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Sovereign's latest commission deal

Sovereign has been accused of being unimaginative with its short-term offer of 210% upfront commission.

Friday, June 21st 2013, 8:21AM 35 Comments

by Susan Edmunds

It is offering the commission on every rate-for-age TotalCareMax Life and all premium options for TotalCareMax Living Assurance and Total Permanent Disablement benefits submitted before the end of June.

Chief distribution officer David Haak said it was one of a number of targeted Sovereign campaigns implemented since 2007. “Going forward we will continue to roll out a variety of campaigns as a way of raising awareness for our product launches - and importantly confirm our commitment to assisting advisers to grow their businesses."

But consultant David Whyte said it was an unimaginative response from Sovereign to try to keep itself ahead in the commission war.

He said if Sovereign really wanted to help advisers grow their businesses, it would be better to offer higher renewals to enable advisers to better serve existing clients.

Whyte said whether churn was an intended consequence of the offer or not, it would happen.

“For mature advisers with a decent book of business, upfront commission exacerbates their tax problem. Younger, less experienced advisers might be swayed.”

He said Fidelity reduced upfront commission to 124% during his stint on its board and increased its new business market share over subsequent quarters by 10%.

“Sovereign offered an extra 10% commission to advisers and their new business market share retreated 10%. So operational support, quality of underwriting, systems management support, and product quality, all came into play as

influential support factors, as well as commission levels.”

Graeme Lindsay, of Strategy Financial, said there had been criticism in the marketplace from people who said insurers were paying too much commission. “The inference is that advisers are demanding it. I don’t think they are. It’s insurers scrambling for market share, trying to buy business. Professional, competent advisers don’t respond to commission bribes.”

He said it was an unnecessary move that would increase instability.  “There’s no need for this. Advisers are there to do what’s best for their clients. This skews the market. I don’t respect it.”

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Comments from our readers

On 21 June 2013 at 9:28 am Bay Broker said:
With my compliance hat on the offer from Sovereign only just pays for the two admin staff I employ to keep my business running. People forget post reg the cost of doing business with a client first principle in mind is an expense way over what we did pre reg. Commission rates are simply reflective of this. (PS OnePath pays me 230%, Partners is similar). All I can say is thank goodness Sovereign has come up to market. Welcome back!
On 21 June 2013 at 11:20 am Claire W said:
Dear Graeme, you don't speak for all advisers - I welcome the extra remuneration. Along the same lines as Bay Broker, my costs of doing business have increased dramatically over the last few years (excluding the compliance costs - think about power, rates, PI Cover, labour costs etc). An insurer must tick all of the right boxes before I even look at commission - but knowing Sovereign is now paying market levels I will be looking at them again.
On 21 June 2013 at 3:40 pm Dr Mike Naylor said:
Bay Broker & Claire W - This is not a debate about total remuneration, as David Whyte says. Sovereign had the choice of increasing trails by x%, and thus increasing your income by the same amount.
By offering a short-term jump in upfront Sovereign is trying to induce advisers to give them the new business instead of that being placed with competitors. Or even worse - churn.
The problem with that for advisers is that even if, like the professional advisers you are, you do not place business on that basis you are still placed in a legally dubious position. This is because under consumer law you have a fiduciary duty to place your business with the firm which is best for the client. When the FMA comes to inspect your books, they will be naturally suspicious of any increase in your placements with Sovereign during this period. You are going to have to be able to prove on a client by client basis that the change in commission played no part in any decisions to place with Sovereign. You can't 'look at them again' - commission differences must have no part.
The world is different post regulation. Sovereign are still living in the old world. There were better ways for them to raise adviser awareness.
On 21 June 2013 at 4:06 pm Informed said:
Quote: “The inference is that advisers are demanding it. I don’t think they are. It’s insurers scrambling for market share, trying to buy business." Excellent point, so you wont mind if insurers start aligning with Australia and lowering commissions? Clients wont mind if soft dollar promotions go either.
On 21 June 2013 at 6:40 pm 6ftndr said:
Well if you look at the other side of the coin - lapses, which by anyway you look at it, are astronomical - you could potentially see a company offering 300% to offset the losses!
On 21 June 2013 at 9:00 pm Crystal Clear said:
Dr Mike, sometimes the "old world" has its place in today's world. Claire W is bang on, if all else stacks up, then utilise the additional remuneration. I would utilise mine for client centric activities, such as 6 monthly health checks, or seminars, surely fhe FMA would approve of that.?
On 22 June 2013 at 8:52 pm bestwoman said:
Dr Mike is spot on and "all else" does not actually "stack up". Our duty is to research (ourselves, not rely on others) and offer the client the best policy for them. Sovereign's problem is their Total Care Max products offer inferior benefits in almost every respect when compared to similar OnePath, Partners, Asteron or Fidelity products. Oh and they are not cheaper. Any adviser supporting them will have a lot of explaining to do come claim time if an unhappy client complains. And please don't go on about claims paying ability, it's an ignorant argument in today's environment under Reserve Bank scrutiny.
On 23 June 2013 at 1:01 pm billy the broker said:
300% renewal I like
On 24 June 2013 at 10:49 am btw said:
Dr Naylor, the fiduciary duties you mention are actually higher than that. The paramount duty of any adviser/fiduciary is to actually avoid that conflict of interest to begin with. So its not enough to prove that an adviser wasn't influenced by [Sovereign]. That is irrelevant. Instead the law requires that an adviser avoid that conflict completely. In other words, placing oneself in a position to receive variable commission, is in itself a breach.

PS. Good job with your comments generally. Keep them up.
On 24 June 2013 at 11:14 am btw said:
@ Crystal Clear, the general law on fiduciaries has been in place for over 300 yrs. The NZ legislation against Secret Commissions is in fact dated 1908. If you want to go "old world" stop taking hidden commissions and start acting in your client's best interests.
On 24 June 2013 at 12:16 pm Ron Flood said:
BTW, please feel free to initiate a civil case against an adviser under the 1908 Act. It is hardly a secret to anyone that risk advisers receive commission so I dare say your case would fall at the first hurdle.
On 24 June 2013 at 12:54 pm Majella said:
@btw - you seem ready to use the term "fiduciaries" - a little more freely than a court would. The legal definition of WHO has a fiduciary duty and what that imposes upon them is quite distinct and extremely onerous, and it does not apply in the case of an insurance adviser.

As to the Secret Commissions Act (dated 1910, in fact - are you conflating it with the 1908 Life Insurance Act?) does not apply when a client KNOWS his adviser is being paid a commission.

Quit this 'holier than thou' attitude, please.
On 24 June 2013 at 1:48 pm bk said:
Disclosure on all commissions essential now. In the new world, many things affect the appropriate purchase of product, centralized around the clients circumstances. I don't really care what firms offer by way of commission. After 30 years in the industry it all works out in the end. I suppose another option is to zero rate all commission and charge a fee. I wonder how many advisers are even capable of that?
On 24 June 2013 at 2:33 pm Boring said:
I agree with Graeme... however, not sure that if I was not self employed, worked at a university and never ran a practice that I would be telling folk that are how they should get paid. This... again, in all this... if "any" client is being harmed... there is currently legislation in place to assist them...
On 24 June 2013 at 3:50 pm Ron Flood said:
bestwomen - Not your best work. I have just checked the Sovereign Total Care benefit analysis ratings supplied by one of the independent ratings providers for trauma, income protection and TPD.
Sovereign's ratings are on a par with Fidelity, Onepath and Partners life on all the above products except that Partners Life's TPD is rated higher.

It is a shame that some comments made on Good Returns go unchallenged when they are, in fact, untrue.

On 24 June 2013 at 4:19 pm Mike King said:
@ Dr Naylor said "under consumer law you have a fiduciary duty to.." Please, Dr Naylor, could you clarify this further, in particular the use of the word 'fiduciary'?
On 24 June 2013 at 4:41 pm btw said:
@ Majella, you’re right as to the date of the SC Act (1910). However, that’s about the extent to which we agree. While this is not the forum for a comprehensive response, my understanding is that the general position is pretty accurately summed by the NZ High Court in Attorney-General v Aon New Zealand Ltd (2008) ... “In addition, since an insurance broker is the agent of the insured, the broker is the insured’s fiduciary and accordingly owes a fiduciary duty to the insured not to put him or herself in a position of conflict”. So, while you’re free to disagree, no, I don’t think I am using the term “a little more freely than a court would”.

@ Ron Flood, what a strange invitation. Why would you wish that on any of my past and present insurance brokers (none of whom have ever passed me details of their commission payouts)?In any event, I am far more likely to sue them under a breach of their fiduciary duties than the SC Act, which doesn't really afford me much relief.
On 25 June 2013 at 1:14 pm Majella said:
@btw - point taken. It appears you have a legal background and I defer to superior knowledge. However, the SC Act refers to "corrupt" practices in keeping considerations secret or without authorisation of the principal.

That raises another question: the High Court ruling states that "the broker is the agent of the insured". I recall from early training, and things may have changed since 1990, but I was of the understanding that, at law, I am considered the agent of the insurer. Is it possible to be an agent to both? If so, is that not a conflict? And if so, then is our whole industry model illegal?
On 25 June 2013 at 5:40 pm btw said:
@ Majella, I'm not in insurance so I don't know industry practice, but it depends on your particular set up and your broking contract as you could be either. If you're an agent of the insurer (e.g. a staff member) then, generally speaking, you don't owe any fiduciary duties to the insured, so really the fiduciary issue goes away. The conflict, in my respectful opinion generally comes when brokers get paid by one party (the insurer), but purport to act for another (the insured).
On 26 June 2013 at 9:18 am Observer said:
@btw – Let’s be careful when quoting law. In the case you quote the adviser (AON) were found to owe a duty of care to its client (Ministry of Agriculture and Fisheries - 'MAF'). What was at issue is AON, at renewal (we all know of course that general insurance is annually renewable), failed to alert its client, MAF, to a change in the policy wording. This meant MAF were not covered for what was reported as a transitional period, resulting in MAF having a $1.1mil claim declined.

The High Court found in favour of MAF - in its ruling making it clear that AON had a duty as MAF's insurance broker (AON wrote the cover with QBE) to highlight the change in the policy and the impact on MAF.

Now here’s a starter for 10. How many advisers let their clients know when an insurer makes retrospective changes to their clients policies (either good or bad), and/or tries to understand how those changes ACTUALLY affect their clients.

Let’s look at a typical example of a company that can change a policy with 30 days-notice. If they remove coverage or leave gaps in cover due to the change, do advisers go back and automatically review their client’s needs, or either don’t understand the changes, or think next time I do a review, then I’ll raise it or simply don’t bother.

I would suggest you be very careful and at the end of the day, the court has spoken, it is not the insurer’s responsibility – it’s yours.

The Life Insurance Reform Act is the legislation that makes the adviser and agent of the insurer. This section of the legislation relates to holding an insurer to account where an adviser has material underwriting information that they fail to pass on to the insurer (either through ignorance or deceit). It does not make the insurer liable for poor advice or a failure in the advice process – unless of course it is sold via an insurers QFE.

It simply holds an insurer liable where the adviser fails in their duty to the life assured to fully record all the information requested on applications forms, questionnaires, or quotes. Let’s not forget that if an insurer is liable due to a failure on behalf of the adviser could result in the insurer seeking damages from the adviser via their PI cover – and let’s not forget PI cover is annually renewable. No PI Cover, no can do business.

There are policies out there (more so medical policies) that do allow for changes with 30 days notice. Also don't over look what benefits or cover, that while may rate well, do not suit an individuals needs which may be uncovered with a thorough risk review.

This is a case where we can't look to blame an insurer or the product for poor or inadequate advice.
On 26 June 2013 at 10:57 am Majella said:
@ btw & Observer - thank you both for the clarifications.
On 27 June 2013 at 2:56 pm bestwoman said:
Dear Mr Flood
Possibly not my best work (well how could you know?) but still very good. I'm disappointed by your approach (and quick dismissal). Relying on one independent ratings provider really is meaningless. I'm sure you are aware there are at least three such "providers", all of which deliver different results, "rate" different things and are, in the end, simply some other person's opinion. If you are interested in the truth can I suggest you do your own detailed analysis, not just comparing benefit features in name, but drilling down into the finer detail, much of which is often not considered by the ratings providers at all. Doing this will take some days out of your week I grant you but at least you'll learn heaps!
On 27 June 2013 at 7:07 pm Ron Flood said:
bestwomen. Sorry if you thought I simply dismissed your your comments and solely rely on a third person's analysis. I have also 'drilled down' into the finer detail and the more I do, the more I find companies adding meaningless conditions to trauma cover in order to gain ratings.

One thing I can't dismiss however is your cavalier attitude towards claims paying ratings from S & P or A M Best.

I suggest you ignore these ratings at your peril. The Reserve Bank aren't ignoring it and I believe they are currently looking very closely at the financial transactions and relationships between insurers and their re-insurers.

On 28 June 2013 at 11:22 am Andy said:
Wow - some very passionate (heated) comments on here - and very educational. One thing that is highlighted is the general disparity in knowledge that we should all know (being an agent of the insurer being the most obvious one). There are people who know the facts, people that don't know the facts, people who THINK they know, and some who have no idea!
I believe, as an industry, we should all be revising what we have learnt in the past, and IMPROVING our education. And don't give me any of the current training that is available - clearly it isn't working. Neither is being in the industry for 50 years. We need to stay current, and stay accurate! Otherwise we will never be considered truly professional!

Then the issue of commission will be irrelevant.

Knowledge is knowing that a tomato is a fruit. Wisdom is not putting a tomato in a fruit salad!
On 28 June 2013 at 12:20 pm Sal said:
Just to clarify - agents are only fiduciaries if they have the power/ authority to create a legal relationship between the insurer and the customer - for example, they are authorised by the customer to accept the offer of insurance cover on behalf of the customer (as distinct from just communicating the acceptance from the customer to the insurer). Most insurance advisers/agents are not fiduciaries.
On 28 June 2013 at 9:32 pm Brian Klee said:
Firstly, I liked to compliment the original commentators, David Whyte and Graeme Lindsay, and secondly, Michael Naylor. I agree with your comments on Sovereign's initiative.

HOWEVER, I feel the need to remind ALL Good Return contributors that these comments are viewed by the public - at the same time as you are voicing your opinions.

If I was wanting to consider insurance advice, and a member of the public, I would be asking myself why would I want to trust this lot? It is a great pity that so many respondents are not upfront enough to use their real names - so the public knew them.
On 30 June 2013 at 10:33 pm bestwoman said:
Dear Mr Flood
Sadly you rush to judgement about me without all the facts. I treat claims very seriously, they are the only reason clients buy insurance (and we have a business). What I find unacceptable is that it is clear to me that there are still some advisers who use "convenient" arguments like "credit rating" to justify what suits them, leaving the best interests of their clients incidental. Many admit as much indirectly by the comments they post on this very web site!

The likelihood of any insurance company being unable to pay claims is remote enough in my view for this not to be placed at the top of the list of factors to be taken into account when giving advice, it certainly does not warrant more importance than policy benefits and features or underwriting terms for example (and wasn't AIG triple A rated when it needed bailing out by the US taxpayer?).

I don't believe it is practically possible for insurance advisers to have both the knowledge and access to all the facts required to form a proper concern or opinion, on an ongoing basis, about any insurance company's inability to pay claims. On the contrary, all the main companies have ratings which suggest claims can be paid and I'm sure the Reserve Bank will know before the ratings firms if and when any company comes close to its minimum solvency requirement. It is improper for advisers to base their advice and opinion on unfounded, unsupported, speculation or rumour.
I doubt any judge would hold an adviser liable for recommending a properly approved insurer precisely because it is realistically impossible for advisers to form an objective, fair and reasonable opinion that any company would not be able to pay claims and as such it is reasonable to rely on the licensing and supervision process to determine who makes the grade and who doesn't. Advisers will however be liable for poor product knowledge and recommendation. A better "credit rating" is cold comfort for a client whose claim is not covered by a policy that doesn't tick the boxes. In the end advisers must put their clients in a position where they can make an informed decision by giving them reasonable advice based on objectively determined facts, not advice based on hopes, assumptions, bias and beliefs borne out of ignorance.

If indeed you do actually "drill down" and do your own research you must drill deeper. (Incidentally it's not just about adding unlikely trauma conditions.) If you had drilled down far enough you would have known what I meant and would not have felt the need to rush off to check with the product rating tool as you said you did. In my view many advisers are going to have to form much better and more detailed understandings of the features and benefits of policies if they are to comply with their duties under section 33 of the FAA. Fortunately many are recognising this and quietly getting on with their education.
On 1 July 2013 at 10:33 am David Whyte said:
Point of order - AIG had lost their AAA status well before the bail-out, but the issue you raise there has merit. The nominated rating houses are paid fees by the clients they rate. Who guards the guardians?
On 1 July 2013 at 1:08 pm btw said:
Re: SALs comments above... SAL, that's obviously quite a different interpretation and much narrower than I believe to be correct. Where did you get that test from (it looks vaguely familiar but I can’t place it)? I don't want to bog this forum down with a legal debate, but a quick reference would be helpful.
On 3 July 2013 at 2:10 pm Majella said:
@ SAL - yes, can you please provide a reference to that opinion? It was my understanding too - that a Fiduciary can treat on behalf of a Principal and must not exceed his authority, treat in a way that is injurious to the Principal, or corruptly profit from the relationship.
On 3 July 2013 at 4:26 pm Kev the RFA said:
@ Dr Naylor - To quote you "This is because under consumer law you have a fiduciary duty to place your business with the firm which is best for the client."

I don't think this is necessarily the case unless as advisers we signed something in front of our clients to state that we accept fiduciary duty.

As I understand it fiduciary duty more applies to most (but not all) investment advisers, lawyers, accountants etc...

As RFAs it's more about gathering information from the client and ensuring we recommend a suitable product, and not calling ourselves 'independent' advisers to avoid confusion.

If I'm way off the mark here please let me know as I'd like any confusion clarified...
On 9 July 2013 at 11:16 pm Bob said:
I have never seen so much misinformation about Fiduciary status, duties and obligations in my life in an industry sector that should be well versed in the same - I suggest everyone read this book and then start the path of further learning - Commercial Equity - Fiduciary Relationships by John Glover (BA (Hons) (Melb), LLB (Hons) Melb), BCL (Oxon) Barrister and Senior Lecturer in Law, Monash University at Butterworths 1995
On 10 July 2013 at 5:24 pm Bruce Cortesi said:
As a long time adviser, what I struggle with is that advisers are facing without doubt an increase to the cost of doing business - if they continue to do it as they have always done.

Advisers need to change the way they do business to meet today's clients and environment. I agree - commission is NOT the way to increase professionalism of our industry, and churning is certainly not the answer.

However, the choice to churn or to take higher commission remains with the Adviser - they do not HAVE to accept it or participate - but they do. Advisers do a lot of talking - that is par to the profession. Their are a lot of good comments here. I only wonder how many of these Advisers will actually walk the talk.

Claims - this is everything. I am well aware of claims as I publish my Company's claims statistics every year, and yes Sovereign and other companies do well in this area - PROVIDED the Adviser and the CLIENT have done the right thing by each other.

The problem is that it is not the Product Provider selling the product or giving is the Adviser.
On 12 July 2013 at 10:30 pm Sal said:
Whether or not an adviser is acting in a fiduciary capacity will depend on the circumstances of each case I.e the nature of the engagement. For example, a financial adviser who provides a discretionary investment management service (DIMs) will likely be a fiduciary.

Any adviser operating under any form of a power of attorney (I.e attorney for the customer) will be a fiduciary.

An adviser who generally provides advice on suitable insurance products will likely not. Each case requires an analysis of the relationship between customer and adviser. It is not a 'one size fits all' scenario.
On 12 July 2013 at 11:43 pm Sal said:
Further to Bob's comments above. Unless you have a lawyer guiding you.... I suggest reading legal text books is not the best way to understand where the law is at on fiduciary relationships.

All insurance advisers owe a duty of care to their clients. That 'duty' was codified with the inception of the Financial Advisers Act.

In essence however, the duty has not changed, it has always existed under the common law. An adviser needs to understand on whose behalf they are acting at any point in the transaction.

Once an adviser is negotiating a contract with a particular insurer and they are going to receive a commission for the successful conclusion of that contract, the adviser is likely acting as an agent for the insurer.

Again, advisers need to really think about the nature of the relationship they have with the customer and what kind of authority they have, and where that authority comes from, before drawing any conclusion about the fiduciary nature or otherwise of the relationship.

There are certain relations that will always be fiduciary. Lawyer and client. Trustee and beneficiary. Others require an analysis of the circumstances of the relationship.

I do not have a fiduciary relationship with my mortgage broker, just because he or she arranges me a loan. My reference is many years in legal practice.

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