Life insurance: Are you for sale?
It’s time for a review of the way advisers trade their clients for big money.
Earlier this year, the Financial Markets Authority conducted a review of a large number of life insurers, and produced a damning report which showed ‘‘a lack of focus on good customer outcomes’’ across the sector.
The weaknesses included lack of focus on client outcomes in product design and ongoing suitability, sales incentive structures which potentially put sales ahead of good client outcomes, lack of oversight of customer outcomes for sales through intermediaries and poor remediation of conduct issues.
This culture flows on through to the product distribution network. Advisers are rewarded for sales, not for good client outcomes.
Of course, great advisers, and there are lots of them, recognise the link between good client service and increased sales. Much of the new business generated for advisers comes from word of mouth, especially referrals from existing clients.
Advisers may have distribution agreements with a small or large range of insurers. However, the presence of bonus commissions or soft commissions such as free trips for reaching sales targets combined with product familiarity, means that in reality, many advisers will give the bulk of their business to one insurer. Insurance companies take good care of advisers who give them a large volume of business and large advisory firms can hold significant bargaining power with insurers.
To an insurer or an adviser, a client represents a future income stream. For the insurer, the future income is the annual premium, while for the adviser the future income is an ongoing trail commission. In both cases, an individual client is an asset which has a financial value at any point in time. It is on this basis that clients can be sold.
The value put on the client of an adviser can be significant. It is commonly calculated as a multiple of the annual commission paid to the adviser. For example, a group of policies with an annual commission of $2000 could be sold another adviser for $8000 (four times the annual commission payment).
Advisers come and go from their profession, perhaps moving on to a different career, relocating, or retiring. For many advisers, the value of their client base represents the bulk of their wealth. When an adviser moves on, a buyer will be found for the client base. The sale will sometimes require the approval of insurers who control the distribution agreements. It does not require the approval of the client.
Client sales an occur at different levels. The sale may be of a whole business to an external party, part of a business to either an external party or a person within the business, or the sale of a single adviser’s clients to another adviser in the same business or to an external party. Small batches of clients or even individual clients can also be sold.
What say do clients have in this process? None. However, in theory a client can find themselves a new adviser if they don’t approve of the adviser they have been sold to.
This is where things get tricky. If a client has been sold for a good price, the purchaser isn’t going to be too happy at the loss of the future income stream that has just been paid for, should the client decide to take their business elsewhere.
Usually, sale and purchase agreements will make provision for some loss of clients, but even so, both the seller and the buyer are usually motivated to retain clients that have been sold. In turn, insurers, who have a close association with advisers, especially large advisory firms, endeavour to support advisers.
If a client wishes to change adviser while retaining the same product, the ‘‘owner’’ of the client may refuse to release the client to a new adviser unless the new adviser pays a sum which is multiple of the annual commission. This policy is supported by some insurers, who will not change the adviser (and therefore the commission payment) on a product unless the ‘‘owner’’ of the client has approved the change. If the new adviser is not willing to pay, a client can be stuck with an adviser they don’t like. That’s because over time, the health of a client can deteriorate, making it difficult or expensive for the client to take out a new or replacement insurance policy. In this sense, the client becomes ‘‘captured’’ by the insurer and/or the adviser.
As the Financial Markets Authority report notes, there is one approach to dealing with insurance industry complexities and that is, policyholder interests must take precedence over the interests of all others including insurers and advisers. If an insurance adviser is retiring or moving on, the first step must be to ensure that their clients are fully informed and have the opportunity to object or change their adviser without any reduction in benefits or increase in costs. There is precedence for this with regard to the sale of clients from one insurance company to another.
The conditions are clearly set out in section 44 of the Insurance (Prudential Supervision) Act 2010, one of which is Reserve Bank approval and independent confirmation that underlying policy holder benefits are not impacted in any way.
It is time that practices around the sale of clients by insurance advisers were reviewed.
Insurance companies take good care of advisers who give them a large volume of business.