Why you should not buy products with upfront commission?

Most insurance products pay an upfront commission to the adviser. Sometime it is just one huge lump sum commission other times it is spread over 3 – 6 years. This is to provide the adviser the incentive to sell products but it also promote short-term attitude. I always encounter the following problems as a result of this:

Many advisers after selling the product offer no after-sales service. When the client wants to modify the policy or do fund switching, the adviser “disappears.”
Others would go back to the same client to ask the client to terminate the policy and buy a more “superior” one so as to earn another round of commission. This is called product churning.
When comes to claim, short-term advisers would run away and not response to client’s request to help make claims. Hence, clients have to DIY with the insurers directly to deal with claims. The most common complain from clients who dealt directly with insurers’ claim department is poor customer service. Actually this is usually not the case because the insurer’s staff are technical people and do not necessary possess the soft skills in fronting customers. Moreover, the customer is in emotional distress (that’s why they are claiming the insurance). The most suitable people to help make claims are the advisers themselves because they are trained to handle customers’ objections and more importantly because they already possess the relationship with their clients. However, the lack of compensation to help make claims provide advisers with no incentive to process claims. Processing claim itself cost time and money. It is not a trivial job.
When an adviser resigns, the takeover person does not get compensated for servicing the policy because the commission was already paid upfront to the outgoing adviser. Thus, this is unfair to the new adviser for he isn’t paid and the client’s interest is compromised afterall the client has no way to know when adviser is going to resign.

In the past, there isn’t much policy servicing required because life insurance are usually par products. Even for non-par, the returns are guaranteed anyway. If there is no claim, there is nothing to service. However, in recent times, majority of the life insurance policies that people buy are investment-linked policy. I’ve yet to come across anyone who did not buy ILP (except for me and my wife – we never buy ILPs). Hence, some policy servicing is required such as portfolio rebalancing and identifying funds that have significantly underperformed. Unfortunately, many ILPs pay upfront commissions either in a single lump sum or spread over 3 – 6 years.

Personally I have the privilege of taking over many clients’ ILPs. These ILPs were not sold by me. They are ILPs sold by other advisers in the industry who have either resigned or refuse to talk to their existing policyholders anymore because there is no further commission to earn for servicing.

Sometime I will just try my luck and I’ll asked the insurer how am I going to be compensated if I would to takeover such a policy and can the insurer claw back the commission from the other firm. The answer given to me was: NO. I told them it isn’t fair. But they said this is how the industry works. Yeah, the industry only promote advisers selling products but have no clients' interest at heart. Personally there isn’t much I can do. Perhaps it will be better that clients complain to the insurers about such unfairness. If there is enough complain, I am sure insurers will do something about it such as changing the compensation structure. But in Singapore, majority of Singaporeans cannot even differentiate between investments and savings. I seriously do not think they even know what to complain.

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