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.
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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