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Commissions not driving adviser behaviour

Former AIG managing director and GM of AIA NZ David Whyte argues a drop in commissions won't drive advisers out - because high commissions aren't attracting them in any great number.

Wednesday, June 15th 2016, 10:40AM 10 Comments

Over the last 12 to 18 months, there has been a continual flow of papers, reports, and articles aimed at reducing intermediaries’ life insurance commissions in the life insurance markets in Australia and New Zealand.

The latest contributions from the Reserve Bank of New Zealand (RBNZ) and the New Zealand Institute of Economic Research (NZIER) are fairly typical of the tone, content, and quality, of the previous contributions.

The response to the latter report from Dr Mike Naylor hits the target in that inadequate data creates questionable conclusions. Despite the lack of provable, testable data than can be replicated for verification, NZIER comes to the conclusion that reducing commissions would be beneficial, despite the likely loss of advisers from the industry.

The (incorrect) presumption here is that lower commissions will encourage advisers to leave the industry.

If that were the case, the converse would be true and the level of commissions made available in NZ from product providers over the last five years would have seen entrants flocking to join the ranks of advisers.

To my certain knowledge, no such flocking has occurred.

There are further jumps from supposition to conclusion in the NZIER paper that Mike Naylor identifies more eloquently than I, and that call into question the quality of the work produced.

Mike’s criticism is based on a researcher’s perspective and questions the significance, relevance, and utility of the metrics used in the NZIER Report.

In a similar vein, the intervention of RBNZ in the debate is curious. Here is the regulator expressing a view that the current levels of commission may threaten solvency. Actually, all expenses threaten solvency, but leaving that aside for one moment, would the author care to express specific concerns in the area of solvency or capital adequacy? How does the commission level threat to solvency metrics manifest itself?

Now I don’t expect to receive an answer, but the approach of RBNZ and NZIER is typical of the approach adopted by the Trowbridge Report, the Melville, Jessup, Weaver Report, and sundry comments that commissions are too high.

Incidentally, the mantra that wraps around this view is something like…”and which produces poor outcomes for consumers”.

The “outcomes” are, of course, never defined, mainly because this would require subjective evaluation of product solutions that the commentators are simply not competent to make.

Nevertheless, the inclusion of these words – or similar - justifies the direction of these publications that have been, either inadvertently or deliberately, supported by regulators, politicians, academics, and media commentators.

However, as any sensible person involved in the financial services industry will tell you, highest commission does not equate to highest premium – nor does nil commission equate the cheapest premium.

Commission, as an acquisition cost to some life companies, occupies the role of distribution expenses in organisations that do not pay intermediary commissions.

Similarly, some companies have tightly controlled General Operating Expense Ratios, while others have expense over-runs that render their retail pricing higher.

To compensate for these expense-overruns, a number of internal alternatives are available, including, but not limited to;

• Reduce shareholders’ dividends
• Reduce management compensation packages
• Avoid investment in systems innovation
• Avoid product innovation
• Reduce distribution/acquisition costs

Each of these requires a conscious choice on behalf of the leaders of these organisations at senior management and board level, and each is fraught.

Trimming rewards to shareholders can cause senior management to be publicly criticised, pilloried at the AGM, or stood down altogether.

Reducing the senior management compensation packages is unlikely to be suggested or supported by senior management.

Avoiding systems innovation is easy by referencing the capital cost, the failure of the last IT project to deliver on time/on budget, and the general lack of awareness at Board level of the importance and impact of technology.

Likewise, the archaic product design, development, and roll-out process held so dear by the “progress prevention” commissars helps to contain the expense of introducing benefits that will genuinely serve the needs of the consumer.

Finally, there is commission.

And what a rich supply of ideologically driven, ill-informed, poorly researched, material has been generated in the recent past to facilitate and encourage others to view adviser compensation as something akin to a communicable disease.

From the British academic at the Financial Capability Conference in Auckland last year who declared all commissions to be evil, to the various reports mentioned earlier, the concept of pricing a product to contain commission acquisition expenses has been condemned, vilified, and demonised.

All expenses in the P & L of any organisation – life insurance companies included – are the responsibility of management to contain within budget.

However, the commission item in many life company models is the stimulant of revenue, and, as such companies tend to market more complex products that require professional advice, why should this model be the target of these poorly constructed reports?

In truth, distribution costs are only a part of the overall expenses of an insurance policy - including the company’s profit margin - and while suggestions that regulating, controlling, or reducing commissions will bring price stability and product sustainability, the spoke in that wheel is the impact of claims.

Mortality is predictable and has plenty historical data to support appropriate premium levels.

Disability claims are more volatile, less predictable, more prone to unexpected ‘spikes’, and pricing is much less stable, as we’ve seen from recent experience in Australia.

So claims that commission containment is a panacea are highly suspect, but it does take the focus away from the inefficiencies of companies with expense over-runs elsewhere, poor product development records, and suspect innovation practices.

A free market economy – or even a mixed market model – seeks to facilitate and stimulate the most efficient solutions on behalf of the wider community.

At present, we’re being assailed with so-called evidence, based on unsubstantiated research, where the conclusion appears to have been reached before the research commenced.

Tags: David Whyte

« Risk poor policy analysis could affect commission decisionsChurn report should include banks: Insurers »

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Comments from our readers

On 20 June 2016 at 11:10 am Steven Popodopolus said:
I have never seen anything in a professional environment as fundamentally flawed as the MJW report. Zero evidence of anything
On 20 June 2016 at 3:28 pm Majella said:
Thanks David - as thoughtful and erudite as ever. But I disagree that lower commission won't necessarily drive RFA advisers out of the business.

Given the way costs have risen over my 20 years since leaving the womb of an Old Mutual, I really don't look forward to seeing revenue reduced arbitrarily (as done in Australia). Costs won't respond sympathetically!
On 21 June 2016 at 7:00 am dcwhyte said:
Thanks to you Majella. Some may well take the opportunity of moving on, but Advisers are a resilient lot and represent Darwinian Capitalism in that those prepared to adapt will survive, those not prepared to adapt will leave or perish.

Commissions have always been set by providers, and even with the measures applied in Oz, there hasn't been a mass exodus of advisers.

From my standpoint, I don't see NZ commissions going the way of our Australian counterparts - but I could be wrong...
On 21 June 2016 at 9:18 am Graeme Lindsay said:
Well said David! - as always.

I too disagree with your contention that (significantly) lower commissions will not drive advisers away. In particular, I disagree with your comment that the reverse would be true - i.e. high commissions would attract hordes of new advisers.

The reality is that asking clients and prospective clients to face their own mortality or morbidity, is not easy. It is contrary to human nature to contemplate the world without your presence. Asking people to forego current consumption for the possible future benefit of others is hard to do. If it was easy, then there would be hordes of new advisers breaking the insurers' doors down.

It is the fact that introducing the subject of life and health insurance and advising and arranging appropriate insurance for people is not an easy thing for people to do as a career, that has created the need for commissions at their current levels to remunerate the people who have the character to succeed in the work. It takes a person with special strength to, every day, risk the rejection that ignorant people throw at the well-meaning life insurance adviser.

I suggest that a small reduction in commissions wouldn't make a significant change in adviser numbers, but a large reduction would certainly do so.

We hear that the mean age of advisers is in the 55 - 60 range. I think that many of these old buggers (55 - 70 years, and I am one of them), would vote with their feet.
On 21 June 2016 at 12:12 pm Dirty Harry said:
I'm currently mid/late 30s. I am either among the older gen y or younger gen x depending who you ask. Usually I am the youngest in the room at any industry event, save for a couple of newbies who may or may not still be around 5 years from now (seen that so many times over the years).

I am looking to grow, and have successfully built on a couple of small acquisitions. Currently talking to older advisers and asking the BDMs about books on the market. Where, prey tell, are all these retiring advisers everyone keeps taking about?

I reckon the baby boomers either can't afford to retire, dont want to, or have slowed down - sitting on a book of trails, writing next to no new (NEW) business, and forgetting what the trails are paid for.
On 21 June 2016 at 5:15 pm dcwhyte said:
Graeme - good call. a significant reduction would likely lead to a reduction in adviser numbers.

And therein lies at least part of the problem.

There is no empirical evidence to confirm the assertion that advisers would leave the industry if commissions were lowered.

Adding the term 'significantly' certainly increases the probability, but I haven't seen any reports from Australia that there has been a 'significant' reduction in adviser numbers - at least. not yet.

I suggest that that there are other influences - in addition to commission - that influence adviser behaviour. Otherwise the highest commission-paying office would be the only company getting new business!

Your own widely-used research platform provides ample evidence that advisers' product recommendation choices are impacted by factors other than commission.
On 21 June 2016 at 5:44 pm Donald said:
Harry, your comment doesn't have much to do with the article but can mention that there are definitely books out there being sold from those wishing to retire or semi retire and not wanting to sit on renewals, perhaps they are just not looking to you as the first stop, I have been offered two in the last month.

However the BDM's aren't always the first to hear of them, often the last.

Your assumption of the baby boomer advisers forgetting what trails are paid for is somewhat unfounded and doesn't serve you well.
On 22 June 2016 at 10:19 am Referee said:
A very good summary David. And as usual Graeme, another very good response and good points, to which I agree with.

To Dirty Harry, unfortunately the industry and profession is now grappling with the fact there are not enough of your Generation interested or practising as Advisers. Those who love this career have to find out what needs to be done to get more Gen X and Y interested in becoming a Financial Adviser.

Hopefully the new direction that IFA and PAA are engaged in will succeed in solving this issue because the Baby Boomers are leaving in numbers year after year now - whether they can sell their practices or not.
On 29 June 2016 at 1:00 pm Dirty Harry said:
My assertion about trails is well founded and based on personal observations over more than a decade of practice, of what clients bring to me. On watching the daily activities of older advisers seeing few clients, playing Wednesday golf and me being the only one in the office most afternoons. It is supported by today's released report that shows over 1000 currently registered and/or authorised advisers who have active agencies writing less than $10k of premiums per year. You don't have to when the trails just keep coming.

Referee I have outlasted countless youngsters who came and went. Some were the sons of older advisers. I went on AMP's new adviser training many years ago, and of the 6 of us, 2 were still in the industry 6 months later. I have long been the only one left out of that group. I have spoken with many my own age, (we tend to gravitate toward each other at conferences etc being so few non-grey people about!) and discussed the arrangements they are working under.

The first thing older advisers need to sort out is to create GENUINE value for the next generation. Big commission splits, fully clipping overrides, retaining ownership of trails - just generally greedy principals are making the high entry threshholds even higher. Expecting value to their business from the first day, as opposed to the pastoral, industry growth mentality you tend to see in the trades. In my own experience the principals made promises about share holding etc, but when the time came they valued the business so high that I walked rather than be their successor. Later we purchased some of their book at a much, much lower price.
On 2 July 2016 at 12:59 am Frustrated Intellectual said:
This report is rather obscure to say the least as their are a number points which are not addressed or highlighted.;

- What is the responsibility of the insurer to automatically pass back upgraded policy wordings and enhancements to all existing clients...?, at no cost.

- Why are all policies Offered by all NZ insurers not based on a 'living platform' philosophy, which will insure clients premiums and benefits will be market related consistently and won't result older existing policies being more expensive than taking out a new one with the same insurer , which means the insurers duty of care is then to enhance that lower base rates that are applied from time to time due to medical science enhancements and extended mortality rates benefit all insurers , which removes the incentive to take out a new policy as clients are very often premium conscious due to substantial financial or personal pressures for various but obvious reasons. Where is the moral and social responsibility of the insurers in retaining and continuing to offer their long term loyal clients the best all the time....?

- Why are the dealer groups so heavily compensated for their involvement in the industry , but a very 'fiery' question that needs to be posed is do they really add value to the adviser and more so to the end user....?

- The dealer groups do not carry any financial liability or risk when or if commission claw backs are placed on an adviser for a cancelled policy...? Yet they have been paid substantial and varying commission overrides by the various insurers based on the previously produced business by the adviser collective..?

_ What did the dealer groups actually do to earn these massive overrides which run into the Millions of NZ$ each year....?

_ Why is it the QFE"s (banks & tied agents) can practice conditional selling which pretty much outlawed in most countries globally and would subject to severe fines if they were found to be using these practices...?, but not in NZ ....?

- The QFE"s staff are fairly well known for a relatively high staff turnover , yet when the conditionally sell insurance risk products they cancelled or churn properly underwritten risk policies of client justifying the end by saving the client .25% off a portion of the clients mortgage over a 2yr fixed term , but they provide the clients with a very basic and or weak version of the cover that the clients had in place with a mainline insurer which for the most part was correctly underwritten at application and not at claim stage or perceived to be underwritten then....?

Again where is the duty of care and moral responsibility of the QFE"s...? And regulatory bodies or institutions who are supposed to protect the consumer and reduce the governments long term liability of the increased economic and financial impact of the clients using such institutions conditionally sold products which means underinsured or incorrectly insured consumers end up needing financial assistance from government groups such as WINZ etc....?

_ In retrospect the insurer may blame churn for their fluctuating revenue streams or data base reduction over or in various cycles over certain business cycles of a number of years, but the shareholders & investors don't get paid any less in dividends,the biggest but though is that none of them would turn away business being replaced from a competitor company to their entity and ironically all or most of the insurers have at some point over the last decade benefited from and even encouraged churn from their competitors by way of special terms, incentives , bonus commissions , trips etc., so again where is the duty of care....?

_ The biggest question left to address is why is the adviser the focus of this topic and the commissions they earn, when advisers are at risk of losing their income within the first 24months and then any renewal / trail commissions , yet advisers are expected to maintain and operate a financially flush business with a set amount of fixed cost every month and comply with everyone's t & c 's including the insurers, dealer groups , regulator and client demands.....?


- The insurers / dealer groups do not subsidies the advisers fixed expenses in any way shape or form , yet the cost is on the adviser to service the client at their expensive and effectively wait for 2yrs before they can say they have been paid and shown a profit....?

Food for thought and then the client is supposed to be at the clients 'beck and call' 24/7 indefinitely because the adviser was paid an upfront loan which resulted in a business turnover with a clawback / reduction in loan advance if the client goes elsewhere or is advised by a non competent institution to change to another institution because the conditional selling or lack of expertise in servicing the client correctly.

Advisers are like any other person who has a family and needs to put good on the table and look after their families , so why is anti competitive behaviour and anti selection being directed at the adviser, are the advisers expected to operate like a charity and work for free....?

There are numerous other issues that need to be addressed and rectified before it gets to the adviser, as ultimately the adviser has no authority or influence as to how the insurers, QFE etc. operate and run their businesses and have no say in product pricing, dealer group over ride , incentives / trips , commission (loan) rates , product design , underwriting decisions or even claims decisions ..? So how is this responsility or blame being placed on the RFA or AFA as we don't even have any control to force clients to take the basic bare minimum in cover like the QFE'S do and if it all goes pear shaped and the claim is not paid foot whatever reason then the advisers sits with disputes resolution tribunals etc. to defend the advice that they had given regardless of the client or institutions tole in the whole process, product, t & c from end to end....?

Sounds like the RFA & AFA are the "scape goat" for the entire industry's short comings and distraction from the market while other changes are being made in the financial industry without the industry paying attention to try make up for the mistakes of the past by the role players and stake holders.....?

Plenty more that could be said or debated, but everyone should be represented and involved and not only a one sided non factual opinion by a handful that don't necessarily have the experience or full insight into the practical and factual flaws of the industry , No text book will give you a practical factual report based on a lack practical expertise and practice over years of service in the industry by many advisers , role players and change agents or innovators over the last 3 - 4 decades....?

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