In­cen­tives in peril?

Investment Executive - - FRONT PAGE - BY ME­GAN HAR­MAN

the sales com­mis­sions, bonuses and other in­cen­tives that in­surance ad­vi­sors re­ceive are com­ing un­der scru­tiny. Reg­u­la­tors have be­gun to ex­press con­cerns about the con­flicts of in­ter­est that th­ese sales in­cen­tives can cre­ate. In re­sponse, some ad­vi­sors are ap­pre­hen­sive about what that will mean for their pay­cheques.

“[The pos­si­bil­ity of do­ing away with such in­cen­tives] is of con-

cern for our mem­bers,” says Su­san Alle­mang, head of reg­u­la­tory and pol­icy af­fairs with the In­de­pen­dent Fi­nan­cial Bro­kers of Canada in Mis­sis­sauga, Ont. “[Work­ing with spe­cific in­sur­ers] is how [ad­vi­sors] make their liv­ing.”

The Au­torité des marchés fi­nanciers (AMF) re­cently pub­lished a pa­per en­ti­tled Man­ag­ing Con­flict of In­ter­est Risk in Re­la­tion to In­cen­tives that high­lights all forms of com­pen­sa­tion and other in­cen­tives that in­surance ad­vi­sors re­ceive — such as salary, com­mis­sions, bonuses and con­tests. The pa­per then eval­u­ates the po­ten­tial for each item to in­flu­ence ad­vi­sors when they rec­om­mend prod­ucts to clients.

The goal of the ini­tia­tive, jointly spon­sored by the AMF and the Cana­dian Coun­cil of In­surance Reg­u­la­tors (CCIR), is to gather in­put from mem­bers of the in­surance in­dus­try on ways of mit­i­gat­ing the risk that in­cen­tives could in­ter­fere with the fair treat­ment of clients.

“Con­sumers must be con­fi­dent that rec­om­mended prod­ucts truly meet their needs,” the AMF pa­per states.

The CCIR also iden­ti­fied “in­cen­tives man­age­ment” as a topic it plans to as­sess in its 2017-20 strate­gic plan, which was re­leased in July. That move sug­gests other provin­cial reg­u­la­tors are likely to ad­dress this is­sue in the near fu­ture.

Harold Geller, lawyer and as­so­ciate with law firm McBride Bond Chris­tian LLP in Ot­tawa, lauds the reg­u­la­tors for ad­dress­ing this topic: “This is a start­ing point for an in­dus­try that, in Canada, has not looked at the harm caused to con­sumers by in­cen­tives com­pen­sa­tion.”

Any form of com­pen­sa­tion that re­wards an ad­vi­sor for choos­ing one prod­uct over an­other has the po­ten­tial to af­fect con­sumers neg­a­tively, he adds.

“The way that in­surance com­pa­nies try to sell through agents is that [in­sur­ers] use in­cen­tives to make sell­ing their prod­uct more at­trac­tive fi­nan­cially for the agent,” Geller says. “The Cana­dian Se­cu­ri­ties Ad­min­is­tra­tors’ [CSA] pub­lished re­search shows this is sta­tis­ti­cally known to dis­tort ad­vice and re­sult in bad out­comes.”

The in­cen­tives that pose the great­est con­flict of in­ter­est risk, ac­cord­ing to the AMF pa­per, in­clude bonuses, con­tests and other ben­e­fits that are tied to the vol­ume of busi­ness that an ad­vi­sor pro­duces.

“Achiev­ing a per­for­mance thresh­old puts pres­sure on rep­re­sen­ta­tives and in­ter­me­di­aries,” the pa­per says. “Rep­re­sen­ta­tives might be tempted to place their own in­ter­ests be­fore those of the client and rec­om­mend an in­surance prod­uct that does not meet the client’s real needs.”

Geller agrees that bonuses and con­tests are prob­lem­atic: “All of a sud­den, [ad­vi­sors] are work­ing to­ward a sales tar­get as op­posed to what’s in the best in­ter­est of each of those clients.”

Mean­while, the AMF clas­si­fies com­mis­sions as a “medium risk” in­cen­tive, not­ing that ad­vi­sors could be mo­ti­vated to sell a prod­uct that would gen­er­ate a higher com­mis­sion even if it were not the most suit­able prod­uct for the client. Salary-based com­pen­sa­tion is clas­si­fied as low risk, as it does not fac­tor in sales vol­ume or per­for­mance.

The in­surance reg­u­la­tors’ in­ves­ti­ga­tion into in­cen­tives comes at a time when com­mis­sions are a “hot but­ton” is­sue else­where within the fi­nan­cial ser­vices sec­tor. Specif­i­cally, re­cent CSA con­sul­ta­tions con­tem­plat­ing a ban on em­bed­ded com­mis­sions in in­vest­ment prod­ucts have gen­er­ated heated de­bate.

Any pos­si­ble changes to com­pen­sa­tion on the life in­surance side of the busi­ness are likely to elicit a sim­i­larly pas­sion­ate re­sponse, par­tic­u­larly from ad­vi­sors who have been in the in­dus­try for many years and have built their prac­tices based on the cur­rent com­pen­sa­tion struc­ture.

“The im­ple­men­ta­tion of any wide-scale change would have to be very care­fully con­sid­ered in terms of the many peo­ple who have been in this busi­ness for more than 20 years,” Alle­mang says. “It’s their liveli­hood.”

Many ad­vi­sors have planned for their re­tire­ment based on the trailer fees or ser­vice com­mis­sions they ex­pect to re­ceive, she adds.

Daniel La Tour, an in­de­pen­dent in­surance ad­vi­sor in Kirk­land, Que. says he con­sid­ers the ex­ist­ing com­pen­sa­tion struc­ture to be fair. In­cen­tives such as sales con­tests and travel re­wards aren’t a con­sid­er­a­tion when he rec­om­mends life in­surance, he says: “It’s the fur­thest thing from my mind. I look at the best in­ter­est of the client.”

La Tour suspects that’s the case for a ma­jor­ity of ad­vi­sors. “If you have the mind­set that you want to suc­ceed, I don’t think a con­test would make a big dif­fer­ence,” he says. “It may for some, but I don’t be­lieve it’s the ma­jor­ity.”

The po­ten­tial con­flicts of in­ter­est as­so­ci­ated with in­cen­tives is an is­sue that’s al­ready on the radar of the in­surance in­dus­try. Last year, Ot­tawa--based Cana­dian Life and Health In­surance As­so­ci­a­tion Inc. (CLHIA) ac­knowl­edged in a pa­per it pub­lished that cer­tain in­cen­tives for in­surance ad­vi­sors could con­trib­ute to a per­cep­tion of con­flict of in­ter­est.

Specif­i­cally, the CLHIA pa­per high­lighted a com­mon prac­tice among in­surance car­ri­ers of pro- vid­ing “all ex­penses paid“trips to con­fer­ences hosted in de­sir­able lo­ca­tions for ad­vi­sors who meet cer­tain sales tar­gets. The CLHIA pa­per rec­om­mended that in­sur­ers change the pa­ram­e­ters of those pro­grams so that in­de­pen­dent ad­vi­sors pay their own costs to travel to con­fer­ences that car­ri­ers host in or­der to avoid per­ceived con­flicts of in­ter­est.

Fol­low­ing that rec­om­men­da­tion, many life in­surance com­pa­nies took such ac­tion vol­un­tar­ily and an­nounced plans to dis­con­tinue their sales in­cen­tive con­fer­ences.

Re­gard­ing other forms of com­pen­sa­tion and in­cen­tives, how­ever, the CLHIA has not ob­served any prob­lems.

“We are not aware of other ar­range­ments that could con­trib­ute to the per­cep­tion of con­flicts of in­ter­est nor are we aware of any is­sues or con­cerns with in­cen­tive pro­grams,” states Wendy Hope, vice pres­i­dent, ex­ter­nal re­la­tions, with the CLHIA, in an email to In­vest­ment Ex­ec­u­tive, adding that the in­dus­try is fo­cused on im­prov­ing dis­clo­sure to man­age con­flicts of in­ter­est and guid­ing “ap­pro­pri­ate be­hav­iour” in dis­tri­bu­tion.

How­ever, more sub­stan­tial changes are nec­es­sary, Geller opines: “Reg­u­la­tors have to be­gin in­ves­ti­gat­ing breaches and en­forc­ing con­flicts of in­ter­est pro­tec­tions. Con­flicted com­pen­sa­tion has to be elim­i­nated.”

“Con­sumers must be con­fi­dent prod­ucts truly meet their needs”

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