency measure the insurers have for advisers. Point is, this is the calculated total cost of acquisition and servicing for the life of the contract, for life paid heavily upfront and for F&G paid on a renewal basis.
My experience with quite a number of base sale and purchases is the servicing elsewhere trails vs servicing with no trail generally comes out in the wash, suggesting adviser businesses values would fall over if the ongoing income followed the servicing adviser is rubbish.
If the trail was paid as servicing then there is less incentive to move business to get a clip of something, as often orphaned clients who need a bit of help, genuinely don't need to or can't move their existing cover, even if there is a better option. Which is probably why they're not getting serviced and the new servicing adviser doesn't get paid for that, and often ends up... (Long winded answer, suffice to say doing the right thing by the client but not always good business practice)
The cry of adviser business value, as has been said you have a good business it's worth money, you have a poor business not so much. If you have a well run business and you service your clients and the value is in the business it will always have a value.
Valuation multipliers, our traditional approach to valuing our businesses. This has been a long term discussion, how do you succeed an adviser's business with 20-25% trails on a 3-5 times basis? Only realistic way is sell to a big player or break up the book. Some might cry foul about the following as it's how they are looking at their own value, but serving following the servicing adviser will likely reduce the base multiplier, if we take F&G as the example, 1X sounds like an awfully big drop in value.
Think about it for a moment, trails used to be 2.5 - 5% not huge in the scheme of 150% + commissions, but this has been changing, base renewals of 7.5-17% are now typical trails for full upfront commissions, the insurers have been slowly moving us advisers along for some time. Ok based on the new trail rates, a drop in multiplier hurts, but then again there is now a higher value risk per client than before. If we move to a muted upfront/higher trail model, because there needs to be an incentive to acquire new business and it is hard work at times, then this buyer's risk only gets higher.
So for a prospective buyer they will naturally reduce the multiplier. Though if you have based your business on the 5% trail model and you're moving to a 25% trail model then 1 times for your business on 25% trail is going to be the same value as 5 times your existing 5% model has in $$ terms, for most this is an increase of 2 x renewals. So what's the problem?
On Milton's comments about buying trails, nice in an ideal world, but the experience has been it doesn't happen. The thinking is if the new guy is trying to buy it the business will be sticking, so I'll get more than 3 times so why bother...
Plenty of food for thought and we need open realistic discussion to help our clients, ensure we have sustainable valued businesses and providers are able to build and produce the product we need to ensure we have a healthy industry. There are some quite simple changes that can be made that would have a massive impact on achieving this, some of them will be hard for advisers and providers to swallow, but if we don't the regulator may well step in and change things in a more drastic way that isn't fully understood and results in the usual unintended consequences issues that meddling with legislation causes. Remember, the recent 80% LVR = no 1st home buyers, 30% investment property in Auckland is going to lock 1st home buyers out of that too... Unintended but massive impact in the scheme of society. Lets get it right from the inside!
On 24 July 2015 at 9:43 am Dirty Harry said:
@RiskAdvisor
1 times for your business on 25% trail is going to be the same value as 5 times your existing 5% model has in $$ terms, for most this is an increase of 2 x renewals. So what's the problem?
My BDM keeps telling me the spread commission is boosting the value of my business. He's selling the idea of 3 X the 20% !!!
lol
I'm young enough that planning to hang on to many years of 20% renewals makes a ton of sense. I'm not old enough to be thinking exit/sale.
Right now I'm trying to get into position to be the buyer of a few local part-timers/golf addict's lists at 1 to 1.5 times. If the old farts around the place still think they'll get 3X or more they're dreaming. Probably why they keep hanging round.
I walked away from a business who had a "generous" offer to vendor finance and "succeed" to me at 4x or more. Plus interest.
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Billy Connolly often said something about sex and travel....
Your self interest is showing. Yes, dear readers, the insurance companies have their own vested interests in the current compensation structure too.
The answers you need to find, Milton, are not in advisers paying several times the last year's trail to take over servicing. You have to think that if the current adviser has a good enough relationship the client won’t be talking to anyone else in the first place. But for the incumbent insurer to have even some chance of keeping the policy, the service commission should be on offer to the new guy.
There are many clients out there who deserve more from their advisers and plenty of advisers who don’t do enough to "earn" their SERVICE COMMISSION. It's not Trail, and it's not passive income.