Responding to an Insurance Agent: Why Commissions Are Not Better (For the Client)

I was minding my own business doing something important (like reviewing movies) and someone tagged me in a TikTok video talking about why commissions are better. This is a topic I absolutely hate talking about so naturally I made a 4-minute video in response. It’s doing pretty good numbers so here’s a written piece to accompany it:

@sethisfy

Replying to @Wagyew why commisions are not better for clients

♬ original sound – Sethisfy Personal Finance – Sethisfy Personal Finance

Generally, I think the agent’s arguments can be boiled down into 2 main points:

  1. Commissions make financial consultants plan well
  2. Fee for advice makes financial planning costlier

Both are puzzling points, so as a stickler for veracity I feel that it is important to address the claims made. Disclaimer: I am currently employed in a fee-only advisory firm but please do not contact me about this as I’d like to keep my day job and website separate as best as possible.

Claim 1: commissions make financial consultants plan well

The entire financial planning process can be largely categorised into roughly 4 stages:

  1. Information Consolidation (or fact-finding, in industry terms)
  2. Drawing up a Plan
  3. Implementation
  4. Monitoring and Review

As a commissioned agent/adviser, where is one paid in this process? It is at the Implementation stage, and only if a product is transacted successfully. I’m sure that there are practitioners remunerated by commissions who are responsible and go through all the stages properly, but if we are purely discussing the merits of remuneration models, which system incentivises and compensates advisers to do a proper job at each stage of the process? 

If you told a school-going kid that only Section D of their test paper generated any marks, or a working adult that their salary is contingent only on a specific task, what are they going to focus on? It is only human nature to focus on things that generate us a return, so it is not surprising we often hear of stories of advisers going missing after making a sale, or the fact that many agents conduct their business in a heavily sales-oriented manner, accosting people outside MRT stations and malls to buy financial products.

Even the most dutiful of agents and advisers would find it difficult to spend most of their time servicing clients when their remuneration is primarily a result of acquiring more clients and closing new sales. Forget about less responsible agents since commissions are largely paid upfront so it’s not likely to see them again unless it’s time to propose another product. Moreover, recurring commissions are often relatively small and taper off with time, and they are locked to the person who sold you the policy so it does not matter if you request a change of servicing agent. 

Importantly, there are often situations where buying a product is not the outcome of proper financial planning. After planning has been done, common scenarios at the Implementation stage could include dropping financial products that are no longer relevant, topping up one’s retirement schemes for tax relief, or simply budgeting more efficiently. Buying something could be the last thing a person needs, yet the only thing a commission-based agent needs to happen to get compensated. How is this a conducive remuneration model for a proper financial advisory practice? 

Claim 2: fees for advice makes it costlier than commissions which are “free”

Even more perplexing is the assertion the agent made in her original Tiktok video that fees for advice would make things more expensive, while commission-based advice is “complimentary”. I hope by now it is obvious that commission-based agents don’t work for free, and commissions are indeed paid by those buying a financial product. On the contrary, most people might be shocked at how much commissions they are paying their agent. 

Consider that a commission-based agent would need to see multiple prospective clients before making a sale. Even with a relatively decent closure rate of 40%, 6 in 10 people do not pay the agent. Again, people don’t work for free, so who is picking up the tab for the time and effort spent planning for these 6 clients? Those who do end up buying the product, of course, would have to pay enough commission such that it is worthwhile for agents to continue facing rejection after rejection to make their next sale. Under a commission-based system, those who buy products end up subsidising the work done for everyone else who doesn’t, so which is a costlier engagement?

Now, insurance agents and self-styled financial consultants are some of the most hardworking people I know, and they are often extremely resilient folk who face plenty of rejection. Under a commission-based system, they are not paid at all for every single person they are unable to close a sale on. Yet, they are also often the most vocal in support for commissions. What are the possible reasons for them supporting a system that does pay them despite the numerous occasions they don’t make a sale?

Seth
Seth

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So what can consumers do?

A comment left on my TikTok said that the entire industry needs to be revamped, but I doubt that’d happen anytime soon. Consumers can only count on themselves to do their own due diligence – ask your agent or adviser in writing how much they are paid and research extensively whenever you are recommended a product. The Telegram is also a good place to get opinions of other people on financial products.

While we can largely rely on the advice of our doctors, lawyers or fitness trainers where the clash of interest is lower, it’s wiser not to expect anything but product-oriented advice when it comes to dealing with commission-based practitioners. It’s not to say that every single person drawing commissions is unethical and practise only to serve their own interests, but when you pay with peanuts, it‘s foolish not to expect monkeys. Likewise, if you pay commissions, expect salespeople more than unbiased advisers. The key is to stay informed, ask tough questions, and ensure that the advice you’re getting truly aligns with your financial goals and interests.

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