This original article was extracted from Straits Times 1st Aug 2010
The way some financial advisers earned handsome commissions after selling a pile of insurance policies using a tempting carrot has been in the spotlight of late.
The Straits Times recently reported that insurer Axa Life was trying to claw back more than $7 million worth of commissions paid out to financial advisory firm Finexis.
Axa saw red because many policyholders surrendered its term plan Future Protector after just one year. Finexis had aggressively marketed the policy by waiving the first year’s premiums in order to notch up commissions.
Many people were attracted by the offer, but more than a few surrendered the policy after a year.
The episode underlines the importance of moving away from incentive structures that may encourage aggressive selling to generate commissions.
In response, the industry regulator and the Life Insurance Association (LIA) reiterated that they expect advisers to ensure that their investment product recommendations are based on a proper analysis of consumer needs.
For consumers, one of the questions to ask when engaging a financial adviser is how they are remunerated. Do note that as part of your financial planning agreement, advisers are obliged to tell you in writing how they will be paid for the services to be provided to you.
The Sunday Times looks at how advisers are paid and the service standards to expect.
Generally, they can be paid in several ways:
* Commissions that are usually a percentage of the premium you pay for a product or of the amount that you invest;
* Fees based on an hourly or flat rate, or on a percentage of your assets;
* A salary paid by the firm for which they work.
Insurance firms
Insurers engage so-called ‘tied’ advisers who are permitted to represent only one product manufacturer or insurance firm.
Commission structures vary, but most advisers are remunerated with a combination of product commissions, bonus commissions and incentive trips.
Broadly, the first-year sales commissions from the sale of a term life product with a tenure of more than 20 years are about 28 to 90 per cent of the first-year premiums collected, depending on the insurer.
The commissions will drop roughly by half in the second year. So if the first-year commissions were 50 per cent, they will be 25 per cent in the second year. In the third year, the commissions could be 10 per cent, followed by 5 per cent in each subsequent year till the sixth year, after which no renewal commissions will be earned by an adviser.
This applies to most life insurance products that attract annual premiums. If the product tenure is shorter, the commissions earned each year are reduced.
It is well known in the industry here that insurance co-operative NTUC Income pays lower commissions to its advisers than its rivals. For instance, an Income adviser will likely receive total commissions of 72 per cent of the premium of a whole life product spread out over six years. This works out to 40 per cent in the first year, 12 per cent in the second year and 5 per cent in each subsequent year till the sixth year.
By comparison, advisers of rival insurers such as Prudential, TM AsiaLife and Manulife get total commissions of 100 per cent of a similar product while advisers at Great Eastern and AIA get 95 per cent and 85 per cent, respectively, according to sources.
Income says it tries to make up for the lower commissions by having value-added products so that advisers find it easier to sell in bigger quantities. Besides, Income advisers receive Central Provident Fund contributions from the insurer for their commissions, and free medical insurance.
For single-premium products, advisers may get a one-time commission of 1 to 2.25 per cent of the premium, depending on the firm.
Besides sales commissions, advisers earn bonus commissions. Again this varies among the insurers.
Most insurers practise the approach of rewarding advisers up to 20 to 40 per cent of the total commissions they have received in the year. The two conditions here are that these advisers must achieve a minimum pre-defined sales production volume, and that the sales have at least a 90 persistency rate. The latter refers to the number of policies that are renewed after the anniversary date.
The objective of the 90 per cent persistency condition is to ensure that quality sales based on needs-based selling were achieved by the advisers.
Besides commissions, an adviser is rewarded with one overseas incentive trip a year if he hits a specified sales quota, which most insurers set at $100,000 in premiums.
Agency managers are remunerated based on sales commissions of the products they sell directly to customers, bonus commissions as well as overriding commissions on the advisers on their team.
An exception is Income, where agency managers are salaried with a bonus component. This removes a layer of cost to the firm.
A few insurers, like Manulife, offer pure unit trusts in addition to their core suite of insurance products.
For unit trust offerings, Manulife clients pay an annual service fee or wrap fee that is between 0.5 and 2 per cent of assets under management. A percentage of this fee forms part of the adviser’s remuneration. These clients need not pay sales charges on unit trusts during future transactions.
Financial advisory firms
There is a variety of ways in which these firms charge clients.
Most financial advisory firms charge hourly rates of say $400 per hour for meting out advice or devising a suitable financial plan. The number of hours depends on the complexity of the plan.
Another way is to charge an initial advisory fee of up to 3 per cent of the investable amount or a fixed fee, depending on the client’s net worth and goals.
The firm may waive the initial fee if the client decides to implement the plan with the firm.
Once the plan is implemented, the annual wrap fee ranges from 0.75 to 1.5 per cent of the invested amount.
Most financial advisory firms that sell insurance pocket the commissions accruing from the sales, except for Providend, which is a fee-only firm. This means that, unlike at other firms, any commissions or trailer fee arising from buying products such as funds, insurance and bank loans are fully refunded to the clients as rebates.
Besides earning from product commissions and wrap fees, some financial advisory firms receive volume bonuses, which are given by the product manufacturer for hitting a certain quota of sales and renewals of specific products. Volume bonuses can amount to millions of dollars.
lorna@sph.com.sg
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SERVICE STANDARDS TO EXPECT
Needs-based sales advisory process
The minimum standard set out by the industry requires advisers to conduct a six-part process that takes the client and adviser from gathering data and analysing financial status to developing recommendations and implementing them.
Disclosure
When you buy a life insurance plan, expect to receive three sales documents from your adviser. They are a ‘Your Guide To Life Insurance’ booklet, a product summary; and a benefit illustration.
The guide contains general information on life insurance, while the product summary describes the features of the particular policy you intend to buy.
In the latter, look out for the investment strategy of the insurer and the key factors that would affect future non-guaranteed bonuses.
The benefit illustration shows by how much the cash value of your policy is projected to grow over time.
Compulsory training
Advisers are required to satisfy a minimum of 30 hours of continuing professional development per year. This ensures the updating of knowledge and skills appropriate to their responsibilities. It should also include development of new knowledge and skills to assist their current or future roles.
Replacement rule
To guard against unhealthy practices such as churning, some insurers like Manulife have a 12-month replacement rule which is stricter than the industry requirement of three months.
This means that Manulife advisers will not be compensated if they sell a new policy to a customer who has terminated one within 12 months.
This is to ensure that the client is not buying policies unnecessarily just so that the adviser servicing him can earn more commission from repeated sales.
