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. And frankly insitutions will continue to drive the discussions as it inflates their profitability at no additional cost to the consumer…the extra institutional profit simply comes from distribution cost reduction.
Politicians buy into the 1 + 1 = 3 debate as they continue to mistakenly believe that reducing commission will result in a better outcome for consumers. It is not precisely clear how those better outcomes happen for the consumer as it is also accepted politically that distribution cost reductions will not flow through to reduced premiums for consumers…So they aren’t getting a price advantage from it. Perhaps lowering the revenue of the actual consumer-facing section of the industry will lead to higher service levels then? Hmmm…probably not. It must be then that increasing the profitability of the institutions will result in better policy performance then? Maybe higher service levels, or higher claims payment ratios? Hard to see give that the claims paying ratio’s and performance across the life and health sector is actually pretty damned good already.
You get the point. Regardless of what actual distribution costs really are, and regardless of whether the insitutions (who pretty much all seem to be announcing sizeable profits) are fundamentally content commercially with their distribution costs, and regardless of the obvious lack of factual linkage to better claims performance from reducing those distribution costs, industry stakeholders are wedded to the idea. Clearly it is an argument that is good for someone…just not consumers or distributors.
The only apparent argument that makes any sort of sense against the brokerage based (commission) model is that it potentially incentivizes bad people to do things for their own gain.
This is true. It does incentivise people with no business ethics and low-to-no morals to whip out and sell someone an insurance policy (whether they need it or not and whether they already have a good one or not) so that they can receive a commission.
But here’s another home truth: people of that ilk will screw consumers over regardless of whatever rules are put in place and no matter what model you believe to be the less-conflicted. Crooks will continue to finds ways to take advantage of others simply because they are crooks, and that is what crooks do.
Note to the politicians: want to get better consumer outcomes? Just get rid of the crooks. When you find them, throw them out of the business forever. Fine the daylights out of them. Lock them up. Make the penalties meaningful enough that the marginally crooked stay on the right side of the line and the intractables are simply removed from the business forever.
Anyway…back to the good advisers trying to look after their clients and do a good job without charging them the earth while doing it:
Eventually when there is believed to be sufficient acceptance by distribution of the inevitability of the commission decline, suppliers will make the actual move to reduce distribution costs. Therefore further reductions in up-front commissions in a number of insurance distribution areas will happen. The only unknown factors appear to be when it will happen, and by how much.
For brokerage-based advisers there is no time left. 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 entirely brokerage based, resulting in no direct charge to clients directly for advice or service. The practice works 100% on a “success fee” model for implemntation of advice and product. The ongoing service revenue is relatively small.
There has been widespread market acceptance of the model as there is merit for the consumers in it. As things stand 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 directly they would pay the same premium as they do when purchasing via the broker. There is no price differential to the consumer between going direct to the product manufacturer and going via an adviser, 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 potentially considering abandoning some business lines or customer segments. 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. The hunt is always on for the next transaction…and that is the Achilles Heel.
As a result many brokerage based advice practices have a business which 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. In other words they become unhappy with the transactional business model trying to force another transaction.
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.
The key is re-positioning through higher and better quality contact and focussing upon the service elements that good advisers can (and do) deliver well. That is what will create the opportunity to build higher ongoing revenue streams, retain more clients, and reduce the reliance upon the transactional elements.