I do not rebate commission due to three reasons: (1) the financial industry equate rebating of commissions with the act of inducement (2) prospects who ask for rebates are usually not genuine clients (3) my core competency is financial planning, not selling products.
Rebating commission is an act of inducement
Although rebating commissions was made legal in 2002, many agents have since rebated commissions - not because they wanted to reduce the cost of insurance for their clients – but to meet sales targets in order to gain recognitions and incentives. By rebating commissions, customers are induced into signing up with insurance contracts that are almost always not suitable.
This was made worst in 2010 when a licensed financial advisory made headlines for the wrong reason. The advisory firm was reported to have induced its customers to purchase an insurance product by rebating commissions that were large enough to fully offset the first year premium. On the 2nd year of the policy, huge number of these policies lapsed resulting in the insurer making huge losses. The insurer demanded $7 million of compensation from the financial advisory firm. Amid the dispute, the CEO of the insurer resigned for ‘personal reasons’. By the way, the product that the customers bought was one of the most expensive as compared to its competitors during that period.
Although my recommendations are always impartial and objective, rebating commissions would tarnish my reputation as I would automatically be assumed to have induced my clients to purchase insurance policies. Empirical evidence has shown that consumers have higher tendency to purchase a good if there are discounts and cashbacks. Despite the fact that the decision to purchase is usually due to a few reasons, it cannot be denied that the discount is one of the factors influencing the purchase decision. If I would to rebate commissions, it is always a certainty that the rebate has some influence over the client’s purchasing decision. Such influence is known as inducement. Financial advisers who are guilty of inducement would be fine and even terminated as it contravenes Financial Advisers Act Chapter 110 section 27. That is to say that the act of rebating commission was made legal in 2002 but the act of inducement remains illegal.
Prospects who ask for rebates are usually not genuine clients
After many years in the industry, I have found that individuals who ask for rebates are usually not genuine clients. Usually they have already made up their minds of the kind of products they want to buy after getting quotations from their agents. Knowing that the projected financial planning fee is less than the commissions of these products, they would just ‘go through the motion’ in engaging the fee-based planner for a comprehensive financial plan. At the end of the planning session, these clients would insist in buying certain products even though it is not recommended by the fee-based planner. Using this method, these clients would get a net cashback since the rebate of the commission is larger than the financial planning fee.
I do not wish to waste time on such clients that are short sighted. I am always looking for long-term clients.
Core competency is financial planning, not selling products
If your primary goal is to purchase a product, you should not engage me. This is because my core competency is financial planning and investment management. Financial planning and product purchase is not the same thing. In fact, most of the time, financial planning results in no product purchase.
Majority of the work I do for clients focuses on planning, advice and on-going investment management. The analogy is that a doctor’s main focus is diagnosis and to provide a treatment plan. Selling medicine is never the primary aim.
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