When insurance agents jump ship, clients may suffer

For those who does not read newspaper, the Sunday Times has an article today on the potential problems that could occur when insurance agents are being poached (When insurance agents jump ship, clients may suffer, 24 September 2017 Sunday Times).

The following is a summary:

1. 300 Great Eastern agents mass resigned to join AIA Financial Advisers. AIA Financial Advisers in turn paid $100 million to them.
2. 250 Prudential agents mass resigned to join Aviva last year but the amount Aviva paid to them were not stated in the newspaper article.
3. The regulator is worried over the poaching issue.
4. Insurers drive growth by poaching top producers instead of spending money and hours to train agents.
5. The client base of the agents belongs to the original company. Hence, cross over agents have to build their client base from zero.
6. Money paid to poached agents comes with sales target and 5 years bond.
7. Consumer may suffer as insurers may also increase premiums or reduce cash .
8. There is a risk that the poached agents may come back to their previous clients to switch out their old policies to buy new ones.
9. Many policies will be orphaned (i.e. no servicing agent).
10. There are too many types of FA firms that consumers are confused.

Here are my comments:

Why are agents paid such huge sum to switch company?

Usually when a person change job, the recruiting company would offer a higher salary to entice the good performer to leave his company. However, in the financial industry, there is no salary. A financial adviser is usually self-employed and his only source of remuneration is in the form of commissions. Commissions are usually paid over 3 to 6 years (for life and ILPs) and a small perpetual amount for accident and health insurance policies. Thus, when a financial adviser resigns, he lost all his future commissions. For him to resign, he has to be compensated for loss of earnings.

The amount to be compensated has to be equal or better than the present value of his loss of future commissions. Let’s consider a simple case of yearly commissions of $200,000, $100,000 and $50,000. Assuming the agent thinks the discount rate of 2.5%, the present value of this stream of cash flow is 200000/(1+2.5%) + 100000/(1+2.5%)² + 50000/(1+2.5%)³ =  $336,733. Hence, the agent will be willing to forfeit his future earnings if he is offered a higher price. It has to be higher than this amount because there is opportunity cost of ‘downtime’ and theoretically loss of his entire client base.  Let’s assume his existing client base was able to provide him with another 50% of additional commission in future for products that will be bought into the future and through referrals, the recruiting company has to pay him $336733 x 1.5 = $505,100 since the agent is no longer able to benefit from this additional 50% source of future commission. Based on this logic alone, the recruiting company has NO RIGHT to impose any kind of quotas and neither does the agent need to replace his previous clients’ policies.

However, in real life these agents are required to meet high sales quota and serve a whopping 5 years bond! The reason is because the lump sum payout also includes an additional amount to secure the human capital of the agent. This human capital is the skill that the agent has to acquire new sales for the recruiting company. This additional amount to secure the human capital is technically not a compensation but a deposit which has to be refunded back to the recruiting company should the agent not able to perform. It is important to note that any clawback should only be pertaining to the amount of this ‘deposit’. The amount pertaining to the loss of future earnings should NOT be clawback.

Why policies will become orphan?

Policies are ‘orphaned’ when there is no servicing agent. In theory, there is one but in practice none due to the following reasons:

1. The new takeover agent is already busy servicing his own client base. His priority is to focus on his own clients.
2. To take over someone client base – especially if the outgoing agent is a very experience one – is like having a workload increase by 100%.
3. To make things worse, the takeover agent usually does not receive any recurring commission for these new clients. Hence, he or she cannot hire additional personal assistants to help. In any case, there are many matters that cannot be deal with by personal assistants due to regulation. For example, if the client wants advice whether to downgrade the integrated shield plan, such an advice cannot be handled by anyone other than a regulated representative. The takeover agent cannot outsource the advice to other financial advisers because the industry works as a one man show.
4. There is no relationship between the takeover adviser and the new clients. It will take forever to build that rapport. Let’s imagine if the outgoing adviser has 10 years of experience. This means he took 10 years to build up rapport with his clients. Assuming the takeover adviser only has 10% of available capacity, the time required for the takeover adviser to build up rapport with these new clients is: 10/0.1 = 100 years!

I know of one financial adviser who took over the policies of an experience financial adviser. The takeover adviser’s production drop to the bottom because the work load to service the huge influx of clients increased by 100%. Contrary to popular belief, taking over someone’s clients often results in drop in productivity and revenue. The potential opportunity to ‘upsell’ to these new clients is merely a fallacy. If you are a financial adviser, NEVER take over another adviser’s clients unless that outgoing adviser is your BFF.

Why clients will continue with the outgoing adviser?

Since the takeover agents are not able to match the same standard of servicing as the outgoing agents and the fact that the takeover agents have no rapport with these clients, many clients prefer to be serviced by their outgoing agents. This is where the danger lies as there is a risk of policy replacement due to the outgoing agents’ pressure to meet sales target.

Advice to clients: How to prevent churning and policy replacement problem?

As a client, you should NOT deal with any financial advisers who does not ‘own’ his clients. Tied agents and bank staff do not ‘own’ their clients. Hence, when they leave, they cannot ‘bring’ the clients with them since these clients belong to the previous principal. How do you know whether your financial advisers are able to continue to service you if he or she leaves? You can simply ask this question: ‘Do you have full vesting’?

What is meant by ‘full vesting’? In the financial industry, full vesting has two parts:

1. The contractual right of the adviser to continue to contact and service his clients after he resigns and joins a competitor.
2. The contractual right of the adviser to continue to receive 100% of all recurring commissions after he resigns and joins a competitor.

A number of FA firms practice full vesting. I have already seen it works for my colleagues who resign and those who join from other firms. Thus, it is not an imagination but something that is practice by a few FA firms.

Full vesting solves a number of problems:

1. Policies will not be orphaned as the same adviser is still looking after it. Clients will still receive the same standard of service.
2. The outgoing advisers will not incur any financial loss and he can continue to get referral from existing clients.
3. Recruiting company does not need to compensate advisers for changing company.
4. Although the recruiting company may still ‘buy’ over the adviser for his human capital to bring in new sales, any clawback of payout is only for this portion.
5. Since there is a lower or no sales quota to meet, the issue of churning and policy replacement becomes less of a concern.
6. Clients’ interests are protected.

Hence, YOU should only deal with financial advisers with full vesting.

Advice to advisers: How to have a successful career?

The most obvious thing to do is to ensure your principal practice full vesting. You and I know that financial advisers are 100% responsible in all clients’ acquisition activities. Does it make sense that all the clients you found belong to someone else who does not even pay you a salary? Does your principal reimburse you for all the facebook advertisements, the cost of hiring telemarketers, the cost of setting up road shows and the endless rejections? If you think about it, your principal does not even take any risk and enjoy all the upside. On the other hand, you take the risk of making losses and yet all the clients belong to someone else! This does not make any financial sense. As a financial planning practitioner, it is important to set an example to your clients that you make prudent financial planning decision by ensuring you join a principal that has FULL vesting.

The second thing to do is to reduce the percentage of your revenue due to commission and increase your fee revenue. By doing this, there is no pressure to keep on finding new sales and new clients to sell to. Even if you would to change principal, there is no pressure because of the recurring fees (and recurring commissions due to full vesting). When your financial situation is secured, it implies you will stay in the industry for a very long term and your clients’ interests will be protected since they can be assured that you will be there for them for a very long haul. It must be noted that product providers will be financially disadvantage under this model because of the lack of pressure to sell products. That is why many financial institutions are against financial advisers from charging fees. Did I just reveal the best kept secret?

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