Commission: The gun that needs to be in the right hands
Commission, it's like a gun, it's neither good nor evil until it is put in the hands of a human.
Monday, February 25th 2019, 8:50AM 
13 Comments
by Jon-Paul Hale
Jon Paul-Hale
Which is where the problems and perceptions stem from, and why we need regulation of both.
We've seen plenty on the commission discussion and debate, and much of it is rooted in personal experience with commission salespeople outside our industry or from life insurance sales back in the days of whole of life and endowment.
When arms had to be twisted to get people to buy a product they only saw as valuable when they died. By then they are past caring. However, they did care about their families, which is why it worked.
Also, to a lesser extent sales of term life before the 2011 regulation, though the personal engagement with living products reduced the need for arm twisting to the same degree.
Moreover, since regulation the industry, insurers, regulators, dealer groups and adviser groups have all worked hard to move advisers into a more professional space.
On the whole, it is working.
More recently we have had Bruce Cortesi and Darren Franks propose a discussion paper on a different commission model, which is great to see people thinking about alternative approaches.
Looking through the paper, it is still a commission model, not too dissimilar to the model used back in the days of whole of life and endowment, with some subtle changes in the moving parts.
If advisers followed the client profile they presently have it has merit, but nothing happens in isolation and adviser, and human, behaviour is programmed to follow the path of least resistance.
Fundamentally from what I know and understand of insurance policy pricing, this particular model has a propensity to focus advisers on insuring younger lives, because they are easier to sell and underwrite at the expense of older lives who are harder to underwrite.
In the process this substantially increases the costs for the insurance company on these younger lives, pushing the premiums up substantially in this area and leaving the older lives to fend for themselves to an extent.
When I came into the industry, we didn't have aggregator groups which are now our dealer groups on the most part and commission models were commission plus production bonus and other levers.
Back then, the majority of advisers were in the 100-130% of API remuneration rate space. One thing from this that we have lost in the conglomeration of commission and bonuses with the aggregation of the commission is levers that could and did drive behaviours.
One of the more creative and complex models for driving behaviours is Sovereign's commission model of the day which compromised a number of levers:
- Sales commission; 30-87.5% of the annual net of GST premiums.
- Production Bonus (PB); 0-80% of the commission paid, not premium.
- Loyalty Bonus (LB); 10% of commission paid for >85% placement.
- PB on LB; 0-80% in line with PB above
- Quality Bonus QB; 0-20% A function of book persistency and sales volumes
- PB on QB; 0-80% in line with PB above
Now what this did, given Sovereign was also looking to drive new business and retention, was to encourage the desired behaviours they wanted.
- Sales commission and Production Bonus was the incentive to go find clients and sell them something.
- The Production Bonus was about, do enough of it and we'll increase your remuneration, in a simple do more get more equation.
- Loyalty Bonus, place the majority of your business with us, and we'll reward your loyalty with higher income.
- Quality Bonus, not only sell our products but keep them in place and we'll reward you with increased revenue for continuing to build your book of business. The larger the book and the better the persistency, the higher the remuneration.
Now given more recent times and more recent discussions not all of this is necessarily appropriate in our current market.
Sovereign has dropped SovNet and the loyalty bonus side of things, well as far as I am aware.
However, the rest still has a level of merit in the scheme of things. Advisers do have higher levels of compliance and as a result, costs in their businesses.
The commission aspect the Government and media have focused on doesn't reflect the full picture. The percentage of the premium for the commission with the majority of providers doesn't take into account the additional bonuses.
Though the comparison is somewhat moot as foreign insurers pay distribution costs in other ways to commission you can't see from the outside, also to foreign insurers have significantly different products to encourage holding them long term, in a similar way to whole of life worked
Here in NZ advisers run their business solely from the commissions they earn. They aren't funded to pay for their running costs in any other way.
Going forward there is a problem with the optics of the current commission structures, which is likely to see pressure through the regulator or legislation on the insurers to reduce this.
However, don't expect it to reduce premiums, they're still either on par or far cheaper than comparable products in other markets.
The reality in putting pressure on the upfront commission the trail commissions will likely increase. The money required to run a successful advisory practice isn't going to change in a hurry either.
For there to be both a sustainable level of income and incentive to find clients that need advice, this commission level is going to need to be in the 100-130% range.
And yes, I hear the noise this will create on all sides. It is also the reality the current pressure on commission rates is having in the regulator and public perceptions. Also, for them, this is probably still too high.
What the public need to understand is insurance companies in New Zealand typically price their policies over seven years, the typical average length of time a policy remains in place.
So this is not a commission based exclusively on year one premiums, but from the value of the policy over seven years, which is a substantially higher amount of money.
The other aspect is the servicing of policies, and I have talked about some of this in the past.
When I came into the industry in 2000 the trail commission rates were in the region of 2.5-5% of annual premiums, and there will be a significant number of policies that are still on this renewal rate.
However, this, on the whole, has moved substantially in the last premiums 10 years with 10-25% renewals (depending on provider and commission structures selected) so there is room to introduce a servicing model going forward.
Presently we have existing agency contracts that consider trail as deferred commission on the value of the policy, that continues while the policy remains in place.
Under our regulations we have servicing responsibilities, which imply that the remuneration pays for this, however, contractually it's not linked in any way. The contract with the client for servicing is where this technically sits. Which historically is the defined servicing advised listed on the policy with the insurer as a basic minimum indicator.
Tinkering with what has happened in the past has its challenges for the government to legislate, as it will likely be in the too hard basket as Murray Weatherston put it recently in a comment on another article, as it impinges on private contract law, which opens a can of worms outside just financial services.
However, going forward there is room to move here. An approach to a 50/50% split going forward, half for asset trail and a half for service, would reduce the pressure to move covers for ongoing remuneration for the servicing adviser.
It would protect the value of adviser businesses somewhat; it would also focus advisers more on their servicing if they were to lose a portion of their income by not servicing.
It would assist those advisers who like to find and help clients get covered but are not great on the ongoing servicing piece. They could work with advisers who aren't so great on the hunting but do very well with the servicing.
This would also then tie in the remuneration to servicing expectations from the regulations, and it potentially would reduce some of the movement of business unnecessarily that does happen.
So the increased commentary from providers about persistency components of their agency measurements could enable remuneration for the right sorts of behaviours too.
There's a lot that can be unpacked with our current commission system that can be tailored to drive the desired behaviours; we need to be open to talking about them.
We need to come up with a solution that works for all involved, before we find ourselves saddled with, something that doesn't work for everyone, government, regulator, insures, advisers and consumers.
At the end of the day, it is us, Financial Advisers, who keep insurers and banks on their toes. We do this by advising clients on the best solutions for them; which is the market at work.
It drives competition to be the provider of choice. Which drives providers to enhance and provide better offerings, it has also included increasing commissions, but that can only be pushed so far too.
As advisers today, and historically, we have done this well with this.
So much so that the institutions, particularly the direct providers and banks, have convinced regulators to throw us under the bus, because we get in the way of them sitting back and taking profits without thinking about consumers.
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You state as fact "Under our regulations we have servicing responsibilities".
Do you want to provide chapter and verse for this assertion?
I've commented in another article about how the bar on this has moved and been measured over the last 10 years as adviser conduct and practice has moved.
The second is the FMA action, which most of us disagreed with, with the client in Aussie that hadn't received service from their adviser in 20 something years. Because they were receiving trial. That adviser was censured by the FMA and fined in that situation.
The action of the regulator is the clear indicator on this, added to the incoming changes being fairly clear about client first conduct and servicing expectations.
If anything of all the non upfront fee rem models out there, commission is the most transparent. At least there is visibility of the money. Salary and bonus schemes hide this driving levers and the lack of comparison as you've said is a good part of the problem. Which the FMA identified in both the soft dollar and QFE reports
Yes it does unless the scope of service includes ongoing service.
In the interests of accuracy, I think your representation of the client who moved to Aussie is wrong. It wasn't FMA
It was an anonymous case manager in the Insurance Ombudsman's office, and the adviser wasn't fined. He had costs awarded against him of $1,000 because it had been hard for the client to pursue her complaint after she had left the adviser and gone to a new one.
I would disagree with your view that the FAA requires an adviser to provide ongoing service (even if in receipt of a trail from the manufacturer).
My reason for debating is that the regulators already have an expansive view of what all advisers should do. If advisers repeat the same mistakes, i fear the regulators will be even more emboldened.
My slightly off point is the current framework has been successful in applying a sevicing context to adviser expectations, AFA and RFA.
The intent of the 6 step process is to have an ongoing servicing component, and while its possible to scope out servicing, that wasn't an original intention of the process.
It was seen in the positive and the unintended no service scoping wasn't necessarily considered in the context. I'd also expect a FMA review finding this wouldn't look too favourably on it either.
And broadly speaking the review of the code is intended to bring its application more consistently to all advisers.
The CWG, FMA, and government have all said servicing clients is something that should be happening. And while it's not specific in its approach in what we have seen to date, the reasonable/prudent adviser test is the rather loose catch all wording that pulls it in.
From what I have seen so far in the industry there are few advisers that don't have at least an annual letter to their clients, and the insurers with adviser channels direct clients to contact the adviser with their renewal letters.
So there's plenty to suggest that servicing in the insurance space is an expectation, and if the regulator is embolded with this discussion, good, as having clarity on expectations is a good thing, as you have said in the past.
We don't gave a prescriptive framework coming, which is going to mean plenty of interpretation, some will overcook it, some under.
Those overcooking it, if they're smart, will use it as a point of differentiation around how they do a better job of client first.
I can't see anything in the current FAA, the current code, the new draft code or FSLAB that dictates ongoing support/service/review. The closest we get is, as Murray says, the nature and scope. And perhaps the 'what a purdent adviser would do in similar circumstances' bit.
But that's a big leap to make, and re-defines the nature and purpose of trail. Or perhaps that is the problem; that trail's nature and purpose has never been defined. But wishing the regulators would do so would be spectacularly unwise.
The adviser and the client should determine/agree the scope of the services being provided and the terms they are provided on. In my opinion.
Under the new rules service sits under culture and conduct, it is vague and as Barry points out scope is where the rubber meets the road.
Let me explain it this way.
AFA’s have the six step process presently, including step 6 ongoing service.
Level 5 qualifications are based on the 6 step advice process.
We have the expectations in past decisions that ongoing service should be provided.
We have commentary that service is expected from the various positions of power.
It is good business to provide ongoing service
The test gets raised from reasonable adviser to prudent adviser.
So if you are not scoping ongoing service then the regulator is going to probably kick your butt. Likely purely with the application of the last point. Let alone any of the others.
No, it's not explicitly stated, at the same time there are enough levers for the regulator to push on to make an issue of lack of on going service.
The FMA has already stated it wants additional law to pursue people it already knows about. And that preferred avenue demonstrated to date for the FMA is through the courts.
Our new legislation is written quite nicely for the court system to set president against, because it is not prescriptive but principles-based.
Which is the piece Murray has had quite a bit to say on. Principals based has a vastly different approach to prescriptive which everyone needs to get their head around, as it means the bar is higher than many realise.
What this means is looking to the new law to say do I have to do this? Is a waste of time, as it's written do the right thing and don't do these things. Which makes the whole point of what's the right thing far more onerous to figure out.
For many advisers it won't be a massive change, where this will impact the most is with the QFE’s which at the end of the day is sort of the point. They're the ones causing the harm and they are the ones that will take this stuff to court.
Advisers are likely to be collateral damage in this way, which is why I'm saying the expectation is advisers servicing their clients on an ongoing basis.
Like many advisers I too was ticking along going it'll roll through and we’ll carry on. In reading the material published I realised this isn't quite so simple, and that's where I got more significantly involved.
Frankly I was late to the party. Most reading now are doing so in the cold light of dawn, party over and with a cracking headache from the hang over.
So yeah many will push back. Unfortunately, for them it is take two panadol and get on with the day.
@no cattle what most don't realise is the DRS schemes are the ombudsman, the discrete ombudsman service as an option outside DRS has gone by the way side. Which made the IFSO decision doubly concerning.
Why do you continue to make such outlandish assertions about what advisers will need to do in the new brave world. IMO some of what you write is arrant nonsense
For example, where do you find the regulator saying officially "you must provide ongoing service. If your scope does not include ongoing service, we will kick your butt"?
It's actually a pity that the regulators stay silent in the face of such assertions. They should stop scaremongering when they see it.
Draft std 4 of the Code says the opposite. The Commentary says "Clients should be able to make an informed decision about (inter alia) the nature of any ongoing advice support".
So the adviser may scope in or scope out ongoing advice. The client has to understand whether its out, or where its in, what it will involve.
Do you not see that?
Second a principles based bar is not necessarily higher than a descriptive one. The descriptive scheme sets out all the steps/things you must do - A, B C D E and F. Miss one or more things out and you are in breach. The principles based scheme sets out the objective or principle, and leaves it to the regulated to decide how they are going to deliver it.
Third you seem to think its the QFE advisers who will have to make more changes - it will be a doddle for the rest of us. But then in your confessions a couple of paragraphs later on that you have realised that 'it is not that simple even for you' seems to obviate your initial point.
I still can't dismiss my earlier thoughts that you might actually be a plant for CWG (or maybe FMA or MBIE). They might say "JP said it, so it must be true. Let's Nike it".
PS on the "right thing", it's quite possible there are many "right things". Also it is possible there is actually no right thing - an example- you are a Doctor in a hospital that has been flooded and landslided. The building is completed munted and the floods are raging. You've got many patients out, but there are some who are trapped by building collapse and lie injured in a totally inaccessible place. Their fate is sealed - they are going to die. Their deaths will be dark, cold, wet, and lonely and could take some time. You can get to them through a narrow gap syringes and some drugs that will kill them quickly. What's the right thing to do?
The combination of lack of adviser engagement and backroom negotiations with corporates has given me a perspective that this isn't small adviser business friendly.
Which is why I post my opinions in the way I do.
So Murray, outlandish, completely depends on your perspective.
We presently don't have the rules in place. We also have relatively low adviser engagement in the process that's going on.
On the principal of shoot for the moon if you miss you are still with the stars, unless advisers engage in the conversation to help shape what this looks like we potentially will end up with regulation that is significantly harsher than everyone is expecting.
The parallel is the HSWA legislation and experience, this is in the same style and approach to FSLAB. As much as we yell from the bleeches about how right or wrong the authorities are, the inspector writing the ticket has the authority to write that ticket how they like.
And no Murray I’m no plant or paid advocate for any of this. My opinion is my own, as I have been clear about in other statements. Though it's interesting you feel the need to try and throw me under the bus with your comments.
I get the approach, its quite apparent in much of our industry, don't like the message, play the man and pull them apart. I have broad shoulders, good luck.
Given your position with SIFA, I get the adviserial approach of defending your turf. However, you have little say on how this plays out, no more than I do in reality. All I'm doing is commenting on what I see.
However, in throwing your toys and stepping out of the CWG engagement you did yourself more harm than favour. And in doing so you have demonstrated your unrelenting grasp on the past.
Which has little to do with the future, everything is being rewritten in a way we have not had to contend with in the past, which is much of my point.
And there is possibly a couple of other reasons the authorities haven't commented.
A. What I'm saying is what they're hoping goes through and all the kicking and screaming in the world won't change that, and they then have the mandate to do their thing unchallenged, in court, because the legislation to date is designed to work with the court system.
B. They're wanting to see the ideas tested by advisers to figure out the workability, flaws and gaps, and figure out what to do from there.
The learning from HSWA has been WorkSafe taking cases to court, that is the primary avenue for them to pursue a business.
FSLAB has been written in much the same way, meaning much of what you're challenging won't be challenged in mediation or one on one, it will be established in court.
That's what the rules allow for.
As to service and scope, yup it's not in the legislation or code, because it needs to accommodate robo-advice as well as the multitude of advice businesses.
So yes you can scope out service, and when clients complain about that, the FMA and the court system will decide if you got it right. Which as you rightly raised last year when we talked doesn't give a prescriptive view on what this is. What we know is no service won't be accepted without good reasoning, and even then it still may not be accepted.
Reasonable adviser in 2010 is different to reasonable adviser today. And prudent adviser now vs prudent adviser in 10 years will be quite different. This gives the industry and regulators the ability to redefine what that is without changing any law or code...
So good luck with your stance, change is coming and it is going to be more significant than people expect.
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We routinely quote bank and direct to consumer life insurance products as part of our advice process and have no problem beating them hands down by recommending companies that distribute through Advisers. The discussion about commissions is a red herring.
Direct to market companies offer simplistic products. Just check out SouthSure if you want some interesting (horrifying) reading on standard exclusions that apply to life and disability plans. Yet SouthSure boasts that it doesn't pay commissions. But it doesn't offer sharper pricing!
Aggregation groups have done a lot over the years to even out commission earnings between providers and make it viable for Advisers to maintain multiple agencies and ensure genuine competition exists.
The authorities have simply got this wrong.