Tag Archives: commission

Personal Finance?

The article in Personal Finance this weekend re the high costs of investments (http://www.iol.co.za/business/personal-finance/financial-planning/investments/costs-are-wiping-out-real-returns-1.1036412) really got up my nose. And not for the reasons you might think.

The article did not frustrate me because it “exposed” the truth about investment costs but rather because it is too easy to be negative about these things and it is my opinion that in a country with an already low savings rate, that articles like this do very little to encourage people to save. I have met too many people with cash in the bank because they are “scared” of advisors and/or the costs on products.

As I have written before (https://www.thefinancialcoach.co.za/2010/08/18/diy-by-all-means-but/) I believe that anyone could do their own financial planning, after all it is not unlike DIY around the house. The reality is that while most of us could fix plenty of the things that go wrong, we either choose not to or could not be bothered and so we call the plumber/electrician/pool guy and we pay their fee to get the job done.

And so it is (or should be with financial planning and advice) – you cant get it for free! You either do the research and homework and go direct (not always cheaper) or you pay a financial planner for advice. There is nothing wrong with this – you pay for any professional service!

Unfortunately in our industry, this service has often been for “free” in the hope that somewhere along the line a product would be sold (and commission earned). This has been the “fault” of the life insurance industry and gave the unit trust industry an incredible opportunity to provide a more transparent and cost efficient product.

Over the years, however, as the UT industry has grown (significantly) and often at the expense of the life industry, asset managers have got greedy (annual fees have steadily crept up). Few people notice fees in a high inflation-high return environment but when the tide turns and returns are muted then suddenly fees become more noticeable. And alternate products again become more popular (in this instance it is the Exchange Traded Funds or ETF’s). If asset managers are not careful they will drive funds away from their funds and into ETF’s – it’s a simple function of supply and demand and value offered.

The other angle on the fees issue is that there has not always been good or even reasonable disclosure about the costs and fees on products. The unit trust industry has gone a long way to changing the bad habits of the life insurance industry but still there are times when investors don’t seem to know what they are paying or why they are paying. Whose fault is that?

I think that the responsibility for this situation rests on the shoulders of the providers, the advisors as well as the consumers. The providers for not being completely open and transparent and for often not writing things in language that the average person can understand (legislation and compliance officers are often responsible for this). The advisors/planners for not respecting themselves enough and for not believing that the fee they are earning is commensurate with the service/expertise offered (and often it is not). And then finally the consumer for playing the victim role and for not taking responsibility for the situation. We all know that there is no such thing as a free lunch and yet we all like to eat and then act surprised when the bill arrives.

To take that analogy one step further – I can remember being taken to dinner many years ago at the Mount Nelson by a girlfriend’s father. We got the menu’s that had no prices on them – so we suspected that it was expensive but had no idea and fortunately we were not paying so it did not matter. But when you are paying make sure that you order from the menu with the prices on it.

So where to from here? If you know what you want then go direct. If you don’t know and you need advice then find a fee-based financial planner and pay for the advice (you pay your doctor/dentist/accountant/lawyer). Find out about all the fees on the products you are looking at and also know why you are paying them and what you will get in return for the fee. Remember, the fees on financial products are usually negotiable – especially when it comes to on-going advice fees. If you are not getting value for your money then discuss it with your financial planner/provider and make sure you do get value/service else change advisor/service provider.

And finally – if you do it yourself it might* be cheaper. But if you cant or don’t want to then you need to pay someone else to do it for you. There is nothing wrong with this!

*see the posts about direct insurance vs using a broker – direct is often significantly more expensive

DIY by all means, but…

I have long been an advocate of people doing their own financial planning. Far too many vested interests in the industry would have us believe that Financial Planning is too complex for individuals to do their own and that as a result they need the services of an advisor/financial planner. Bollocks I say. There is so much common sense involved that just about anyone with a brain and some time and effort could do their own financial planning (there is no need for it to be complicated or out of reach of Joe Average).

However, to my mind, doing your own financial planning could be likened to fixing the plumbing at home. Any one could do their own: get the instruction book, get the correct tools and parts and then spend the time fixing it. While this might provide an element of satisfaction to you, it could end up taking 2-3 times as long as it might the plumber (and lead to plenty of frustration and fowl language) and you might need to do it over because you did not do it right the first time. Or, you call the plumber. It is about the maths…you need to know how much your time is worth to you versus what it would cost the plumber. Either you spend the time fixing it or you call the plumber who will probably get it done right the first time in a fraction of the time and at a fraction of the cost.

And so it is with financial planning – you do it yourself or you can call the financial “plumber”.

Partly as a result of the DIY approach there has been a proliferation of “direct” insurance companies that have sprung up over the past years encouraging people to go direct, to cut out the middleman, to save on commissions and fees…and while this all sounds very attractive it is, in my experience, hardly ever true.

I wrote a while back about how expensive 1LifeDirect is compared to using a broker (https://www.thefinancialcoach.co.za/2010/03/18/1-life-direct-misleading-advertising-so-expensive/) and now it is the turn of new comer, OUTsurance Life.

I finally managed to get a quote from them after a few emails, a blog post about their poor service and then spending 40 mins on the phone with a very polite and friendly call centre agent. Towards the end of the conversation as he built up to the crescendo of his sales pitch he proudly announced to me that I was an “excellent” candidate for life cover with them and that as a result I would qualify for a very competitive premium. Bearing in mind that they have advertised that there was no advisor and therefore no commission on the policy I was expecting something quite attractive.

And here is the problem – it was R220 per month (almost 53%) more than a comparative quote through an insurance company (where the commision has been removed) and even with full commission on the comparative quote it was still 22% more (see below).

So let the old warning apply: Caveat emptor – or Let the buyer beware. By all means follow the DIY approach and go direct but beware – there are a lot of “lies, hype and spin” (also known as marketing) out there and just because it says there is no advisor and therefore promises to be cheaper, it does not necessarily mean that it is. My advice is this – rather find an advisor/planner who can supply you with the product you need without the commission costed into and and pay him/her a fee for the work that they do for you.

Comparative quotes from OUTsurance Life and Altrisk Insurance Company for a 43 year old male – R2million life & R300k dread disease cover:

OUTsurance (no commission): R644 pm

Altrisk (with commission): R529 pm

Altrisk (no commission): R422 pm

And on top of this, OUTsurance promised me an OUTbonus of about R3800 in 5 years time…attractive indeed but if you take the R220 that you would save by using the Altrisk product and saved it for 5 years (without any growth on it) you would have more than R13000 in 5 years time. Now that would be a BONUS!

OUT is not In!

About 2 weeks ago I responded to an online advert by OUTsurance for Life cover at significantly reduced premiums (because they were cutting out the advisor and therefore the commission). Within “minutes” I received the following email from them acknowledging my request for a quote:

“Thank you for requesting an insurance quote from OUTsurance! We are committed to AWESOME service and will do our best to quote a premium that really suits your pocket. One of our highly trained advisors will call you shortly to complete your quote. And just in case you had any doubts as to why we are the largest direct insurer, see attached a brief summary of our product features and service offering!

Regards, OUTsurance”

Despite the promise of AWESOME service I heard nothing for a week. And so I contacted them again and again I received an acknowledgement promising me that my request would be sent to the appropriate person for an immediate response. Still nothing…

And that is a problem with going direct (or cutting out the advisor) – there is no one to speak to, no one who is really interested and my “urgent” need for life cover has not been addressed.

Around the same time I was contacted by a client who was looking for life cover. He had heard that we charged a fee for the work we do, that we do not earn any commission and that as a result his premium would be significantly lower (up to 30% less).

After explaining to him how we worked he asked me to get some quotes for him and told us that it was urgent as he was going away on the 15th August for a month and wanted the cover in place before then. We duly sent him the quotes and then the relevant application form which he completed and sent back to us on Tues 10th August. The case was underwritten the same day, medicals were done the next day and the case was issued on Friday the 13th…now that is AWESOME service by the relevant insurance company (Altrisk, for the record).

If the client had gone “direct” he would still be waiting for someone to return his call…

And IF, OUTsurance ever get back to me, I will write a follow up post comparing their quote with what we can get elsewhere.

Where has all the commission gone?

About 5-6 years ago the Life Offices Association (now ASISA) made the claim that up to 35% of the cost of new business was due to the commission paid on the products (http://www.busrep.co.za/index.php?fArticleId=2627965&fSectionId=552&nld=2005-07-18&t=html&f=d) and that was one of the reasons life insurance products were “expensive” and heavy penalties were levied when these were cancelled before maturity.

As a fee-based financial planner it has always amazed me then that when we dont take commission on life insurance products we never see a 35% reduction in the cost of the cover. There is a reduction but it is nowhere near 35% and not all companies are equal either. So where is the commission going to?

Consider the following case:

R4million life cover for a male age 35 would cost ±R506 per month and the commission that the advisor would earn would be almost R7000. If the commission is removed from the policy (yes it can be done) the premium would reduce to ±R372 pm – that’s a saving of R134 per month (26%) for the duration of the policy. Over 5 years that means you would save at least R8040 in premiums. The question I have is why is it only 26% – where is the “other” 9%?

So I did a bit of comparing and it turns out that 26% is a really good reduction and that most of the insurance companies are only reducing the cost of the cover by 15-20% (see table below – these figures are based on quotes for life and disability cover on my own life):

Company Std No comm % Diff
Liberty R 997 R 801 20%
Discovery R 862 R 732 15%
Myriad R 985 R 822 17%
Sanlam R 524 R 445 15%
Odyssey R 778 R 631 19%
Altrisk R 1 153 R 850 26%
OM R 951 R 761 20%

From the table above it is pretty clear that none of the companies is giving the full 35% reduction that the LOA spoke about  and many of the companies also appear to be “holding back” some of the commission that would have been paid (I can only guess where it is going).

In my experience, Altrisk, which has a 26% reduction,  is consistently the best company when it comes to reducing the cost of the cover when the commission is removed (they also have a really simple but highly rated product).

So where to from here?

My advice to you is the next time you consider taking out some life insurance, ask your advisor what the premium would be if there was no commission on the policy and then ask him/her what fee they would charge you to do the business – you could end up saving quite a bit of money if you are prepared to pay a fee for the work that is done (typically we would charge between 2 and 3 hours for the implementation of a life policy). So on the above R4million example, you would pay a (maximum) fee of 3*R750 = R2250 to us (we allow our clients to pay this off over a few months if necessary) and you would have the lower premium for the life of the policy – this way you can also be satisfied that if the advisor recommends any additional benefits (such as disability or dread disease cover) they are not doing it to increase the premium and thus increase their commission – they are doing it because it is in your best interest. Under the commission model, the greater the premium, the greater the commission paid – whereas the premium has no bearing on the advisor’s earnings under a fee model.

1 Life direct – misleading advertising & so expensive!

Just saw the 1Lifedirect TV advert again this evening and it really gets my goat – their advert is so incrediblymisleading. It should come with a huge health warning similar to that on cigarette packets. They were offering a 44 year old male R1million life cover for just under R500 (if i remember correctly) and at the same time boasting about how cutting out the broker would save up to 22%.

While the 2nd part of the claim may be true, what is distressing is that I can buy R1million life cover through an insurance broker for about R190 per month. If I cut out the commission (broker) then that drops to about R144 per month which is less than 1/3 of what they claim to be able to offer without any commission on it.

What an unbelievable bunch of thieves! They are just like any of the other insurance companies in this country and on top of that, their claims to cut out the paper work could provide you with some very nasty surprises come claims stage.

Based on the quotes above, I would opt for the services of a broker every time – even at full commission.

Commission free life cover…

thumbnailCA5TPCTEAs a follow up to the post on cutting out the middle man, I thought I would write about another case of “half-truths” from insurance companies.

About 6 years ago, I was at a financial planning conference where the issue of fees and commissions was being discussed by a panel. One of the panel members was representing the LOA (Life Offices Association, now ASISA) and he stated that about 35% of the cost of new business for life insurance companies was the cost of commission that they paid to advisors. This means for every R100 of premium, R35 was (according to the official industry association) a direct result of the commission that was paid to advisors.

Being the trusting type, I therefore assumed that if you remove the commission from the quote, there should be a reduction of ±35% in the cost of the cover. So for about 6 years now, we have been providing life cover for our clients without any commission on the policies*.

The problem is that in whole time that we have been providing commission free life insurance policies (yes it can be done), we have not yet seen a reduction even close to the supposed 35% that the LOA was touting, nor have we found anyone in the industry that has been willing or able to explain the reasons for the discrepancy.

For the record and in our experience, if we remove the commission from the life cover then there is a reduction of between 12 and 27% in the cost of the cover (depending on the insurer) this is clearly far short of the supposed 35% and some insurers are obviously creaming more for themselves than others.

In practise this means that if the cost of the cover (with full commission) would have been R1000 per month, by removing the commission from the policy, the premium could be reduced to ±R750 per month). Over a 10 year period that is a saving of at least R30000 in additional premiums. Makes you think, doesn’t it?

That’s all for now!

The Financial Coach™

*we do this by charging an hourly rate for work done in providing the cover – typically this is anything from 2-4 hours depending on the type of cover involved.

Sometimes cutting out the middleman just leaves a gaping hole!

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I recently received a marketing offer from 1lifedirect to take out some life cover directly through them, thereby cutting out the paperwork, expensive medicals, the broker and therefore the commission. All of this, they promised, would save me up to 22% on the premiums.

Having seen their rather funny TV adverts and being the curious sort I decided to give them a call to see if things were as good as they promised. After all, their flyer offered me R500000 life cover for only R140 per month (subject to certain terms and conditions of course).

On the face it of their offer sounds quite attractive – but on further investigation it is anything but so. Some comparative quotes to see what I could get elsewhere revealed that I could get R896000 life cover for R128 per month (with full commission on the policy). The same cover without any commission on the policy would cost just R100 per month – now that is a saving of 28% on the full commission quote and is over 50% less than the 1lifedirect quote. So there really is no saving of anything and in fact, sometimes cutting out the middleman could turn out to be quite a bit more expensive.

The 1lifedirect offer is not nearly as good as it initially seemed and far from it being a quick and convenient process they could not give me a quote over the phone because of the fact that I do the occasional scuba dive. The quote needed to be done by their actuaries…7 working days later and still no quote from them despite 2 follow up phone calls from me. By this stage, the average insurance broker would have had the case finalized and issued and I don’t even have a quote. Sometimes going direct is certainly not a quicker or more convenient process.

1lifedirect also say that they cut out the need for expensive medicals – for the record, most medicals are paid for by the insurance company concerned. This is certainly the case where the insurance company is the one that calls for the medicals. Sometimes going direct can mean that you stay ignorant of the facts.

1lifedirect also claim that they cut out the need for paperwork. Far from this being a pro it could turn out to be a real negative the next time you apply for insurance cover; no paper work means that you have no record of what you answered on the medical questions and no record of answers significantly increases the risk of accidental non-disclosure. As a consequence this significantly increases the risk of a claim being repudiated by the insurance company (because of the accidental non-disclosure).

So, far from being “life insurance that is quick and convenient, and that – by cutting out the broker – saves you money!” in my case, the offer by 1lifedirect turns out to be significantly more expensive, not so quick and also potentially increases the risks when applying for future insurance.

For the record, I have no problem with people going direct. To me it is much like fixing the toilet at home – I can do it but it will take time and effort and I might not have the necessary tools. Either I invest the time and energy or I pay a plumber to do it for me.

In the same way, if a broker can’t add value to the client and he/she knows what they want and has the time to do it then there is no reason that they should not go direct.  They just need to be aware that it may not always be the best option and that while in some cases it may appear to be cheaper it could turn out to be a very costly exercise.

Sometimes cutting out the middle man just leaves a gaping hole.

That’s all for now.