What role does commission have to play in the provision of pure protection advice, and could the market ever move towards a purely fee-based proposition?
Market viewsStuart Tragheim, LV=Firms offering protection advice as their sole proposition to customers are fairly thin on the ground. Those who wish to make a success of this niche business model need to invest heavily in infrastructure to support their propositions.
Current market leaders in the field rely on the commission-based remuneration model to support their significant commitment to infrastructure development.
If an advisory firm with ambitions to handle significant volumes of protection business had to rely solely on fee income, its ability to invest in technology, such as tele-underwriting or software systems, would be severely limited.
The simple fact is, for the foreseeable future, most consumers will not be prepared to stump up a significant fee for advice that is limited to their protection needs. It is difficult enough to persuade consumers to pay a fee for holistic independent financial advice, potentially solving financial issues from long-term pension and saving provision to mortgage arrangements, with protection just one important part of this mix. So, why would we expect consumers to rush for their cheque-books to pay for a more niche form of financial advice?
To close the protection gap, we need to find ways to alert and persuade consumers of the importance of financial protection. We also need to find ways to convert increasing public interest in health and wellbeing issues into engagement with financial protection and expert advice. Any sudden lurch towards purely fee-based advice now could, effectively, kill off ordinary families' access to valuable specialist protection advice. Fay Goddard, Aifa
Most advice on protection business today is remunerated by indemnity commission, which means advisers are paid for the work they do at the time they do it and carry the persistency risk. Few can argue this is wrong, yet, there is a desire among many to abolish indemnity commission, albeit over time.
There are firms that do offer fee-based advice on protection products and the typical reduction in premium for business arranged on a nil commission basis is 20% to 25%. This can make a significant difference to the amount paid over the life of a policy and sufficient to make the fee option a good choice for those clients happy to pay a fee. Other fee-based advisers offset commission from protection business against the fee for advice on investments so that the investment is made on a nil or reduced-up-front charge. This, too, can provide good value to investors.
There is also the argument that commission generated on larger policies, effectively, cross-subsidises smaller policies, allowing professional advice to be accessed by those who would not otherwise be cost-effective to deal with.
Consumers should have the right to choose how they pay for advice, including commission. But firms should think about fees; it can be a financially beneficial route for clients and help create a more professional business. It also ensures you get paid for the work you do, such as advising on and arranging trusts.
Dale Tranter, Sesame
If the client gets the right policy, it probably does not matter to him whether the adviser is remunerated by commission or fees, as long as they were no worse off. Advisers can - and do - give good advice, irrespective of how they are remunerated. Which way they choose will depend on their favoured model - many advisers are moving towards fees, or have already done so, with no effect either way on the quality of advice given.
But, what if the decision is not revenue neutral for client or adviser? Protection remuneration has, traditionally, been by commission and mostly up-front high-percentage Lautro scale at that. Obviously, if what the client is able or willing to pay in fees does not match the rewards previously available then issues arise, although both pensions and investments have successfully moved towards fees without advice disappearing from the equation and protection could do too.
So commission, at least in the medium term, probably has to stay, albeit in a reduced percentage of cases. Clients and media alike should recognise, however, that that is no bad thing.
Bob Perks, Alchemy Business Partners
Much heated discussion takes place over commission rates. However, I believe most advisers will not be influenced by the percentage indemnity commission rate paid by the provider in their initial product selection for a client. Having said that, the issue of indemnity versus non-indemnity is much more influential - a significant proportion of advisers would be, I believe, heavily influenced against a life, critical illness or income protection (IP) product that did not pay indemnity commission.
I sit on the board of a specialist IP provider that offers both commission structures and non-indemnity accounts for less than 1% of our business.
The length of the earnings, or "clawback" period, is influential, particularly in the mortgage market, where two-year periods are preferred, enabling the adviser to tie in a review of term cover rates with the expiry of the promotional interest rate on the mortgage. This does influence some advisers in their choice of product and one must question whether this is always in the best interests of the client.
More could be done by providers to reduce the impact of these factors but it is unfortunately a tactic employed by some marketing departments as a way of differentiating themselves from their competitors and gaining market advantage, often to the detriment of the client.
