Why do insurers allow advisers to choose ARF commission rate?

[Duke of Marmalade]

This is a nice short video made by my good friends at Regis Media for a firm I know well based in Dubai AES

Michael Kitces is a respected financial planner in the USA and prolific researcher and author

Video | How to choose a financial adviser

A highly qualified financial expert can add significant value to your life. However, how do you choose the a suitable financial adviser whose interests are aligned with your own?

hubs.ly

Mixed messages there from Kitces. On the one hand commission is a bad word. On the other hand fees related to how the investments perform create the right incentive for advisors. Sounds like a justification for trailer fees/commissions to me. And not a credible one - the advisor has no influence in how the investments will perform.
We have been reminded by OP that this is about providers facilitating wide variations in trailer fees at the advisors' discretion. They are called commission to avoid VAT, fair enough, but they are presented and justified as paying for a service from the advisor to the customer. If you ever book a flight these days you will be bombarded with a range of optional extras - seat choice, priority boarding, baggage allowance etc. All ways to make extra money for the carrier for sure. I personally tick the box for many of them. But it is clearly optional and it is clear what I am paying for.
When a client signs up for a 0.5% trailer fee I have a number of questions.
1. Was it optional? Could they opt not to have the future service or have a more yellow pack service?
2. Do they know what the service is that they are paying such high fees for?
3. It is suggested that the service consists of the advisor being on a retainer to be at the end of a phone in times of market stress. Is there a clear option to pay for these counselling services as and when they are needed rather than by way of retainer?
4. And of course @Wollie's question. Do the providers have a responsibility to ensure that this is a fair and transparent commercial arrangement between its customers and its distributors? Or are they basically facilitating and turning a blind eye to a rip-off?

 

[Marc]

So the salient issue and something I have already addressed in my first answer then is simply this:

why do insurers allow brokers to select commission rates? - legally the broker is the agent of the insurer not the client.

If you want your advisers to represent you, you will need to pay them a fee. It really is as simple as that.

 

[Conan]

@time to plan Thanks for posting. I really liked this sentence:
In some cases, the “best” advice may require sacrificing financial gains for other ends (e.g., psychological comfort), which means the “best” advice could be wealth-reducing!
Never a truer word was spoken. If someone is as nervous as a kitten, it's bad advice to put them into a risky investment.

However, I would like to get back to my original post, which was aimed at insurers, not intermediaries.
Suppose the insurer has two identical clients, with exactly the same risk profiles, making exactly the same fund choices. The difference is that, in one case, the intermediary has demanded 0.5% trail commission; the other is happy with 0.1%. The client pays for the excess commission to the first intermediary. How can the insurer's directors and senior managers stand over this? Do they demand that the first intermediary provide five times the level of ongoing service as the second? Should they?

Because the Insurer is only providing the product. They might never meet the client. The intermediary is the one meeting the client and providing the advice.

 

[Wollie]

Because the Insurer is only providing the product.

The legal contract is between the insurer and the client. The intermediary has no role, no responsibility in the legal contract between them. They can disappear off the face of the earth the day after the product is sold. The insurer must be there to pay the income as it falls due, to deliver the promised return after 20, 30 years or whatever. By then, the intermediary may well be gone to their final reward. The likelihood is that no-one will know or care. Before they died, though, they probably will have sold their business to someone else, who will continue to claim the trail commission - paid at the client's expense. Shows how ludicrous the whole situation is.

 

[AJAM]

The question I always come back to is, Why to insurers FORCE you to use a broker?
As far as I know, you can't go direct to any of them.

 

[Conan]

The question I always come back to is, Why to insurers FORCE you to use a broker?
As far as I know, you can't go direct to any of them.

Not true. You are not FORCED to use a broker. Insurers will deal with you directly, but they won’t necessarily offer to a better deal by cutting out a Broker.

 

[time to plan]

Not true. You are not FORCED to use a broker. Insurers will deal with you directly, but they won’t necessarily offer to a better deal by cutting out a Broker.

Don't they just make you use a tied agent?

 

[Steven Barrett]

Not true. You are not FORCED to use a broker. Insurers will deal with you directly, but they won’t necessarily offer to a better deal by cutting out a Broker.

Don't they just make you use a tied agent?

Yes, that is correct, you get someone from the direct sales team and can only charge a commission and not a fee.

 

[Dave Vanian]

The question I always come back to is, Why to insurers FORCE you to use a broker?
As far as I know, you can't go direct to any of them.

As has been said, you can go directly but you won't necessarily get a better deal by doing so.

Off the top of my head, I can't think of any manufacturer that will sell you their product at reduced / wholesale prices if you buy directly from them. I'm thinking phones, cars ... maybe there are but I can't think of any right now.

 

[time to plan]

As has been said, you can go directly but you won't necessarily get a better deal by doing so.

Off the top of my head, I can't think of any manufacturer that will sell you their product at reduced / wholesale prices if you buy directly from them. I'm thinking phones, cars ... maybe there are but I can't think of any right now.

Hotels are usually cheaper (I find) to book direct. Not manufacturers but neither are insurers. Takeaways seem to be offering a better deal if you bypass the justeats of the world.

 

[Duke of Marmalade]

As has been said, you can go directly but you won't necessarily get a better deal by doing so.

The point of this thread is that if you go to a producer directly, or for that matter through another broker, you definitely will get a better deal than the maximum allowable commission.

 

[Gordon Gekko]

The point of this thread is that if you go to a producer directly, or for that matter through another broker, you definitely will get a better deal than the maximum allowable commission.

In reality though who pays the maximum allowable commission?

 

[Duke of Marmalade]

In reality though who pays the maximum allowable commission?

More to the point, who charges it? And why do insurance companies facilitate it?

 

[Gordon Gekko]

More to the point, who charges it? And why do insurance companies facilitate it?

As I understand it, the insurance companies just say “we’ve 5% to play around with, how do you want to divvy it up?”, but it doesn’t have to go in the broker’s pocket.

 

[Wollie]

As I understand it, the insurance companies just say “we’ve 5% to play around with, how do you want to divvy it up?”, but it doesn’t have to go in the broker’s pocket.

The trail commission either goes into the client's pocket, or it goes into the broker's pocket. There is a straight trade-off.
I'm looking at the product details for the ARF product for a leading life company. The client pays a management charge of 0.75% a year if there is no trail commission; they pay 0.85% a year if there's a 0.1% trail commission, etc., up to a management charge of 1.25% a year if the broker opts for trail commission of 0.5% a year. There is no question of checking if the client gets a better service if the broker opts for a trail commission of 0.5% rather than 0 or 0.1%. How can anyone - either life company or broker - defend such practices?
We've heard lots from brokers about this. How about hearing from the life companies? Or from the CBI? What about the consumer protection lot who were jumping up and down about the sins of the non-life companies with 'price signalling'? Is this not far worse collusion against the public, on a grand scale?

 

[TheGoodTheBad]

The trail commission either goes into the client's pocket, or it goes into the broker's pocket. There is a straight trade-off.
I'm looking at the product details for the ARF product for a leading life company. The client pays a management charge of 0.75% a year if there is no trail commission; they pay 0.85% a year if there's a 0.1% trail commission, etc., up to a management charge of 1.25% a year if the broker opts for trail commission of 0.5% a year. There is no question of checking if the client gets a better service if the broker opts for a trail commission of 0.5% rather than 0 or 0.1%. How can anyone - either life company or broker - defend such practices?
We've heard lots from brokers about this. How about hearing from the life companies? Or from the CBI? What about the consumer protection lot who were jumping up and down about the sins of the non-life companies with 'price signalling'? Is this not far worse collusion against the public, on a grand scale?

You give example of an amc of 0.75%. Firstly that is dependant on commission, allocation, fund value etc. So rates can vary quite a bit.
Depending on how advisor works will depend on what rate.

What if an advisor provided a standard AMC of 0.5% (through negotiations on commissions and allocations, fund value) but then added a trail of 0.25% so your overall AMC was 0.75%.
You seemed happy with an AMC of 0.75% in your post, so what difference is it to you if option 1 the insurance company gets 0.75%, or option 2 the insurance company gets 0.5% and then a broker/advisor gets 0.25% with his trail. You are paying 0.75% either way.
Is there any issue that the advisor took their income over a longer period and not Immediately in that case.

There are many ways a broker can choose their charging structure such as taking commission or taking zero commission, what allocation the clients get such as less than 100%, 100% or even above 100% and a broker can add his trail to the AMC as well.

If your grievance is on trails, what is your ideas on Brokers/advisors taking commission. (the standard way advisors took payment historically)
As said on other comment a broker can take say anything up to 5% commission, leaving a client with the possibility of say 98% allocation, but more realistically a broker will take say 3% maybe so client gets 100%. Depending on the size of the fund, 3% commission can be a sizeable amount just to sign them over. (yes I know a lot more that just signing a paper) But Once the policy is in place the broker really doesn't have to do a whole lot, they have done their hard work "selling" the service or product and received their commission. Their work was done getting the policy in place.

Again by a broker taking a trail income instead like above example, their income is dependent on the performance of the ARF or any other pension etc so they want it to perform so their income does well also.

Like most professions, there are some great and some not so great.
Some advisors can justify having a trail for ongoing service provided and I don't think that can be argued. Others maybe not so much.

I think you could make the argument about any profession regarding pricing structure and service they offer.

 

[Steven Barrett]

In reality though who pays the maximum allowable commission?

More to the point, who charges it? And why do insurance companies facilitate it?

There are so many people out there that have no idea of how the personal finance markets work and they are easy pickings for brokers who are out to make as much money as possible off them. They don't question the charges and in some cases are so overwhelmed with all the paperwork, that they don't notice. Or they don't want to feel stupid by asking questions about the charges so they don't ask, even though they are perfectly entitled to ask.

I spoke to someone yesterday who is reaching the Normal Retirement Age for a pension he has that he left years ago. Someone from the large corporate brokerage told him that he had to get the paperwork in now to get the pension matured for October. This guy says he is still working away and doesn't need the money at the moment. He had waived his tax free lump sum entitlement from a redundancy, so if he transferred to an ARF, any withdrawal would have been taxed. Him and his wife were being put under pressure to get the forms back and you could see it was a commission play. I told him that he had all the time in the world and as long as he made the decision by the time he was 75, he was fine. What can be done about these people giving incorrect advice in order to get sales?

Duke, the higher commission options are still there but they are used less and less. The life companies still want to facilitate all spectrums of broker, probably afraid of losing business because they know that one of their competitors will still offer the high commission structure. Over my 20+ years in the industry, charges have only come down. The Bid/Offer spread is gone. The 50% initial commission is gone along with their initial units. The standard commission for a regular premium pension used to be 25% initial, 4% renewal. That is gone with most advisors.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)

 

[Wollie]

You seemed happy with an AMC of 0.75% in your post,

Of course I'm not 'happy' with any level of charge. You seem to be arguing that I picked an extreme example. I did not. I chose a bog-standard document from a leading life company. It says in bold at the top: "This is not a customer document and is intended for Financial Brokers and Advisers only." You can bet your bottom dollar that it is not a customer document.
The document then goes on to list the trail commission options, ranging from zero to 0.5% a year, with the associated increase in the yearly charge to the client, from 0.75% to 1.25%.
I should add that the same document lists all the options for initial commission, ranging from zero to 5%, with allocations to the client falling by the same percentage at each step.
Therefore, the broker can choose - THEIR CHOICE - between limits of zero initial commission and zero trail commission (presumably with a fee to the client) at one extreme and 5% initial commission and trail commission of 0.5% a year - FOR WHAT IS ESSENTIALLY EXACTLY THE SAME PRODUCT.
Think about it. The broker can even choose between these two extremes for an ARF that is invested entirely in cash. Even if there were 100% investment and zero trail commission, the client would be lucky to make a cent from the contract over its lifetime, yet the broker can take 5% up front plus a recurring 0.5% a year on it. It is truly scandalous.

There are so many people out there that have no idea of how the personal finance markets work and they are easy pickings for brokers who are out to make as much money as possible off them.

You're absolutely right. What is more, the life insurance companies are doing all they can to make it easier for those brokers to con their clients. And you wonder why the general public has so little trust in the industry?
Who is ever going to put a stop to this daylight robbery?

 

[Duke of Marmalade]

There are so many people out there that have no idea of how the personal finance markets work and they are easy pickings for brokers who are out to make as much money as possible off them. They don't question the charges and in some cases are so overwhelmed with all the paperwork, that they don't notice. Or they don't want to feel stupid by asking questions about the charges so they don't ask, even though they are perfectly entitled to ask.

I spoke to someone yesterday who is reaching the Normal Retirement Age for a pension he has that he left years ago. Someone from the large corporate brokerage told him that he had to get the paperwork in now to get the pension matured for October. This guy says he is still working away and doesn't need the money at the moment. He had waived his tax free lump sum entitlement from a redundancy, so if he transferred to an ARF, any withdrawal would have been taxed. Him and his wife were being put under pressure to get the forms back and you could see it was a commission play. I told him that he had all the time in the world and as long as he made the decision by the time he was 75, he was fine. What can be done about these people giving incorrect advice in order to get sales?

Duke, the higher commission options are still there but they are used less and less. The life companies still want to facilitate all spectrums of broker, probably afraid of losing business because they know that one of their competitors will still offer the high commission structure. Over my 20+ years in the industry, charges have only come down. The Bid/Offer spread is gone. The 50% initial commission is gone along with their initial units. The standard commission for a regular premium pension used to be 25% initial, 4% renewal. That is gone with most advisors.


Steven
http://www.bluewaterfp.ie (www.bluewaterfp.ie)g

Initial Units, that’s a real blast from the Stoneage.
It is good to hear of the fall in commissions in general.
OP is referring to ARFs.
Your description of the typical relationship between punter and advisor is so apt. Very few people would seek to discuss fees with their medical consultant, certainly not me. And the same with your financial advisor.
Perhaps naively I believe that my medical consultant’s fees have been decided by some process of governance that ensures it is not at his discretion. The analogy that OP is referring to is that the system has given my consultant a tick box to charge between €150 and €750. Of course that wouldn’t work as I would have to write a cheque. Or the VHI would have to pay. But in the case of the ARF it all looks pretty seamless, the life company will appear to pay but unlike the VHI the life company simply deducts that €5,000 p.a. from my policy, nothing for me to be bothered about.

 

[Itchy]

What if an advisor provided a standard AMC of 0.5% (through negotiations on commissions and allocations, fund value) but then added a trail of 0.25% so your overall AMC was 0.75%.
You seemed happy with an AMC of 0.75% in your post, so what difference is it to you if option 1 the insurance company gets 0.75%, or option 2 the insurance company gets 0.5% and then a broker/advisor gets 0.25% with his trail. You are paying 0.75% either way.
Is there any issue that the advisor took their income over a longer period and not Immediately in that case.

The issue is the defacto protectionism, facilitated by the insurance companies. Its no coincidence that going direct costs the same as the broker charge. If your argument is truly about legitimately earning your commission then I'm sure you would have no problem if there was direct access available to the products at the 0.5% AMC or even at say 0.65% retail rate.

But Once the policy is in place the broker really doesn't have to do a whole lot, they have done their hard work "selling" the service or product and received their commission. Their work was done getting the policy in place.

This is the crux of the issue for me.

Again by a broker taking a trail income instead like above example, their income is dependent on the performance of the ARF or any other pension etc so they want it to perform so their income does well also.

From a broker perspective! That's just not the case from the client perspective. Earing slightly less as an underperforming fund bobbles along is not linked to performance in my eyes. No hurdles, no benchmarking, no sunset on the commission, how is it linked to performance? Income is dependent on the resilience of the client to keep committing their capital.