Ever since I can recall, there has been controversy surrounding commission payments to sales professionals in the insurance industry. A few years ago, one state even went so far as to propose that commission payments to sales professionals be disclosed to their clients! Being a consumer of life insurance and annuity products, and never having sold insurance, one might assume that I’d be in support of such proposed regulation.
I am not.
First of all, let’s realize that if insurance companies want to sell their products, they need to incentivize their distribution to do so. Most life insurance companies do not sell their products directly to consumers over the telephone or Internet; the products are typically complex enough that you need to meet with prospects face-to-face to ensure product understanding. That means you cannot bypass the incentive; you need warm bodies in order to move your product.
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But how can one incentivize distribution to sell? Cookies? No? Bartering? I don’t think so. Paying commissions to sales professionals is the best way to incent them to sell. Some would argue and claim there are other ways sales professionals can get paid, and that these alternative payment forms are superior. I’m not going to argue the merits or pitfalls of being a fee-based, fee-only or commission-paid salesperson, as that is beyond the scope of this article. I’m just going to say that although these alternative payment forms are different, it does not make them better.
Yet some cry foul because the insurance-only licensed salesperson may make a 6 percent commission selling an indexed annuity (for example), when the broker selling a mutual fund may only be paid 1 percent commission. And that 6 percent is high, right? No. The salesperson selling the annuity is making 6 percent one time, on a 10-year annuity that he has to service for the entire 10-year surrender charge period (and potentially longer). The salesperson selling the mutual fund is paid 1 percent commission every year the mutual fund is held (because he has to be incentivized annually to properly manage the fund, to avoid a loss in value), so, he’ll make 10 percent over the same 10-year period.
So, haters are going to hate.
If you ask me, as a consumer, I think it is ridiculous to spend any more time and money on pressing for commission disclosure on insurance products. Do I know when I buy a house that my realtor is paid a commission? Sure. Does not knowing what amount they are paid tick me off? No. How about the gal who’s going to sell me that new Mini Cooper I’ve been dreaming about? Sure, I know she gets paid a commission. I’ve never really been curious about how much it is, simply because dealing with her is just part of the sales process.
Let’s say in some alternative universe that there was forced commission disclosure on life insurance products. My buying behavior wouldn’t change. Would I buy from this lady, and not that other one, just because the commission that she disclosed to me was lower than the lady she is competing against for my business? No, I wouldn’t necessarily. My purchases are based on quality of product, value of the relationships, and a deep, unwavering trust, not commission.
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