Practical approaches to commission management
Commission paid for policies sold is the dominant remuneration paradigm for the industry at present. It will probably continue to be so for some time to come.
Tuesday, October 23rd 2012, 7:19AM
by Russell Hutchinson
While some people talk of advisers getting astronomical rates of commission there is almost no-one that does, or it happens only very rarely.
High headline numbers often ignore all the parts of the premium that don’t count, or get paid commission at a lower rate. I keep a detailed database of commission terms, and I am familiar with the actual levels of payment, so I know it’s a bit like the top end of the speedometer on my car – a theoretical possibility that has never actually been reached.
This is just one of a number of commission myths. I think my favourite is the line pushed by consumer ‘advocates’ that ‘you should go direct because otherwise you have to pay an agent commission’ – which completely ignores the simple fact, discoverable with about 10 minutes price comparison online, that some of the most expensive offers and ‘direct’, and some of the cheapest are offered by advisers.
So in amongst all the puff and nonsense what is going on in the world of insurance commission and what should you do about it?
Over the past year we have seen a number of insurers adopt the non-commissionable policy fee. This has helped insurers to maintain a high ‘headline’ number for commissions while keeping the actual average commission about the same as it was before.
Most advisers appear to be unconcerned by the change. It has come at the same time as a number of other additions – share schemes, increases in income protection commissions, and continuing company support for adviser groups. So overall there has been little or no change – or perhaps a slight increase.
Of more note is the reference to conflicts of interest in general and commissions specifically in materials published by the FMA.
They want to see conflicts of interest declared clearly to consumers – it helps to reduce their effect on the purchase process. Authorised Financial Advisers have specific requirements to meet from the Code. Registered Financial Advisers are, according to the FMA’s view in their recent ‘care, diligence, and skill examples’ also required to declare in writing how they are paid and detail conflicts of interest.
The great challenge here will be to prove that the individual recommendation you made was not influenced by money matters.
That can be addressed in a number of ways. The first is to have a robust selection process which is clearly defined, easy to replicate, and is documented. Any questions will easily be proven by reference to the file. Similar cases would result in the same recommendations.
Another step or choice is to achieve effective commission equalisation: if you run a team pay members of the team an equalised rate across all companies, ‘overs’ or ‘surplus’ commission can be used to fund other activities or placed in the end of year bonus pool.
Even if you are on your own, you could achieve something similar with a careful review of your main companies and their terms.
There will certainly be arguments about whether non-financial (soft commissions) are more dangerous and conflict-inducing than purely financial incentives.
You may need to consider that in your disclosure. Certainly some advisers will opt for cashing up non-financial incentives. Others will retain them – but will manage carefully to ensure that their product selection process is not compromised by an overwhelming desire to ‘make the trip’.
Once you have conducted a thorough review of practice, go back and read what the FMA has to say about disclosure again and rewrite your commission disclosure.
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