By Tony Vidler, CFP CLU ChFC
Churning is a topic guaranteed to generated heated debate. At one extreme there are advisers whose entire business seems to exist by churning anything and everything that they can get their hands on…regardless of consequences to the consumer. At the other extreme are advisers who refuse to replace any business for fear of being labelled a churner.
Both extremes are ridiculous in my view as both are self-serving positions adopted by the extremists.
The “adviser” who does not advise appropriate replacement for fear of competitors or peers criticising them is not working in the interests of the client. They are protecting their own reputation and interests. Furthermore, they are placing their reputation amongst their peers on a higher level than their reputation with consumers.
The businesses who exist simply by replacing anything they can find are despicable. They are the modern version of snake oil salesmen, and deserve to be run out of the industry.
The difference is important to understand, and important to acknowledge, because one is focussed on what is right for the adviser while the other is focussed on what is right for the client.
Churning insurance business is a sales-orientated focus. The entire objective is generate new revenue in the form of commission paid to the salesperson for successfully moving the contract to a different provider. The provider may benefit – and that is arguable. The salesperson definitely benefits. The consumer may benefit marginally. Typically the sales pitch for churning involves “saving the consumer some cost”. The amount saved is often negligible…and I have seen ridiculous situations where a consumer is supposed to be substantially better off because they saved a few dollars a month in premiums, yet had to invest many many hours to do so (and frankly their time is worth more than what was saved). More importantly however, additional risk is introduced for the client, and those additional risks are rarely worth a nominal premium reduction.
Additional risks imposed upon the consumer – and they are imposed – include mandatory stand-down periods on risk benefits, additional exclusions, different benefit types and reduced levels of cover in key areas. All in the name of saving maybe $5 a month. The consumer does not benefit from this behaviour. Nor do the insurers in the long term, given there is an inherent tendency for the higher risk business to be kept on the books with disproportionately higher claims to be expected, while the better quality or more profitable business moves away. Of course the insurers can compensate for this long-tail claims issue by encouraging the introduction of some other insurers churned business to come to them. It is a merry-go-round of good quality business shifting hither and yon – and being called “churn” when it leaves an insurer, but being called “new business” when it comes to an insurer – that typically results in an attrition of benefits for the client. But the salesperson continues to generate commission each time.
It is wrong. It is wrong that insurers and other industry stakeholders do not discriminate between churn and replacement business. It is wrong that churners are not outed and run out of the business. It is wrong that we label proper advice-focussed replacement as “churn”.
I firmly hold the view that a professional adviser has a moral obligation to begin every engagement with a client with essentially a clean slate. The advice offered 3 years ago may no longer be relevant. The product used 3 years ago may no longer be fit for purpose. The changes in just 3 years in product development may well throw up options the client didn’t have back then. The point is that a professional should test and challenge their own previous advice and assumptions when reviewing existing business, and should give consideration to whether there is a better solution available to the client.
IF there is a better solution for the client, and IF the benefits of such a shift in business result in the client having discernible and tangible benefits being added to their financial planning, then the professional adviser has an obligation to recommend changing products. To not recommend that is not meeting the professional obligation to place the clients interests first.
Any adviser who considers themselves a professional and is working in the clients interests must consider at every initial engagement and at every subsequent review the question “is this solution fit for purpose?” If it is, then all is well enough. But the secondary question should be: “is this solution the best fit?” If it is not the best fit possible, then surely there is an obligation on the part of the adviser to try and get the best fit possible in product solutions for the client?
If the product is a suitable solution, or even the best possible solution, then it does not ned replacing. If the product is not an ideal solution but the clients circumstances have changed and ideal solutions are no longer available to them, then one has to work with what you have.
If the product is not a suitable solution and the clients circumstances allow replacement without adverse consequences, then it should be replaced if at all possible. That is always right.
If there is an appropriate solution in place however, and there is no discernible benefit to the client in replacing that solution, then it is simply churn for the benefit of someone other than the client. That is always wrong.
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