Tan Kin Lian's Blog: Disclosing the commission earned

Wednesday, November 18, 2009

Disclosing the commission earned

Someone asked why it is necessary for an insurance agent to disclose the commission earned on selling an insurance policy, while sellers of other products are not required to disclose their commission.

The answer is, the insurance agent is supposed to give advice that is in the best interest of the client. The payment of commission create a conflict of interest.
The commission is paid indirectly by the client, from the premiums. A high commission means a high cost to the client.

The regulators in the UK, where this concept of disclosure was developed, thought that the disclosure was the best way to manage the conflict of interest. If the client is aware about the cost, the client would be able to evaluate the advice of the agent.

This belief has turned out to be naive. The consumers were not savvy. The advisers were able to hide essential facts from the clients or to give misleading information.

I understand, from comments posted in this blog, that the UK authorities have now decided that this "disclosure" does not work and intends to ban the payment of commission entirely. I have not been following this specific development, so I am not sure about the details.

I agree with the thinking that it is better for insurance advisers to be paid a fee for their advice. Some practising advisers also hold the same view, as they prefer to be transparent in their dealings with their clients.

Tan Kin Lian

20 comments:

Anonymous said...: Buying other products consumers can see and touch and make informed decision.Even if one is conned it is a one off.
For financial products they cannot be seen, touched and tried.So one is unable to assess the value of it and worse consumers are unable to check whether the products are suitable and sold correctly to him or her.
Consumers have to trust the words of the insurance agents. It is well known that there many kinds of agents, the good the bad and the ugly and there are more bad than good.
Trusting the agents is a sure way of getting conned. So it is better to ask and commission is one of them to see if one is paying so much for so little advice.
The agents have no qualms even to con own policyholders and friends , what more strangers.; November 18, 2009 8:27 AM
Anonymous said...: UK FSA will be implementing the no commission for financial products sometime about 2011. Australia will follow suit. US has already done partially and more insurers and fund houses are expected to follow.
MAS will release , among many changes, a guideline on this early next year.
Commission is an evil which has to be removed. It is well known that insurance agents are salesmen and not the so called financial consultants they call themselves. They misrepresent to the public that they are financial experts but actually they are conmen and women.
Many sell because of the commission and usually the high commission products. These salesmen are so specialised in wholelife and endowment
whcih are useless as financial planning vehicles.Therefore, to stop these unethical practices and conflict of interest MAS must stop commission as a means of remuneration.
3 changes need to be made to stop unethical practices by insurance agents.These changes too will sift out the salesmen and women agents who are only sell for commission.
1. make need based approach a must, ie remove product advice option to outlaw product selling and peddling.
2. remove commission and replaced by fees to make it more transparent so consumers will know waht they are paying and make decision whether to engage the adviser.Good for the advisers too becuase they will not be played out by some consumers who want free advice.
3. make the advsiers responsible for the advice and recommendation to comply with section 27 of the FAA.

These will professionalise the indsutry and make it safe for consumers and get fair dealings. Currently consumers are fleeced left right by agents and the companies they represent. They work hand in glove to achieve their goals, the insurers to increase production to be #1 and the unethical agents to achieve the dubious mdrt and incentive trips. The suckers are consumers who play into the hands of these wolves in sheep's new clothing under rebranding.

The Watchman; November 18, 2009 9:06 AM
[cz] said...: Hmm.. i remember in Financial Times there was an article whereby some people research on the effectiveness and usefulness of disclosure. And it turns out that most of the time it is not too useful even when the information on conflict of interest between the advisor and the user is disclosed.

A good illustration is a patient seeking consultation with a doctor. And the doctor prescribe some medicine for him. Even should the doctor explain that his fundings comes from the company that produce those medicine, which result in conflicts of interest, the patient do not have the expertise to decide if the medicine is really good for him or not and have no choice but to accept the doctor's recommendation or seek a second opinion.

So i guess, disclosure is pretty much useless. It seem to be a tool for people to get away with litigation by saying that they have disclosed the relevant conflicts of interest and the onus now lies with the user.; November 18, 2009 9:20 AM
Vincent Sear said...: I used to have a friend in UK who was an investment adviser. He specialised in investment trusts (IT as known in the UK, equivalent to ETF as known in Singapore).

His firm charged 3% on transaction plus a time-based advisory fee.

Why a combination of commission and fee was because, if the transaction amount is too small, a high fee is unfairly expensive to the client, whereas if the transaction is very large, a high commission is also unfairly expensive to the client.

Anyway, the commission and fee was always fully disclosed upfront.; November 18, 2009 9:57 AM
Anonymous said...: Many FAs are practising fee based .
Their clients benefit from services that salesmen insurance agents don't give.Of course salesmen don't have financial planning skills, so how to give?
The regulator must must ban commission. The consumers must insist on need and fact finding even for simplest plan.Don't let the agents fool you.; November 18, 2009 12:08 PM
Anonymous said...: In spore, the experienced FA still expect u to tell them what u want to buy, what is good for u as a client.
They are only interested in their commissons, but not yr interest.
We don't reaaly need to aproach a professional FA.
Any body can become a FA if he/she had good contacts with money to spare.; November 18, 2009 3:10 PM
Anonymous said...: I am practitioner. I think fee is fairer; it is transparent; the consumers know what they get and what they pay . They decide and agree before work begins.No surprises.
Commission? it is shrouded in secrecy. Consumers not told of what work and scope of advisory service .; November 18, 2009 8:32 PM
Anonymous said...: The problem is that insurance agents don't practise like doctors although it is expected by MAS.
When you walk into a clinic the doctor doesn't immediately pitch a product to you or the doctor doesn't sell you a product that you ask. Becuase both approaches are wrong and it can lead to a fatal outcome.
When you walk in the doctor will invite you to sit down and ask you to tell him your story. AS he listens he asks questions and then then examines you. He will then give his verdict of the symptoms you told him and his examination.He will then tell you what you are suffering from and then prescribes the medicine.
An adviser is expected to conduct a fact find first then examination and followed by a need analysis before prescribing the product/products. The product/products were not known until after the examination.
The product is prescribed based on your needs and circumstances and it will not be wrong and the cost is within your affordance.More importantly your need or problem is fixed.
If you are paying a commission you will be satisfied to know that your need is professionally looked into and so much work was done in order to earn the commission and the commission might be very low if term products are recommended.
But if you buy from a salesman or an insurance saleswoman she will not do anything except to peddle the features and the benefits of a product which she hopes MIGHT match or hit your hot button and make you buy and you might end up with a product that is appropraite, expensive and you are short changed.You might walk away wondering if you have attained peace of mind. Worse you don't even know what commission you have paid. You only find out that you have been conned after consulting with a third party. By the time it is too late.
However many consumers never discover that they have been conned.Many also don't want to know and labouring under an illusion that they have peace of mind.The truth is painful and to know that they have been fooled is even more painful. Best is to bury your head in the sand. This is the attitude of many consumers, afraid to know, afraid to lose face.And this the agents exploit and manipulate knowing that you are dumb and emotional.
Remember , if you have hot buttons make sure it is not revealed to insurance agents otherwise you get conned.; November 18, 2009 10:54 PM
Anonymous said...: Product pushing agents will be finished next year.MAS is coming down very hard on them, removing the commission.; November 19, 2009 12:08 AM
Anonymous said...: I don't think MAS will come down hard on commission-based products in such a short time. It is quite drastic and nobody knows for sure whether how it will impact the industry.

Furthurmore, commission-based sales are everywhere, not just in insurance industry. It is probable that it will impact the banking channels first as people there are also earning a salary.

Insurance folks, on the other hand, are not earning a salary and no CPF, so by and large, I think commission will still be the only source of income.

I believe the change will be a gradual one, maybe it will take 5 to 10 years for the public to see how effective this move is.

Regards

An Insurance agent.; November 19, 2009 9:10 AM
Anonymous said...: To do a proper financial planning job 2 meetings are needed to complete the sale.
The first meeting is to gather information and data and identify the needs. The adviser will then process and analyse the data and propose a plan with recommendations.
The second meeting is to explain the report and recommendation to the client and if the client agrees to the recommendation the adviser will implement the recommendation.
I am surprised to hear ntuc agents could close many cases in one meeting, up to 10 cases. Indeed they are super duper salesmen. How do they do? Sign blank forms?
Yes , it is possible. Sign blank forms , avoid all analysis and push products to a group .
Compared with the above you can see the customers are short changed.The product may not be the right one. More importantly the needs unlikely met. From the deal the agent earns many commissions for doing form filling and product presentation only.
Can they justify the commission ?; November 19, 2009 9:13 AM
Anonymous said...: So far, I have yet to meet any financial adviser who would say "I will earn $x as commission from selling this product to you"; November 19, 2009 9:56 AM
Vincent Sear said...: Frankly, I haven't volunteered to tell anyone my commission when I was an agent. But frankly too, there were clients who asked and I disclosed frankly. I didn't feel there was anything to hide.

Those were the days before MAS directive on distribution cost disclosure on benefit illustration.

That directive has been in force for a decade now. We can all read it. If there's anything we don't understand or need to clarify, it's the agent's duty explain it.; November 19, 2009 10:50 AM
Anonymous said...: To anon 9:56am

So far, I have not met anyone, regardless financial advisor or not, would say, "I will earn $x as commission from selling this product to you."; November 19, 2009 11:37 AM
Anonymous said...: I also heard that MAS will want all insurers to remove commission from the products and let the agents earn from advisory service so that there will be no conflict of interest.
Commission has been known to be the cause of many debacles, unethical practices and cheating and becuase of this consumers never get proper advice and proper products.
So it is good to hear this. This will wipe out at least half of the population of insurance agents.
Commission is the root of all evils.It has led many to go astray and to commit crime.; November 19, 2009 12:19 PM
Anonymous said...: You can read about the planned ban on commissions by UK FSA on FT.com here, published on 26 June 2009: http://www.ft.com/cms/s/0/d7ce36c4-61ea-11de-9e03-00144feabdc0.html?nclick_check=1

You may need to register to read the article. It is free.

Basically, the ban is supposed to take effect in 2012, and affects all financial products under the purview of the FSA, not just insurance but also unit trusts, investment trusts, etc.

Aviva has predicted that up to 50% of companies in the industry and associated staff will close down.

Regarding Singapore, I'm very sure many elites and policymakers are well aware of the bias against consumers' interests caused by commissions. However MAS will go slow so as not to cause upheaval in the finance industry. The mention by MAS official couple months back was more for "review" of commissions rather than banning them outright.

Unlike UK, Singapore is far more pro-big-business than pro-consumer. Domestic consumption only contributes 30% to GDP, not enuf of impact to bonuses of ministers and superscale civil servants! :-); November 19, 2009 5:04 PM
zhummmeng said...: This is good news that commission will be replaced by a more equitable form of remuneration that commensurate with work, quality and complexity and scope of advice and not product peddling like koyok salesmen.
Many years ago when this was mooted the life insurance association estimated that about 5000 qualified advisers would be enough. Qualified advisers are advisers with tertiary financial planning qualifications, with few years experience and who meet the fit and proper requirement of the FAA.
Currently there are about 14000, dropped from 24000 10 years ago.The number is still big becuase this business is still attracting people who have been lured by the get rich quick promise by insurance company recruitment. These new agents never treated it as a career of choice but hit and run in the first place.The agents are people who joined to try out first, or people like retrenched secretaries , receptionists or factory workers or bus drivers retrenched and cannot get a job immediately and are in transition.
These people ought to go. And removing the commission hit them where it hurts most. They were never in the first place passionate or serious about helping others financially.If they are , why they are still poorly educated, no upgrading so that they can help their clients better?
There are about 1500 advisers who are properly qualified, ie with tertiary financial qualifications to help their cleints with insurance, retirement, investment and wealth planning, college funding and estate palnning etc.The run of the mill insurance agents can't perform these functions. They only can peddle and push like koyokman for commission and for dubious awards like mdrt, cot or some incentive overseas trips.
Hope Singapore will follow other jurisdictions to clean up these fly by night insurance agents and investment salesmen scammers.; November 19, 2009 6:16 PM
Anonymous said...: Many insurers and fund houses were prosecuted by FSA UK for millions of pounds and were made to compensate the customers. This is the real regulator fierce and no nonsense watch dog.
In UK roadshows are banned. They were known as hawkers hawking their wares.Insurance agents are not allowed to solicit on the streets. They can be charged as street hookers(prostitutes).
MAS should be like FSA UK and not like a sick toothless tiger which only meows at the wrong time.
The errant insurance agents should be locked up and not allowed to prowl the street to con poor old folks and aunties.
If commission is banned I wonder what tricks they have up their sleeves.; November 19, 2009 11:10 PM
Anonymous said...: Many insurers exploit the greed of their insurance agents to achieve their goals. They use either commission or incentives in kind and often at the expense of their policyholders who have no idea at all. These consumers trust their agents and they become unwitting victims.
I know of one insurer is trying desparately as if addicted or with sinister motive to become number one to prove that he is smart or smarter than somebody he replaced.
Common sense will tell you that cost will increase and will affect the quality and return of their products. There will be cut corners and policyholders short changed.Do policyholders notice them? No!!!! the products are cleverly hidden deep in a heap of rubbish frills like so called additional benefits. Secondly, the insurer uses the greedy agents to tap on their relationship with their clients to dump the products on them.The clients hardly know what hit them. They trust their agents.For the sake of money the agents would do anything.
So this company is using strategy to be number one.
The question is ,does the company and the consumers gain from all this? No... only the person with personal agenda and goal and the greedy agents benefit. These people work hand in glove to fleece the consumers to achieve their own goals.

Concerned agent; November 21, 2009 10:38 AM
Anonymous said...: It is not just commission. I understand Insurance companies give many many perks to agents too.

NTUC Income for example brought hundred of agents to Vietnam and rented a whole museum for party.

They also just took another few hundred agents on a all expense paid holiday in Australia in the midst of financial crisis and cutting bonus for policyholders.

Imagine the millions spent.

Correct me if I am wrong.; December 08, 2009 1:15 AM

Wednesday, November 18, 2009

Disclosing the commission earned

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