It's the commission, stupid

Practice suggests this is not true - intermediaries chase the best commission regardless of what might be best for their clients.

This emerged in full-year results for the Liberty Group last week.

Most parts of the life insurance and asset management businesses are doing well, but Liberty took a knock on sales of retirement annuities (RAs).

The reason - "We made a decision to move to the new commission structure before we had to, so intermediaries are less incentivised to sell Liberty products," says CEO Bruce Hemphill.

Others feel it, too

This is not the first time brokers have shown commission comes before clients. Allay Gray and Coronation launched RAs two years ago following the outcry over the harsh termination and surrender policies on traditional life company RAs and endowment policies.

The asset managers new RAs were based on underlying unit trust fund investments and commission was not as high as conventional, and largely discredited, life fund RAs.

Both Allan Gray and Coronation battled to get sales going because brokers were not interested in products that paid a lower commission.

The draft regulations on commission were released on Friday, and are expected to be gazetted and become part of the Long-term Insurance Act by the end of the year.

These recommend that half the commission due to an intermediary is paid upfront (when the policy is sold), and the other half over the term of the policy, on a monthly basis, to encourage ongoing service to the client.

Commission on products such as RAs are currently paid upfront, at the beginning of the first and second year of the policy. An RA can be for 30 years or longer, and there have been many complaints from clients that after selling them the RA, they never see the broker again.

Reasoning

But Liberty must have guessed that moving to the new commission structure before the mandatory date would affect sales, so why did they do it?

"We made a decision as a company that we wanted to do the right thing. We have lost a bit of market share in the broker space. I hope we will get it back, but sometimes you have to take the lead."

Hemphill is not unsympathetic to what the new commission structure will mean to brokers. "Commission is a big incentive. The new half upfront system is going to be tough on new brokers entering the market, it will be easier for established brokers to implement."

We accept that intermediaries should earn decent commission. However, as National Treasury clearly agrees, being paid full commission within two years for a long-term insurance product is not healthy. And placing commission above the real needs of clients is totally unacceptable.

That is why financial magazine Finweek supports the global move towards intermediaries not being paid commission by the product providers, and instead charging clients a mutually negotiated fee directly.

A small but increasing number of South African brokers are doing this - the ones we know seem to be doing well.

- Fin24