rebating
life insurance
Historically, rebating of commissions has been in the bad
press because of the elements of inducement. I consider rebating of commissions
as giving in to the 'dark side of the force'. Most clients are unaware of this
dynamics of the 'dark side' because they will always select the cheapest route.
Therefore, the onus is on the adviser to do the right thing. Unfortunately, it
is difficult to decouple rebate and inducement. In all cases, the line is
blurred. My advice to any company or advisers to be very careful especially if
not charging any advisory fee and neither offering any comprehensive financial
plan. Doing a Type 1 or 2 KYC is not a comprehensive financial plan. In fact,
according to MAS' mystery shopper exercise, 90% of advisers did some fact find
but only 28% made suitable recommendations. A professional must not exploit
known weaknesses of clients by using commissions rebates to induce a purchase.
A professional must do the right thing even if the client thinks otherwise. A
professional has no control over what the decisions the clients make. But a
true professional can always control what he does. If the client does not make
rational decision, the professional must walk away. In the sense, a true
professional places his or her integrity and ethical values above all things
else.
A better way to reduce the cost of financial product is to
have the product manufacturers distribute products at reduced commissions or
without any commissions at all. This is what MAS wanted for insurance companies
to sell products directly without commissions. For this to happen, MAS must
step in to ensure the lack of commissions actually translate to reduce
premiums. I have seen one particular insurer which sold 'directly' to consumers
and disclosed in its benefit illustration that the distribution cost is $0
(i.e. no commission). However, when I check the premium, it is the same as that
if purchased from a commission-based agent. This means that the lack of
commission did not translate to actual savings to the consumer. In fact, the
shareholders of the insurance company pocket the entire commission as retained
earnings. The consumer is disadvantaged for buying direct because there was no
cost saving and no servicing agent too! To prevent such unethical practice, MAS
must step in.
Before I end, in my view rebating commissions is the wrong
way of reducing cost for consumers. Rebating commissions is the lose-lose
situation for advisers and consumers. For advisers, it means reduction in their
earnings and soon many advisers will quit. Advisers have the right to earn a
decent living just like everybody else. For consumers, they subject themselves
to inducement. History tells us that the outcome inducement is misselling. To
me, the best outcome is the professional approach and fee-based approach.
Advisers must provide a higher advisory services so that clients are willing to
pay for advice. To reduce cost, product manufacturers should reduce or eliminate
commissions.
I am always willing to work with product manufacturers who
are willing to structure products without commissions so that the cost can
truly be lowered as I am fee-based. From my statistic logs and based on IP
addresses, I know many insurance companies and even MAS reads my blog. If you
are reading this, call me for a chat.
BTW, I found out that in most states in the United States,
rebating life insurance commissions is considered as illegal and deceptive.
Interesting! See Unfair and Deceptive Insurance Practices; Rebating
