by Tony Vidler
There is a remarkably simple way to use the high up-front commission system on life insurance products (as it exists in this part of the world anyway) for the benefit of the client and the adviser. And it sure doesn’t hurt the insurer. In fact, I can’t imagine regulators having too many issues with it either.
It is simple: get the client to pay a fee which is half of what you will save them in premiums.
Yep…get the client to pay a fee. And clients will if it is put to them correctly. Here’s how it works:
- The adviser proposes to work on a “success fee” basis. That is, if the adviser can get the client the cover they want at a price the client is happy with, then the client will pay the adviser directly. The agreement is that the client will pay half of the premiums that the adviser can save over the anticipated duration of the cover.
- The anticipated duration of the cover is the period of time which the client reasonably expects to require it. Regardless of whether the cover is renewable until age 99, if the client is only wanting and needing the cover for the next 7 years, then that is the duration of the cover for establishing the client fee.
- The adviser discloses in full what the upfront commission is that is payable, and shows the anticipated premium will be.
- The adviser shows what the revised premium will be when the entire commission is reduced to zero. This typically equates to about a 20% or so reduction in premiums payable by the client for the duration of the contract.
- a client wants $500,000 of various lump sum insurances (life, trauma, TPD for instance), and the most appropriate company has a price (say) of $2,500 per year. It is important to note that this is the price the client will pay by going directly to the life insurer.
- the client needs the cover for the next 10 years or so it is anticipated.
- the adviser “zero-ises” the commission, resulting in a reduction of (say) 20%, or $500 per annum.
- the anticipated duration of the cover is 10 years, so that is a minimum saving of $5,000 over that period of time passed on directly to the client. (If it is a yearly renewable contract the actual savings will be more for the client)
- the client agrees to pay $2,500 for the successful placement of the cover on those conditions.
The adviser carries no commission risks with the product supplier, and the adviser is being paid directly by the client for clearly demonstrable value.
What could be a better deal? How could the client not be happy?
The adviser took the risk, and no fee was payable by the client unless the right cover was able to be secured at an agreeable price. The client receives the best price possible for the life of the contract/cover. The adviser has been paid directly by the client on a success-fee basis, which is still a direct fee payment however you look at it – so no conflicted, product-driven advice arguments will carry much weight. There has been utter transparency about every possible dollar on the table and how it can be used for the benefit of the client, so the regulators have to be happy. The insurer gets the business without having to pay extravagant distribution costs.
Everyone has to be happy with this outcome.
You may also find this post useful: How to explain your process and fees to clients
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