An industry veteran challenges current compensation practices
By Bud Blake
I suppose I am a person with a long-term commitment to the insurance business. My grandfather and father were insurance men before me, and now with almost 44 years in the business in my own right, I have a serious interest in what is happening within the industry. It is disturbing to observe the many scandals while at the same time realizing that within the last 4 years, there has been an 89% attrition rate of new agents according to the latest annual Agent Production and Survival study from LIMRA International.
I have a vision for professionals who work in the industry. My vision is void of the long-held perception of agents as “policy pushers.” Rather, I see the role of agents as client builders, people who develop a comprehensive service plan for their clients over an extended period of time. Brokers and agents only can benefit from engaging in client building, and customers will be better off from gaining greater control over their insurance purchases. I challenge carriers to redesign the way their agents are compensated.
The time is now for carriers, agencies, producers and customers to join together in examining the way agents are compensated for their services. There can no longer be a veil of secrecy about the cost customers incur in relation to products and services offered them. The National Association of Insurance Commissioners’ proposed Broker Disclosure amendment to the Producer’s Licensing Model Act is clear about this, and the Department of Labor requires that ERISA-qualified business report all compensation, including bonuses and fees, to customers.
Now that the customer has become such an important part of the formula, it is especially important for carriers to consider the impact that pricing and agent compensation will have on their customers. One insurer addresses this issue by reminding producers that when they charge customer fees, they must obtain written consent in order to receive any compensation from the company. The company recognizes that compensation for services can come from the carrier, customer or both as long as there is full disclosure and a written agreement.
With variable products, there may be resistance in some quarters to the Securities and Exchange Commission’s proposal to make full disclosure of costs at the point of sale. The National Association of Insurance and Financial Advisors along with the Association for Advanced Life Under-writing contend that customers already have access to fees, risks and expenses in the product prospectus. Their call is to keep it simple. Where does this really leave customers who fail to fully understand the prospectus? The answer lies in redesigning the way in which agents are compensated. I propose that carriers pay agents commissions that are prorated over a period of 4 years. In my discussions with two veteran actuaries, one from academia and the other from a large insurer, they say it is a simple process to include the retainer fee expense in the pricing of different insurance policies.
With that in mind, I recommend that beginning with the fifth year,agents enter into a written agreement with their clients that defines commissions and fees along with products and advisory services which will be provided. The future is now for producers and agents to assume the role of advisors offering ongoing services to meet the evolving needs of their clients.
Historically, compensation of agents has been a very highly scrutinized and volatile issue. So, there is nothing truly new here. I propose that the first-year commission paid by the carrier be prorated over the first 4 years of a new account. Thereafter, the client will pay the retainer and sign the Producer Service Agreement espoused in the newly amended producer licensing model law. This will enable producers to focus on evaluating clients’ needs and on doing the necessary research required to offer them the optimal choice of products and services.
David Woods, NAIFA’s CEO, in an interview in National Underwriter (March 29, 2004), suggests clients will be willing to pay more in order to work with a professional advisor. I agree. I have found that my clients appreciate knowing the amount and the way in which I am compensated. That is why I make full disclosure of compensation and expenses to provide clients with insurance coverage and any services I perform such as estate planning.
When considering that commissions have decreased substantially over the last 40 years, is it any wonder that temptation is great for agents to offer only the highest priced products? The NAIC has adopted model legislation that would require new disclosure guidelines for brokers. This was designed to inform customers how brokers are compensated for selling insurance to them. That is why I recommend that producers establish a consulting relationship with their clients and that they fully disclose their fees under a contract of agreement renewable annually.
If you wish to be successful as a consultant in the insurance business, you may want to consider strategies that have worked well for me over the years. First, I urge you to do something of value for the client before engaging in sales. When you show what you can do, without attaching a price to it, you begin to earn the confidence of your clients. I do not enter into an agreement with a client with a preconceived notion of what he/she needs. I consider this a subliminal approach to marketing my services. It is doing something for a client when I don’t have to do anything. Rather than spending a lot of time and energy in making a sales presentation, I focus on defining the terms of agreement based on what I can do for clients.
Rather than making an aggressive sales presentation, I wait in order to observe each client’s situation. This gives me an opportunity to understand and read clients to find out what is on their mind. I listen to what clients tell me about their situations to better understand the priorities they place on their needs. You may ask, “What do I do when waiting on clients?” Quite often, I use this time to seek the advice and counsel of experts from various sources. In fact, I like to utilize a network of experts in order to establish a helping relationship with clients. My network consists of people representing banking, accounting, mortgage, legal and personal services. By using my network, I am prepared to meet the many contingencies that often arise in serving my clients. There is nothing more rewarding than to offer well-researched opinions based on expert advice.
Finally, I tell the whole story to clients. This means both the pros and cons of each transaction and the long-term implications of their choices. Following these strategies builds confidence and culminates in clients placing their trust in my services. Within the past several years, we all have witnessed the immense growth of information available to clients via the Internet. Web sites offering online broker services are a large part of making products readily available at preferred prices.
I am disturbed when I hear brokers tell only part of the story and not give all the facts to well-informed customers who may have done their homework via the Internet. This deception fails miserably when presented to people who already know about products and pricing.
When clients have put their confidence in me it is because they knew I gave them the whole story. On more than one occasion clients have thanked me for providing financial information they already knew. Nothing was hidden from them. No short cuts are tolerated in telling the whole story. This is the only way to build a client base that will bring value in my consulting relationship with them and will yield clients who gladly enter into an annual retainer fee agreement based on full disclosure. These principles are at the core of business values I learned from my father, James P. Blake, a truly great master trainer of insurance professionals.
Bud Blake, a 44-year industry veteran, is with Blake and Associates in Kansas City, Mo. He can be reached via e-mail at email@example.com.
Rather than ‘product pushers,’ I see the role of agents as client builders, people who develop a comprehensive service plan for their clients over an extended period of time. I challenge carriers to redesign the way their agents are compensated.”