by Tony Vidler
There is clearly a mood afoot for various industry stakeholders to see up-front commissions reduce in size in a number of financial products, particularly in life and health insurance products.
It will become a self-fulfilling prophecy of course, as the more it gets debated the greater the acceptance of the inevitability. Eventually when there is sufficient acceptance of the inevitability, suppliers will make the move to reduce distribution costs.
Therefore further reductions in up-front commissions in a number of areas will happen. The only unknown factors appear to be when it will happen, and by how much.
For brokerage-based advisers now is the time to invest in solutions for the loss of revenue/client which is coming.
The difficulty for many financial advisory practices is their business model is brokerage based, resulting in no direct charge to clients directly for advice or service. The practice works on a “success fee” model, which is widely accepted by consumers in a number of different industries beyond financial services.
Looking at it objectively, one would have to say that there is merit for the consumers in such a model as they do not generally pay any fee personally over and above their premiums, and if they were to by-pass the broker model and go direct to the institutions to purchase the same products they would pay the same premium as they do when purchasing via the broker. There is no price differential to the consumer, and the broker is only remunerated if they are able to successfully place the business on terms acceptable to both the institution and the client. The broker assumes the costs of attempting to facilitate the transaction initially, and then receives ongoing (modest) brokerage for servicing the business. For consumers who are primarily motivated by successfully conducting a transaction – just buying a solution – this is a good business model.
However, with the push to reduce initial commissions on these products at some point, in turn threatening the existing brokerage business model, there is a need to implement strategies to remain viable – or abandon the business. This is largely because the practices have evolved to be overly reliant upon the transactional element of business placement, rather than the ongoing opportunity of servicing business with satisfied customers. The obvious exception to this is in the commercial general insurance brokerages where they have built significantly larger businesses than in life and health by focussing on the ongoing service business rather than the initial transaction.
The high initial commission per transaction business model has resulted in business practices that are fundamentally focussed on continually attracting new high value transactions. Generally very small proportions of business revenue are dedicated (or reinvested) in servicing those accounts. For many brokerage based advice practices their business looks like this:
In my experience most of silent attrition occurs simply through neglect. Poor, or infrequent, communications from the broker resulting in customers simply forgetting who they are and what they do. So the practice loses the opportunity to create and maintain brand familiarity and top of mind awareness with its own customers simply because it doesn’t systematically commit to engaging with them.
The next significant loss of customers is usually driven by unhappiness on the customers part. Here’s a hard truth: most unhappy customers become unhappy because of our actions and approach. It doesn’t tend to happen because a policy didn’t perform, or prices changed. The unhappiness occurs because they got tired of being neglected for a long period of time and then being treated as sales prospects all over again.
There are some simple steps that can be initiated to save a brokerage business model from the threat of extinction when up-front commissions reduce. At the very least (and as quickly as possible):
If executed well these steps will be sufficient for a brokerage business to stem the loss of customers through silent attrition and unhappiness, and therefore shift the reliance away from the up-front commissions.
You may also find this post useful: How to balance satisfied customers with profitability0