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Servicing and Commissions

One issue the FMA has discussed is policy replacement and servicing commissions, which would remove the incentive for advisers to replace cover and get paid for the work they do.

Wednesday, May 15th 2024, 9:16AM 1 Comment

by Jon-Paul Hale

One of the harsh realities of the life business is that you take on servicing existing clients and don't pick up service commissions in most cases. (Some exceptions with medical providers).

This creates a situation in which the new servicing adviser has to approach the old one and buy the trail/renewal commission if they are to get paid.

The problem here is that the new adviser is taking the punt on the client, keeping their cover and paying upfront to buy that client, often in the face of not earning anything with that transaction, which doesn't make for good business either. Maybe for the long term, but that's also a punt, and often, that new servicing adviser is also recent to the industry, building their book.

The new adviser has taken on the client because they haven't received the expected service. Before the trolls say that's the adviser's choice and the client should have remained with the originating adviser, that client wouldn't have been talking to the new adviser if the old one had provided the expected service level.

Also, yes, that is the new adviser's choice; it is also beholden to the original adviser to provide service levels that retain the client, too.

The other side of this is that if that client has changed servicing advisers and the new adviser is approaching the old adviser to buy them, why should the old adviser sell the trail? The client may hold that policy for another 10-20 years; you'll receive a renewal for that time vs. selling it for three times renewals.

This creates a situation in which advisers do not sell policies, and I have encountered this over the years when I have approached advisers to buy client renewals.

While we expect clients to be bought and sold between changing advisers, the rules do not require this.

There's been noise about whether, if you're being paid, you should be providing service, which I agree with. At the same time, if the client has actively chosen to move servicing to another adviser, this disconnects the client from the remuneration.

This brings me back to the FMA comment: there is more incentive to provide service if the renewals for the client are paid to the servicing adviser.

More recently, we have seen a couple of things from providers where they manage the switch of renewals through their systems.

  • Partners Life, where they will transact a market valuation debit and credit between the adviser agencies and transfer renewals to the new adviser.
  • nib with its Change of Servicing Adviser process where the old adviser receives service commission for three years after the change of servicing, and then it switches to the new adviser.

Part of the challenge is that the value of adviser businesses has been established based on a multiple of the value of the trail and renewal commissions.

It would be unfair to arbitrarily switch renewals on the date of change of servicing, though Southern Cross and Accuro take this stance.

There is a second piece to this: where the adviser has taken a lower upfront commission for a higher trial, the return on this approach takes five years to break even, and the client may only be a couple of years in when they change advisers. The return on investment and the recognised value of the client with a transfer haven't been met until about year eight.

Anomalies aside, where the industry needs to move is somewhat akin to the nib approach, where the client trail/service commission moves after three years. The existing adviser gets paid what's due for the client, including inflation adjustments and age-related increases to the commissions; the new adviser eventually gets paid but doesn't have the capital impact on the business. With an overall fairer approach, the money for client servicing is paid to the adviser doing the work.

I've had comments that a change like this would create a distortion of advisers running around signing over servicing and not doing anything for it.

True, this is a possibility.

However, an adviser doing this as their primary approach has some significant barriers.

  • They would have to self-fund for three years before seeing any income from this approach. Yes, they would have new business commissions as we do now, but not at volume if the focus was switching people en masse.
  • The likelihood of this working is low, as there are still regulatory requirements to provide service and do the work of an adviser; it's more complex than just knocking on doors and signing servicing.
  • The comments have been made mainly by advisers who fear this, meaning they probably aren't providing the level of service they should be.

Do the work have no fear.

If the industry, insurers, moved to follow nib's approach here, we would see a dramatic shift in the approach to replacement and servicing. Businesses doing the work would get funded, and those focused on new business who don't like the servicing aspect would be rewarded for finding clients.

In cases where finding clients is the passion that adviser could have a relationship with an adviser that prefers servicing; the client gets handed over to the servicing adviser at a point, maybe year two, the new adviser signs off servicing and the messy process of sale & purchase gets taken care of with a lot of paperwork and hassle.

Overall, it would reduce or remove the time, energy, and angst surrounding the transfer of clients at low volume across the industry.

  • Sure, the insurers would have to create a mechanism to manage this. Still, at the same time, they are in the best position to make these changes with the incentive of reducing the workload on their agency teams with individual S&P agreements for single client transfers.

Overall, a bit like the knock-for-knock approach in the general insurance world, this would remove a significant level of costly administration from the industry, making everyone more productive and profitable.

Also, if we don't solve this, the FMA probably will, and if they do, we will probably like it less.

Tags: Jon-Paul Hale

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Comments from our readers

On 15 May 2024 at 10:22 am JPHale said:
Sorry for the typo in the third to the last paragraph; the messy process of sale & purchase gets taken care of without a lot of paperwork and hassle. is how it should read.

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