Kathryn:       Hi everyone, this is a little bit of an Inbetweenysode for season four.  It’s going to be a shorter one than usual and you just have me this time.  And what I’m going to be doing in this episode is just chatting a little bit about the structure when it comes to advisers who take commissions and advisers who take fees for their services, because there’s been quite a lot of debate about this.  I think a lot of people who are listening will probably be aware of some sort of like national press coverage of this and what I want to do is – I’m not going to be sat here sort of like talking about which one’s better, or different things like that.  I’m a strong believer that there is a time and a place for everything.  But hopefully I am just going to be laying out the facts for you as to how these things work.  This is the Practical Protection Podcast.

So, when an adviser is going to be helping a client, there is usually a couple of ways that they would do that in terms of like how they get paid for that.  So, one way is fees and one way is commission.  And commission also has a couple of options within that.  So I’m going to try and be as – this is going to be a really nice short episode hopefully, so I can make this as jargon-free as possible and just make it clear what the different approaches do.  I’ll try and sort of maybe put forward the positive for each approach and then maybe – not a negative, but maybe something that maybe would end up being not ideal for someone potentially going down that route.  And that’s not to say that any which way is specifically better or worse – it’s always dependent upon the client’s circumstances, for what’s right for them, what they feel comfortable with.  But as with anything and I think a big thing that’s been mentioned quite a lot of the time at the moment over these things is, it’s a transparency.  So that people are just really clear about how their services are paid for and that there’s never any kind of question from the client, as to what has gone on, in a sense.

So just to be very, very clear, I am a commission-based adviser.  That’s just the way that I work because it works very well for my client set and hopefully I’ll be able to explain that later on.  So I’m going to be talking about these three main areas.  So, let’s start off with the fees-based approach first of all.  So fees-based approach is usually – people would see it if they speak to an IFA, so somebody who is doing things like the pensions and the investments.  Typically, I was going to say a typical fee maybe for an adviser – potentially a wealth adviser, I imagine there’s going to be people listening to this going, “Well I don’t charge as much as that,” and other ones saying, “Well that’s a lot cheaper than what I charge.”  I would say probably on average – I would typically hear that a fee-based adviser would typically charge around £1,000 for their services.

Now, what can be quite unusual is that with this approach – not saying unusual is bad but just that it can be something that can happen – is that you might have a fee for doing maybe the pensions and investments side of things, which is usually a big area that wealth advisers tend to operate in.  You might be quoted that fee and then if you wanted something like protection insurance, that’s something like life insurance or critical illness cover or income protection, then there would be an additional fee on top of that.  Now that additional fee could be one set fee or it might be that there is a specific fee, to say, “Right well this is what I recommend for you to have and this is my fee for having assessed everything about you and come together with this recommendation.”  And then there might also be a further fee on top of that to actually get the insurance in place, so for them to do that application for somebody.

With this approach, it is kind of seen as best practice especially in the wealth and investment and pensions space, because the adviser’s charging a fee and they don’t get a commission.  It is something that became a regulatory requirement for advisers to not do commission-based approaches to their renumeration within the pensions and wealth space.  And what we would usually find with an adviser who maybe works in that area who does charge a fee, they might charge a fee to obviously do the recommendation, to do the advice, but then what they would do is that they would set the commission on the policy with the insurer to 0%.  So what that means in the grand scheme of things, if possible, to sort of like try and make it as simple as possible – if somebody is an adviser – is applying for an insurance policy for somebody, then the insurer has a kind of like default set to pay 100% commission to that insurer for their work. And that’s how a commission-based adviser is paid.

But for a fee-based adviser, they wouldn’t typically take both a commission and a fee base.  They would usually just charge a fee, put the commission to zero, which then means that the insurer doesn’t pay them anything for arranging the policy for the client and then the client is getting the premium at the absolute base price, you know, really, really low.  So what is – I say really, really low, it depends on what your feeling of low is in comparison to other things.  It just basically means that there isn’t that money inbuilt in there for covering the costs of you getting the advice.  So the positive with the fees is that it’s quite clear obviously straight away to the client, as to what they are going to be paying.  They will know straight away, “Right, well if I want advice and this to be done for my pensions, for my investments, for my insurances, this is the fee.  That’s what’s happening.”  And, you know, they’ll have everything presented to them and as I say there should be a very clear explanation from the fee-based adviser as to whether or not they take any commission from the insurer because that, you know, will affect potentially the premiums on quite a few of the different policies from different insurers.

The potential negative of this route in the long term of things is that somebody might pay a fee for this recommendation and they might pay an additional fee for the application to go forward and it might end up being that that application is declined or postponed.  The pricing might not be what that person is happy to pay for it.  They might just not think it’s worthwhile.  They might not be able to afford it.  And then what happens is that they have paid that fee and they’ve actually got no return in a sense from the end of it.  You know, they could walk away from speaking and getting that advice out of pocket and still uninsured.  Now, that’s not everyone in every situation, it just can happen to be that if somebody is in a situation where maybe their health is seen by the insurers to be a slightly higher risk or it could be that they are travelling a lot or potentially working in an occupation that is again considered more of a high risk situation, then that can potentially happen.  The terms can potentially come back not as we would expect and unfortunately, not as we would – what we would hope they would be.

One thing I’ll be saying obviously upfront about and say I’m not sure about, because obviously I don’t know every adviser’s approach, but obviously if the – if somebody does charge a fee for the recommendation and then the application – and then that application is declined or postponed, then there is the potential that, you know, I don’t know – maybe they would then charge a further fee if they had to place the application elsewhere and go further forward from that.  And then that in itself presents a number of questions in terms of treating a client fairly and making sure that we get to the right insurer first of all rather than multiple applications and overcharging clients at different points for that.

So onto the commission side of things – so something I’m much more familiar with and probably consider maybe a bit more – overall a bit tricky – I think some people think it’s trickier to understand than fees.  I don’t think so, but maybe that’s because I’m inside of the commission-based structure.  But it will be interesting to chat about it anyway and then maybe hear your thoughts as to them.  So, there’s a couple of ways that an adviser can take a commission when arranging the insurances.  I am going to use some random numbers to kind of explain the differences, so that hopefully they’re as clear as possible as to what these differences are.  So, commission is paid to an adviser by an insurer when a policy has started for a client and that payment is based upon how much money the insurer feels that they have saved in terms of marketing costs and having their own salesforce and obviously all those overheads that come with that by having advisers in a sense bring a client to them.  I’m sure there’s other things as well that come into play with that but that’s obviously sort of like two of the main key areas as to why an insurer would be doing that.

Now, a lot of advice firms that take commission do so on what is known as an indemnity commission.  So I’m going to be throwing this jargon around unfortunately.  So you can have indemnity or non-indemnity commission.  So we’re going to focus first of all on indemnity commission because that’s the one that a lot of firms use.  So with indemnity commission, that means that the insurer is going to be paying an adviser a commission that can be almost thought of a little bit as borrowed money.  So I’m going to use some examples now and hopefully I will say them and it’s a bit strange doing this and not sort of like having people immediately feed back to me to say, “Oh hang on a minute, can you just go back a step there?” but I’m going to hopefully be saying it as clearly as possible.

So let’s start say like with a client case where an adviser is going to be paid £1,000 in indemnity commission.  So that adviser, based on the indemnity side of things, will get all that money in one go as the policy starts.  And they’ll usually have what’s known as a clawback period of between two and four years.  So what that basically means – this clawback period – and again I’m sorry for the jargon, but it basically means that if the client were to cancel that policy within that two or four year period then that adviser, or their company, would need to pay back some of that money to the insurer.  So let’s say on a very, very rough example here, £1,000 in indemnity commission, the client is going to cancel it in two years and into this, you know, basically we’re into a four-year clawback period.  So the adviser maybe has to pay the insurer back £500.  So they’ve done their work, but in a couple of years’ time, they have, you know, obviously they’re having to pay back half of what they originally earned.

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So the approach with this can be quite problematic, as in the sense that advisers can become stuck in what’s known as a bit of a trap of operating on borrowed money.  So they can end up having quite large liabilities of potential clawback pots.  So if you can imagine a company is earning, you know, this upfront money, it’s good, it’s nice.  You know, they’ve got all this money that can start to grow and they can get bigger and bigger and bigger but unfortunately whilst they’re out – they’re spending all that money, this money is covering their overheads, potentially hiring more people, getting new offices.  It is still essentially borrowed for a good amount of time, so if we do start getting these clawbacks in and I don’t think there’s any point in saying that advisers never get clawbacks, they do.  Things change.  Different things can happen.  People might need to suddenly reduce how much insurance they have.

You know, maybe they’ve had some kind of a situation where they’ve had to downsize their property, their mortgage has changed or maybe they’ve actually come into some money and they’ve been able to pay off a good chunk of their mortgage so, you know, you can get a clawback even if somebody doesn’t necessarily cancel a policy.  It is something that can still happen.  And the point is, is that, you know, if you’re two years down the line – three years down the line, then firms can potentially, you know, have a bit of a difficulty, because they got paid that money back all that way ago and they have been – they’ve probably paid that money out in lots of different things and they need to make sure that they still have those financial reserves there to pay the insurer back if this clawback is suddenly enacted.  So a bit of a quick summary, so indemnity commission – it obviously can give the adviser that lovely upfront fee but it does have that drawback that we’re always kind of there, worrying, “Is that kind of a clawback there?”

Also something that’s really interesting as well and I’m not sure if necessarily all firms are aware of this, but it’s something we’re very, very clear on, is that if a firm does operate in this way and there is potentially – their advisers are getting a bonus and there’s potentially a clawback structure, really, really important that they maybe get that double-checked with a solicitor to make sure that they’re not putting themselves at any risk at all.  Because if you – kind of like, the traditional thing would be to sort of say, “Well, here’s your bonus, oh hang on, this clawback’s come in, so I’m going to take this away from you,” so it actually makes it harder for that adviser to then reach their bonus for that month or whatever the timeframe is.  Because not only are they trying to achieve their bonus based upon their usual practices, their usual clients, they now have to make even more because of the fact that they are having to cover this money that’s come back.

And it’s quite strict limits in terms of employment law as to how long you can put these clawback periods towards an adviser’s target. Which can obviously come to a number of different things – you can be leading towards adviser burnout and potentially making sure that we are continuing to treat customers fairly and we’re not trying to – we’re not at the stage where any kind of adviser is being – feeling as if they’re maybe having to sort of like be more pushy than they would maybe want to be with clients or maybe making rash kind of decisions or recommendations because they’ve got this additional amount of money that they’re suddenly going to have to reach, to be able to – to be able to get their bonus for that month.

The other type of commission and it’s something that my firm operates on wherever possible, is what’s known as non-indemnity insurance and non-indemnity commission.  So this is where, instead of the insurer paying a lump sum of money to the adviser straight away, what they do is they pay the adviser a small amount of money every month for a certain amount of time.  Now what’s good about this approach is that there’s no clawback liability.  So, you know, if somebody – if you put this policy in place for this client and in two years’ time they cancel, you’re not suddenly having to find, you know, this £500 somewhere.  You know, it’s just a case of the insurer says, “Well, we’re just going to stop paying you this money going forward.”  Now what can be quite difficult with this approach and it’s one of the reasons why other firms have potentially fallen into these traps of getting stuck with an indemnity commission, is the fact that obviously the money that they pay straight away is quite small.

You know, if you can imagine taking that lump sum that you would get at first, that looks quite nice, you’ve got a lump sum of money. But, if you’re going to take out – but small over the same amount of time and I’ll go through some of the figures with it in a sense, then that’s not going to cover a lot of overheads straight away.  So there’s really – it needs to be very, very balanced in the way that you move from potentially indemnity to non-indemnity if you can do.  It can be very hard for companies to do that if they are really entrenched within the indemnity side of things.  It can be very, very difficult to move towards non-indemnity.  But if you are somebody who’s starting out in this kind of industry and it is something where you can kind of, I don’t know, safely manage a nice balance between non-indemnity and indemnity, you know, maybe, I don’t know, depending upon your structure, it might be that you say, “Well, I’m going to take half my clients indemnity, half non-indemnity.”  And then slowly try and switch that up some more, become non-indemnity.  It can end up, in the long run actually as well making you much more financially secure.  Because as I say, you don’t have this kind of clawback amount that’s kind of like sitting over you for the next four years or so.

So if we go back earlier to that example that I mentioned before.  So, if you’ve got maybe something like £1,000 in indemnity commission, let’s just say again, very rough figures, just pulling them out of the air here – that they might offer something like £1,300 instead as non-indemnity commission.  So you would usually find that in non-indemnity commission, over the full policy – well over the full commission time frame, will pay roughly 25-30% more commission than if you do it on indemnity approach.  So instead of getting £1,300 up front, what’s going to happen is, the adviser is going to get paid that commission over a set period of time.  So if we take four years again as an example – so £1,300 divided by 48 months is around £27 per month.  So that’s where you can see probably the very, very big difference in terms of what people are going to be facing in terms of their income and those bonuses and hitting those bonus structures.

So instead of getting that £1,300 straight away which is immediately going to be hitting, you know, a really good bonus and a lot of companies were potentially seeing £27 a month and I imagine a lot of people listening if they are an adviser are thinking, “Well that would be impossible for me to reach my bonus and my target, if I was getting £27 per case.  That’s just not possible.”  So what comes from that is, is that it’s a very distinct need for the company to have the bonus structures that actually match and support advisers when they are doing this approach, because long-term it’s much more safer for the company.  They’re going to get a bigger amount of money overall and also it means that the advisers again, they’re kind of building up this pot of bonus.  You know, this £27 is going to be going in each month, so after a certain amount of time, as more and more of those come together, actually reaching a target – it becomes easier.  But certainly, something where the company needs to have a specific bonus structure for a non-indemnity based model.

So some of the big questions that can come from this approach is, you know, do clients fully understand what they are getting?  You know, if somebody, you know, is this transparent?  So if somebody goes to an adviser and they say, “Well, I’m going to charge you £1,000,” and they go, “Oh, okay, charge me £1,000.”  But is it as clear to say to somebody, “Well, if I’m doing this and I’m going to pay this much, but actually if I took 0% commission, you’ll pay this much per month for this cover?”  And this is sort of like a lot of the time where there’s this query about the transparency.  Now, for myself, I don’t think really that there is a question too much of transparency if an adviser is doing their job right.  The commission is detailed all over the documentation that a client will receive and obviously, an adviser should be telling the client exactly how this all works.

But what is interesting, is obviously how we do approach this.  So it’s important to be clear with – that most insurance policies you can choose to take 100% commission or reduce that percentage which will then in turn reduce the premiums for the client.  Now, when we’re talking about quite small premiums to start with, if you go to 0% commission, it makes hardly any difference to the premium that that person will be paying.  Obviously, when we’re talking about going into premiums that are potentially hundreds of pounds or even thousands of pounds, we are talking potentially much higher differences in the premiums.  But it’s really hard to say how much that premium is going to reduce by.  What’s even more important to say is that with the majority of advisers, the premiums that they are paid are going to be the same as if that person were to go direct to the insurer.

So from most advisers, most firms, they will be, you know, if somebody can go online straight away, find an insurer, do their application and it’s going to cost them £8 a month.  Then if they use an adviser, it will also cost them £8 per month but the benefit of using the adviser is that they have received advice, they then have that security as well – and not to like the idea of talking about complaints and things like that, but they have that security of saying, “Well actually, if I’d gone to the insurer direct myself, if I’ve done something wrong, then it’s my fault.  But if the adviser’s not done something, if they’ve not done something right, then actually I can complain about them and I can get some better support from this.  And the industry, the regulator, the Financial Ombudsman Service is going to check this out and make sure that everything is done right.”

But there is a little bit of an area that is possibly not transparent.  But not transparent seems like a really harsh kind of word and terminology to use but maybe it’s just not as clear in some ways.  So it’s really important to be aware of what’s known as loaded premiums.  So, some adviser firms, some financial networks and insurers come to an agreement with some advisers that they can maybe arrange a policy and the premiums are going to be higher than if that person went direct to the insurer.  So this is essentially so that they can get more commission for having arranged that policy.  So, this is where we would be seeing a situation where somebody – if they went to the insurer and could do £8 per month direct that they might actually see a higher premium using an adviser.

Now, there are many calls for this practice to be banned because essentially it’s not massively clear in this kind of route that that’s happened.  But I think it’s really important to not say that, you know, that any – we shouldn’t point fingers, that’s not to say that adviser firms that have done this are necessarily bad people or that this process is unnecessarily, you know, that it’s been done by people who are just money hungry and wanting to do this and that.  There needs to be an acceptance by, I believe, an acceptance by advisers, financial networks and insurers that they’ve all allowed this practice and that it is something that is not in a client’s best interests.  Now, some firms might be set up specifically to be doing this this way and I’m sure that me saying what I’ve just said is probably not the most positive thing to be heard.  But ultimately, everything that we do and everything that we have to do in terms of upholding integrity that is set by the Financial Conduct Authority and other sort of like regulators and overseeing bodies that we have in our industry, is that everything that we should do and every action that a financial adviser should make, should be for the betterment and in the customers’ best interests.

And obviously, something like loaded premiums is not that.  And I do think that it’s a positive call that this is something that is being looked at quite in depth and that hopefully is not going to be in practice much longer.

But I think what’s also really important as well is – and another reason why I say don’t point fingers at advisers and say, you know, that anybody’s sort of like particularly bad, is that sometimes – and I’m not saying this everywhere, but sometimes adviser firms are maybe part of a network or some other kind of arrangement and they might not be aware that the premiums that they are offering are loaded.  It might be something that is quite – it’s just not massively talked about – it might not have just been very clear in the discussions and, you know, that can be something where an adviser might actually turn around and be thinking, “Well how on earth has this person got this premium at this price, when they’ve spoken to that adviser firm over there and they can do this much cheaper than me and that doesn’t make sense?  Or that other advice firm must have been misadvising them and not doing the best quality that I’m doing.”  And actually, it’s maybe not that case.

Obviously sometimes we do have that situation, but it could well be as well that you are operating under loaded premiums and you just don’t realise it.  So it’s always something that’s really a good idea to make sure that, you know, if you are not directly authorised, that you check with whoever is obviously the people that help you get into the market and access insurers that you know exactly what these premiums are.  And so just double-check.  I would just say to ask, go back to your overseers and just basically say, “Can I just check, have you got any loaded premiums in here, because I just really want to know this,” because as I say, people don’t always realise that.

So the pros with commissions.  The pro of it is that the client doesn’t need to pay a fee.  You know, if the adviser cannot find the insurance for them, so they’ll chat to them, they’ll do the recommendation, they’ll do the application, they may even do the application to a number of firms if there’s been a decline, or premiums and/or terms, exclusions aren’t as expected.  And during all that time the client isn’t out of pocket, you know, they’re not going to be walking away having paid a commission-based adviser and, you know, be left uninsured.  It means that more people can access insurance that cannot afford the upfront fees of an adviser that is fee-based.  Now, as I said earlier as well, I think there is a time and a place for all of these approaches, so I’m certainly not saying, you know, sort of like I’ve done pros and cons for each person so – and each approach, so hopefully that’s going to come across nice and clear.

But then obviously, there is the con side of this – that sounds terrible, I’m going to say the cons.  Not a con of commission, because that is just going to be taken in completely the wrong context.  So we’ve done the pros, so I’m now doing the cons, making sure I’m saying the ‘s’ there.  There is a debate over whether commission should have a maximum amount.  Okay, so, you know, you do hear sometimes of advisers receiving well into tens of thousands of pounds when it comes to commissions, that would usually be the indemnity-based commission side of things.  And, you know, there is questions as to whether or not – has the workload of that person has done and the advice liability.  So we have to make into it – it’s not just – it’s not just the recommendation of the adviser or they’re going through the application.  It’s their administration team that’s helping them along, it’s the advice, you know, the potential that they could have, sort of like the queries, the advice, the indemnity insurances, lots of different things that they need to take into account when they need to obviously receive some kind of a renumeration.

But ultimately, you know, you do get to a point where you sometimes think – and you look at these things and you think, “Is that really worth tens of thousands of pounds?”  Now I’m not saying, yes or no and certainly I’m not obviously questioning anybody, you know, I’m sure that firms that work – and obviously for me, I work on the commission-based side of things, you know, there are reasons that we obviously will take commissions and they reach certain levels.  But yes, there is obviously potentially that again – another call may be to say, “Well maybe there’s an upper amount, maybe we shouldn’t go above that.”  But just to be clear as well, when it comes to things like commissions, not every case is tens of thousands of pounds.  You know, that’s certainly not the usual kind of level.  When you’re talking about commission – so for our company, our average commission for a lot of our clients is probably less than £1,000 a client.  And that is often after taking months of supporting them in terms of getting reports from GPs, liaising with the insurer, sometimes having a debate with an insurer over terms, lots of different things that come into that.

But on the other side of things as well, the smallest amount of commission that we might be paid for a case is just £18.  So it’s not always huge money.  And I imagine again that some advisers are listening to this and some organisations going, “£18, well that doesn’t make business sense.”  There’s a couple of things with that.  The first is that obviously, it’s treating the customer fairly.  You know, if it’s something like an £18 commission, it’s one of these policy types that are really not hard to set up and they’re usually quite quick to do, so in a sense, why not?  It’s not going to take up much of your time.  But also, it’s all about building rapport and you never know what might happen in that person’s life, that they may suddenly need a lot more support, they may come back and, you know, say to you, “Well actually, you were the only person that would actually help me and now I’m in this situation,” and it could be a future relationship that means the world to somebody.  And, you know, I think we do have to think of that foresight as well.

The main thing for me about all of this is the idea – as I say, so we’ve done commissions, we’ve done fees, we’ve done the pros, we’ve done the cons, I apologise if I’ve missed any pros and cons out anywhere, I’m just trying to give a nice overview as to what this is all about.  But ultimately, it has to be the customer’s choice.  You know, some customers will want to do fee-based, that is fine.  Some customers would much rather it be that they don’t pay a fee upfront.  And that yes, in a sense, the insurer kind of pays a certain amount.  The premiums are slightly higher, so that they can – they can spread out the fee of using that adviser.  And I think that’s probably another way to look at it.  So when you look at the commission that an adviser would receive, especially if it was something on a non-indemnity basis, you know, if you’re saying, “Well it’s this much per month that’s going to this person,” how many months does this commission need to pay to equal the fee that usually would be obviously charged in a fee-based approach?  And I think we’re talking quite a bit of time.

So there’s lots of different approaches, I certainly feel that there is definitely a need for all sides to be able to obviously speak openly with each other and respectfully with each other.  I do, you know, I know there was some tensions that were going on sometimes on social media and certainly in terms of some of the press coverage we’ve had.  You know, we need to make sure that we all have these open debates and also be open to understanding the other perspective, you know, the other side of things.  You know, if we’re commission based, you know, we certainly shouldn’t be grumbling at the fees and if you’re fee-based, then certainly don’t grumble at commissions, because obviously they are possibly helping people who can’t afford your services and ultimately as I said, it should really be the consumer’s choice as to what they want to do.

So that’s it, a nice short one this time. Hopefully you’ve enjoyed it, hopefully you’ve found it useful, hopefully I’ve not said anything controversial or wrong!  But next time, I am going to be back with Roy McLoughlin and we’re also going to have with us Andy Woollon from Zurich and we’re going to be chatting about inter-generational wealth planning and also how that really does fit quite nicely with protection.  If you would like a reminder of the next episode, please drop me a message on social media, as always – I’m always there happy to chat.  Visit the website, practical-protection.co.uk and don’t forget that if you’ve listened to this, you can claim a CPD certificate on the website too thanks to our sponsors Octo Members and you can also bank your CPD within the Octo Members app, so definitely worthwhile having a look there too.

But speak to you all soon.  Bye.