As in other sectors, growth in the protection market spans various business models. But do different remuneration options offer brokers enough choice? Edward Murray reports
If there is one thing the financial services market has never been short of, it is business models. It has more models than the catwalks of London fashion week and, like the models, each is dressed up in various guises to attract potential clients while empowering the advisers themselves. Many advisers will have had little choice in the business model they operate and the remuneration they receive having joined a firm with existing practices and standards in place.
Others who have set up on their own will also be influenced by the workings of previous employers and may have found it difficult to see past what they were doing or investigate the other options available.
The protection market is no different from other sectors of the financial services world in the variety of models in place. Recent years have seen the growth of telephone, internet-based and specialist brokers; however, where there is a difference is in the options open to brokers in terms of their remuneration and the way it impacts on their relationship with clients, the underlying value of their business and its long-term viability.
Choices
Peter Chadborn, principal at IFA firm CBK, believes it is time to reassess the way financial intermediaries are paid in the protection market. He feels it is time to open up the choices they have and begin to align the payment structures in place more closely with the terms of the policies offered.
There are three basic ways of remuneration in the protection market at the moment: fees, indemnity commission, and non-indemnity commission. Fees are a matter for each firm and there are a number of arguments both for and against them. There would also need to be a serious cultural shift in the buying habits of UK financial services clients for them to really take hold.
However, in terms of commission, Chadborn believes that IFAs are not being given enough choice by providers to really make the most of the business opportunities they have, or to deliver the kind of service to clients that they should.
The market has become polarised between indemnity and non-indemnity brokers, with the vast majority going down the indemnity route. He feels there should be options between the two to allow advisers to tailor the commissions they are earning to the service they are offering and to help generate ongoing and sustainable revenue streams, which in turn add value and stability to the business.
Advisers should be able to take enough commission upfront to cover their costs, but also to leave enough over to create meaningful ongoing payments rather than having to choose between an all-or-nothing option.
He explains: "We want to know if it would be possible for there to be some sort of a menu where the adviser could take, say, 50% of the commission upfront and spread the remainder over not just the four-year indemnity period, but over the whole term of the policy."
Chadborn believes it is difficult for advisers to demonstrate that they provide long-term, service-based relationships for their clients if they have to chase large upfront commissions to get paid.
Reputation
He also believes it is a practice that will continue to eat into the already diminishing reputation of the IFA market in the long run, and adds: "I believe this does nothing to convince the increasingly disillusioned consumer that they are dealing with a professional person as opposed to a sales person."
Nick Kirwan, protection market director at Scottish Widows and chairman of the Association of British Insurers (ABI) Protection Committee, believes that a degree of upfront commission is required given the nature of the work done and comments: "It is right that the remuneration of the adviser reflects the work they put in and I think in the long-term protection market it broadly does."
He adds: "Cases have to go through the underwriting process. Often it requires the help of the intermediary to arrange medicals and chase and collect information. It is often tied up with the mortgage and so they also have to align policy start dates and it is not quite the same as starting up a pension."
Deciding how firms would operate if there were more commission options available will be a decision for each firm and it would be difficult for many to make a switch from an indemnity commission model to a longer-term payment structure overnight. At the most basic level few businesses have the kind of cash flow that could deal with such a move.
Kevin Carr, head of protection strategy at LifeSearch, estimates that his firm would need something in the region of an eight-figure cash injection to cope with such a sudden move, but admits the firm is currently trying to shift across the divide gradually.
Carr believes that commission payments aligned to the term of a policy would amount to being 15% to 20% more valuable and agrees that it creates a more solid bedrock for firms to work from. He says: "It does suggest a more stable business model as you are not dependent on the cash upfront, but many people do not have the kind of cash flow that would allow them to change. We are switching gradually to the non-indemnity basis, which is more stable and more profitable."
He is also keen to point out that firms such as CBK, which offer a raft of financial products rather than specialising in protection, will be remunerated in a number of different ways. As such, making the shift to a longer-term drip commission model would not impact it in the same way as other intermediaries who specialise in one area.
However, even for firms that are not protection specialists there are still problems, according to Rod Murdison, proprietor at mortgage specialist Murdison and Browning. He claims that bridging the gulf between upfront commission and longer-term payments bearing fruit would be difficult: "Once that period has gone by and you haven't gone bust, then it is a good idea, but most advisers are one or two-man bands and they are getting by rather than having enough clients to do this."
Cancellation
For many there is also a concern that if the policy is cancelled then they will miss out on fees they could have earned. Admittedly if the policy is cancelled within the indemnity period then commission would be clawed back, but if there was still a relatively large proportion outstanding after that period had ended, then advisers would stand to lose out if the policy was cancelled.
As far as Chadborn is concerned, the initial commission would pay for the work done in broking the policy - if after the indemnity period it is cancelled, then the broker is doing no further work for the client and so should not be paid.
This is perhaps a bitter pill to swallow, especially given the fact that many policies will be cancelled not because they have not been carefully monitored and updated nor because they were not suitable in the first place, but because clients' circumstances change.
Indeed, Murdison believes a long-term commission model is not necessarily proof that the best service is being provided for clients and comments: "People move away, they get married, divorced, change job and it is difficult to legislate for that."
Abuse
There is also an argument, however, that too much choice will simply create a situation in which certain advisers can manipulate the market to their own ends, at the expense of their clients. Certainly this will not be the route that most choose, but by opening up options, Simon Burgess, managing director at Britishinsurance.com, believes possible abuses are being further introduced to the market.
He comments: "There should be a unified and modest commission structure in place on a one-rule-for-all basis to avoid abuse. Commission should also be paid over the long term so that advisers participate in the risk. Businesses that do not believe this is viable are operating from too high a cost base. By changing their operations and commission structures, they could inject huge amounts of residual value to their firm."
Some would perhaps argue that clients who go down the commission route, as the vast majority do, have no interest in how their adviser earns that commission. However, there is no doubt that clients are becoming more financially sophisticated and will look to question the models in place and make their own decisions as to the effect they have on the type of service they can expect to receive from various firms in the market.
While it is not necessary to disclose commission under the Insurance Conduct of Business rules, treating customers fairly initiatives across the insurance industry mean all ABI members do disclose the commission payments and so are essentially open to scrutiny.
As the protection market continues to evolve, advisers have to accept that their clients will become more interested in the remuneration and how it affects the service on offer.
They will also have to be able to take a step back from their day-to-day operations and investigate if the model they are operating from is really the best one for their own long-term success and survival.
The answers will not, unfortunately, be found at London fashion week.
Edward Murray is a freelance journalist
