PHUKET: I often run across clients of other firms who complain that they receive absolutely no service on their policies. I understand how they feel, but having been in the industry a long time, I also understand why. It is simply a misalignment of interests and is inherent in the way many of the insurance companies allow the introducing and servicing firms to be compensated.
The main problem stems from a practice called ‘indemnifying commissions’, where the insurance company charges a management fee to the clients and pays the introducer a one-off upfront fee. Now, if things go well from here, an introducer can then expect referrals or additional business and thus interests are theoretically aligned. The problem however, lies in situations where things don’t go so well and a relationship sours. At this point, attentive service is probably needed the most. However, when a ‘troublesome client’ is almost certain to lead to no future revenues, interests are no longer aligned as the client becomes a lot of work with no future value. The situation then becomes one of damage limitation.
The above scenario is extremely common and leads to what I call ‘orphaned clients’, who are left with no service on their policies since the insurance companies do not step in to fill the gap (they still collect their fees, however). Half the time the original brokers fail and leave the industry altogether, and their replacement knows they are likely to get nothing but headaches from a given account. Thus, they ignore it. I have known brokers who have gone a whole year without a single paycheck and still spent hours every day sending emails and trying to smooth over relationships with disgruntled clients, only to be forced to leave the industry when their savings ran out. While there are many unscrupulous people out there, I think the problem is structural more than anything else, but luckily that means there is a very easy solution.
Insisting that there is no ‘lock in’ or ‘redemption penalties’ will avoid a situation where you get orphaned, as insurance companies will only indemnify commissions if they know they can get them back from clients via redemption penalties. The same is true of underlying investments, anytime there is any redemption penalty of any kind it means someone is taking an upfront commission. This means their business model is more dependent on finding the next commission, not providing great service and earning an ongoing fee. If they are compensated via an ongoing fee, this not only incentivizes them to give great service, but also builds them a steady income and ensures they can stay in business for the long term.
So what if you have an existing policy and have already been orphaned? You can always find someone to take over the servicing of the account for free, but this is usually a bad idea. Every time I have done this myself, the client turns out to be a lot of work because they still have a bad taste in their mouth from the original experience. Nobody wants to be on the receiving end of abuse, and this leads to an ongoing situation where the client continues to get poor service.
In this instance it is best to agree to provide the new servicing agent with some form of ongoing fee. It shouldn’t be exorbitant, but remember that you get what you pay for. Even then you need to understand that you cannot buy returns. You need to understand the risks of everything you do and remember that anyone who guarantees anything when it comes to a return above and beyond what a bank pays on an interest-bearing account is not being truthful. Paying a management fee simply ensures your account will get serviced, but it doesn’t mean projected returns will be achieved.
David Mayes, MBA, resides in Phuket and provides wealth management and life coaching services to expatriates around the globe, specializing in UK pension transfers. He is a regional representative of Faramond Group, located in Kuala Lumpur, Malaysia. Faramond UK is regulated by the FCA to provide advice on pensions and taxation. He can be reached at 085-335 8573085-335 8573 or email@example.com
— David Mayes
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