Talking About Financial Matters That Affect You and Your Organization
G19 - Commission Disclosure for Group Benefits & Retirement Plans
Mar 2nd, 2018
Canadian Life and Health Insurance Association (CLHIA) has announced its intention on disclosing group insurance commissions effective January 1, 2019.
The current debate over whether disclosure is required has created multiple story lines within the industry. CLHIA members are implementing policy G19 to avoid regulators imposing disclosure, or even banning commissions altogether. Some advisors are holding insurers ransom to pay out transfer bonuses to retain business. Some advisors are being too heavily compensated which is impairing client's premium rates. Clients are demanding disclosure of the costs that make up their premium rates. Compensation is creating a conflict of interest for advisors and clients. While there are many more story lines, G19 is in place and disclosure is coming to the group benefits and group retirement marketplace.
Looking at comparable distribution channels, investment advisors already face full disclosure on compensation prior to and including CRM2. While the impact of disclosure under CRM2 is still playing out, the impact on the consumer has not been overly dramatic. It could be argued that a by-product of CRM2 has been to increase the movement of investments to lower cost ETFs and enable technology driven solutions like Robo-advisors. But there are many other factors leading consumers two these options. Interestingly, life insurance and living benefits advisors do not have full disclosure. CLHIA has not taken any steps towards disclosure in their individual lines of business, even though commissions, bonuses and incentives exist. Comparable business and individual focused industries like Property & Casualty insurance do not have full disclosure. In fact, when you review the myriad of consumer-based industries, there are very few industries that have full disclosure of their distribution costs.
The question of disclosure is really about transparency. The impact of greater transparency is unknown, the unknown is causing much of the industry push-back among advisors. Most advisors would agree there is no issue about transparency as long as it is fair and thorough. What this means to most advisors is that while commissions bonuses and incentives are part of the costs for the client, so are record-keeping, adjudication fees, pooling charges, taxation and insurer's own distribution channel costs. So, the question might be asked, why transparency on only part of the costs that a client pays? Why transparency on some products and not others?
Most consumers understand the costs associated with securing a solution and having adequate advice, advocacy and support. There is a cost for this. The cost of these services are embedded (bundled) into the premiums that are paid. The group insurance and group retirement industries have operated this way since inception. The industry operates similarly to any other consumer facing industry. So why now, and why only these products? With no consultation with the trusted advisors that distribute their products, CLHIA has mandated a change in the process with G19 and attempted to implement the change in a self-imposed 12-month time frame. No surprise advisors are upset.
The real question to be asked is whether clients will benefit from disclosure? Some might, where the advisor delivers little to no value and is overly compensated for their work. Advisors will compete on price and value. Where clients do not see value in advice, direct channels be created to deliver more price efficient solutions. For some clients, there will be no change since the advisor earns the compensation they are paid because they can articulate their value. For some clients, they may see a rate increase as advisors right-size compensation to reflect their costs to support the client. Some clients may not be able to secure an advisor at all, if the compensation is not worth the effort. What is important to understand is that advisor's support of clients is not rigid and fixed, it is a fluid relationship that requires throttling of support and guidance as changes occur, as such, the compensation paid may not be "earned" every year, but in return, may be understated relative to the demands. How does this get reflected through disclosure? In addition, Numerous studies exist on the issue of commissions in the UK and Australia as their regulators banned them outright.
Consumers understand that service providers need to be compensated. In fact, most of them would hope that their advisor is being compensated enough in order for them to continue to provide the services which they depend on. In turn, advisors have costs that include wages, benefits, office space, technology, and taxation. They are businesses themselves.
Transparency works when it is full. This includes all costs that impact the prices clients pay, G19 addresses only a fraction of the costs. Eliminating elements that raise conflict of interest is right, G19 does not directly address this issue. Change can be healthy if done in a mindful way and understanding all of the intended consequences while reducing the unintended consequences. The free market is just that - free. Clients have the right to demand disclosure today (as some already exercise this right), perhaps the greater issue is that the market should and can address this issue versus artificial interventions.
G19 is flawed, the process to create it was flawed. The industry can and should do better. Clients and their advisors deserve better.