As many already know, the Direct Insurance Purchase was officially launched on 7 April 2015 today. Many financial advisers are unhappy that the government mandate that insurers sell insurance directly to consumer and bypassing their agents.
After doing some analysis, I found that financial advisers can actually earn even more if they tell their customers to buy direct. Here was what I found:
I use the Direct - AXA Term Life as an example here. This is in no way implies that I am endorsing AXA Life nor am I implying that I am advising anyone to buy from AXA Life.
The Direct – AXA Term Life cost $632.20 annually for a male, non-smoker born on 1/1/1985 of sum assured $400,000 covering death/TPD and CI. The coverage period is 20 years. This product has no commission – and the client buy from AXA Life without any financial advice.
The equivalent term insurance from AXA called the AXA Term Protector that one can buy from an AXA agent or an IFA (like me) would cost $901.21 (although I must add that the two products are not identical). The distribution cost for this product is $1,617 (cumulative over 20 years). The commission is lower than this distribution cost but I will use the later since it is officially printed on the benefit illustration while the compensation (also known as Gross Revenue) may differs between distribution channels. Hence, you can assume the agent, his manager and the agency gets about $1617.
The difference between the two premiums is 901.21 – 632.20 = $269.01. Thus, client saves $269.01 every year or 269.01 x 20 = $5,380.20 for 20 years.
But let’s say the client really need financial advice and the client just do not feel comfortable declaring he know everything (the client has to declare full understanding of everything in the checklist before purchasing the product direct without advice). What the client can do is to approach an AXA Life agent or an IFA and pay him or her half of the amount that would have saved. This works out to be ½ x 5380.20 = $2,690.10 for an advisory fee so that the client can get advice. Of course, the agent or IFA can also advice on other stuff and not just this term insurance (such as how to go about budgeting for the new housing purchase, will writing, retirement planning, etc).
If you think about it, this is a win-win situation. The financial adviser gets to earn a living as he is compensated. In fact, the adviser’s compensation far exceeds that if he would earn if he sells the term product (i.e. distribution cost of $1617 vs $2690.10 as advisory fee). The customer gets financial advice and will still save a huge amount of cost too by purchasing directly from the insurer.
What is the difference between the two methods?
- The financial adviser is truly an adviser. Product transaction is done separately by the product provider.
- There is no need to push product.
- Pure independent advice.
- Adviser no need to keep on finding new leads (because the compensation per product is now much higher). A happy adviser will result in better customer care.
- The consumer is happy to know that his or her interest is looked after.
- The cost of advice is transparent. No more hidden fees.
- More important, huge savings for the client and can get the adviser to do other stuff (i.e. tax planning, will writing, budgeting, investment advice source for best mortgage loans, etc).
Everybody is happy and the industry’s professionalism standard is raised. This is a dream come true for all financial advisers who really wants a breakthrough.
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As an afterthought, why is the cumulative savings for the direct product and the product bought from an adviser far exceeds the total distribution cost of the later? The difference is by more than 2.3 times! I do not have an official answer. But what is well known is that the effective compensation of an adviser depends on his production. The high producers actually get higher compensation above the official commission through numerous incentive trips.
Using the above method I just described, even a low producer can earn a far higher compensation as compared to just receiving commission by selling the product… and this does not in any way increase the cost for the client.
The question is this; would the lead take the advice and subsequently refuse to pay the agreed fee? I have being charging fee for a long time. I would say that the secret of avoiding this problem is to learn how to read a person within 10 minutes of meeting him or her. This is an art, no science is involved. You can also ask for a nominal deposit say $500. This deposit is too small to compensate for the work done but it is meant to ensure the lead is sincere. It is one of an effective ‘filter’ mechanism to ensure the lead is a genuine case. I discovered many 'filtering' methods over the years. Sometimes I learn by attending conferences but most of the time I just invent it myself. 🙂
All the best to all advisers to help your clients achieve their goals at a lower cost and at a higher earnings for yourself..
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Hi Wilfred,
This system seems interesting, but the average man on the street wouldn’t have enough cash to cough out $3k on the spot. Perhaps as a testament to the client’s needs and meeting of expectations with the agent, an initial fee of $500, and subsequently, smaller payments of $300 over 8 to 9 months. That way the clients won’t feel cheated, and the agent has at least something rather than nothing, subject to the number of cases he closes a month, of course.
Hi Wilfred
Thank you for this informative article. If I interpret correctly, you’re saying any financial adviser can switch from providing a commission-based service to providing fee-based advice?
Is there any criteria my adviser has to fulfill before he provides fee-based advice to me?
Yes, any commission-based adviser can provide fee-based because such an adviser is usually self-employed. As a self-employed person, they make their own decision regarding their revenue model as long as it is not against the law.
As far as I know, there is no industry standard nor regulatory criteria before an adviser can charge fee. But as a consumer, you would only pay a fee to a person worth paying for. So here are my suggestions:
(1) How many years the adviser has been in this field?
(2) What is the core business of the adviser ? (Is he more focus on life insurance? Is it more focus on Group Employment benefit? Is he comfortable advising on CPF rules? etc). There is no standard answer for this. An adviser who is familiar in many areas is advantages to you but that also means he could be ‘jack of all trade master of none’. On the other hand, an adviser who is too specialised will not be able to give you well-rounded advice.
(3) Is the adviser a full time or a part timer? You want a full time adviser. As the saying goes, practice makes perfect. A full time adviser practices more compared to a part timer – all things being equal.
(4) What is the qualification of the adviser? CFP, ChFC are some suggested qualifications.
(5) Was there any MAS enforcement made against him in the past? You can check by searching his record using his RNF on the MAS website.
(6) Ask him or her to provide some testimonies / reference. This may not be easy to get because most clients are private.
(7) Last but not least, ask him what is his revenue model to continue to service existing customers. A sensible revenue is very important because you would not want an adviser to keep on growing the client base as that will definitely impact the service quality to existing clients.
99.99% of salesmen & saleswomen wouldn’t know how to give proper fiduciary financial advice to save their own lives. Most will simply charge you fees if you want it, but continue selling for high-commission to other victims.
Life insurance going digital is inevitable in the long run….
http://www.businesstimes.com.sg/banking-finance/going-digital-inevitable-for-local-insurers-in-long-run
The CompareFirst.sg is the forerunner of things to come. In the future no need for flesh and blood salesmen and women but ROBOadvisers. Flesh and blood salesmen are untrustworthy and manipulative and Roboadvisers objective and unbiased.