Can a client buy insurance without paying commission? Will it be cheaper? The answers are “Definitely Yes” and “Probably No.” Here are the main options available.
Direct Nil Commission Products
Most ‘direct’ insurance companies do not charge any less than full commission offers. Some do, some don’t and there is a value for money equation to be considered because many such products do not offer the full range of features offered by advisers. Although some come with advice, most do not. Even those that do come from a full advice channel there isn’t usually as much choice of insurance provider. The value that they deliver tends to be based on the bits you cannot see: they save you time by having very short forms (sometimes with no health questions at all).
But if a client is interested in an advice process which is based purely on a fee and has no commission component then this may be a way to get the lowest cost over time. Nil commission offers by advisers tend to come in the following versions.
Nil Commission Products and Fee Payment
Choosing a nil commission product and charging a fee direct to the client. There are very few of these services offered as a main way of doing business. Most advisers, however, will offer this as an option under some circumstances. Limited duration but large premium cases for business insurance are one example. Another is for cases with very complex underwriting. In such cases the total reduction in premium can be around 20%.
Whether or not this is a good deal depends on the size of the fee and how long you will hold the cover for. In the purest form of this service the fee for advice is payable irrespective of whether the client proceeds to buy the cover. A separate fee may be charged for handling the actual application. Fees will be payable whether the case is accepted by the insurer or not. For clients used to not having to pay a fee, both funding the fee, and having to pay it even if the application is not successful may come as a shock. As with all pricing and scope issues in financial advice, clear communication is the key.
We have heard of fees from $475 to $2,000 for normal advice processes for one person with moderately complex cases. Really difficult cases with a lot of underwriting challenges would tend to be hourly paid and could work out to cost a lot more.
Fee Offset by Commission
Another version of the process is to charge an explicit fee, take full commission, and allow the commission to offset the fee. In this case the premium remains unchanged – there is no ongoing discount. The client enjoys the benefit of not having to fund the fee themselves. This approach is carried on by a good number of mortgage advisers, but rarely by insurance advisers.
The version which is most commonly practiced includes a fee only if the application is unsuccessful. This can be seen as a minimum fee and all the commission is kept by the adviser for the case. This is another situation in which crystal clear communication of the fee is required, I understand a lot of complaints about fees of this type are received by complaints bodies.
There is an alternative which is more transparent where the adviser discloses the value of the full commission and rebates the excess above the fee (after any applicable responsibility period). As an aside, although some people say that there is no requirement to disclose commissions at present, I am not sure how one can meet the requirement to disclose conflicts of interest without telling clients about commission. Proponents like this because of the reduced strain on the client and the fact that it leaves service or renewal commission payments with the adviser to pay for ongoing support.