Valuable Service or worrying trend?
Over the last decade we have all watched in awe as direct insurers have grown to become massive companies. The change in advertising spend over that time has been very interesting, in every medium. Groceries have been mostly relegated to junk mail and inserts, ditto IT companies. The unsecured loan industry had their day in the sun (when did you last see a Wonga advert?) until the African bank fiasco opened that can of very noxious gas over that grubby market. (Interestingly adverts from that sort of company still dominates the UK TV with APRs (Annual Percentage Rate) of 1000%!). Direct insurers take up a chunk of premium TV airtime (just one of them is estimated to spend R400,000,000 pa)– but have they seen their heyday?
The biggest threat to the direct insurers is that their premiums creep up to a level that they are no longer the ‘cheapest on the block’ (this is already happening) and then as time goes by and those client actually have to claim they find out the value of an intermediary over a huge company and anonymous call-centre agent who has a mandate to pay as little as possible. It is much easier for some salary paid employee to say “sorry for you” than a short term broker that has built up a relationship with you and will help you fight the insurer to get what you are due and isn’t perversely incentivised to ‘minimise the claim’.
The direct model was never going to be cheaper. Those massive marketing budgets and call centres have to be funded. Commission by any other name is the same thing when it costs as much. At least commission feeds an entrepreneur whose success is tied to your success, not a fat cat corporate who pay minimum wage, do the bare minimum of training and re-distribute the premium to lawyers and retention agents who will wear you down before letting you cancel. They might have been able to golden-handcuff clients with bonuses, but as soon as those are lost due to a claim and then to add insult to injury they are screwed over during the claim, they start looking around.
Even in short-term insurance, the ‘brokers’ of old have wised up. We’re living in an era where service is a valuable, sought after asset. Yes, it is easy to insure a tangible asset like a car or house, they can be easily valued and usually easily replaced, but it takes a human to understand that with every loss of an asset there is a very real hurt, even trauma. Unfortunately too many of us have first-hand experience of this. A home invasion or hijacking will alter you forever. Even a burglary will leave you feeling vulnerable and violated. This is often where a direct insurer will come short. Call centre agents are usually young, inexperienced, poorly paid and not recruited for their people skills. In the last 18 months I have not been able to get a short-term quote for a client from a traditional short-term company that hasn’t beaten a direct company and given better terms. The service is an added bonus. If the direct insurers have done nothing else but make premiums more competitive then it’s a service to all of us.
You’ve probably noticed that those direct insurers have now turned their focus on the ‘life’ industry. Even Vodacom now flogs life insurance. Your life, on injury or death is not a commodity, but it is possible to reduce it to a number. Using a handful of questions (which they usually dispense with BTW) you can determine a person’s basic life cover needs, so you can see why direct insurers are now moving their focus into this arena. They are still small at the moment, but I predict that they are going to become a dominant force on our landscape. Why?
Is added value a myth in Financial Advisory?
The buzz word right across the business world is ‘value proposition’ – supplanting mission statements as the platitude of the year. In Financial Advisory it has taken on a sense of urgency in response to the recommendations made by the Retail Distribution Review (RDR). To put it simply, while financial advisors provide a multitude of services: Identify and quantify needs – usually at a location of your choice ( house-calls); analyse risk and investment portfolios; manage, switch, modify, upgrade contracts; transfer skills to clients; draw up reports and make recommendations; run investment scenarios; review portfolios; assess impact of regulatory change; identify new benefits and match them to changing needs; draw up wills; do estate and retirement plans handle claims and implement new policies (broking). At the moment it is only in the last stage that they get remunerated, it is in the broking or ‘implementation’ that they get paid, usually as commission but also as an “asset under management” fee on LISP platforms.
This is all going to change. It is recommended that there be no commission on investments, only fees. This is going to have a huge impact on ‘insurance’ investments. It’s all very well for me to say “I’m okay Jack” because I don’t use them, but thousands of traditional advisors do and you cannot suddenly replace that up-front lump-sum commission with the month by month as-and-when commission overnight. It takes years to build up a ‘book’ to replace upfront commission. Not just that, but the as-and-when asset under management fee can be switched off by a client if they are not receiving ongoing communication and advice on that investment (and even if they are but see no value in the advice they are given). For a broker that has been used to being paid upfront for all the advice – and there being no repercussions if he never sees the client again, it is going to be a nasty shock. Advisors are going to have to ‘add value’ to their investment clients and there is only one way to do that – communicate frequently with those clients to reassure them that the broker has his/her finger on the pulse of the economy, tax implications, regulatory changes and investment choices and offer a wider range of higher quality services. Whether it is fair or not, brokers that do not have access to all the different investment and insurance investment platforms are going to come off second best. Investors are much more savvy than they were even a decade ago and will know when advice is restricted to a single platform. Investments on insurance platforms usually have to be managed right where they are because of the onerous ‘early termination’ penalties.
Commission on Life products will also change, while they aren’t recommending they be scrapped immediately, it is expected to start with a 50% cut. The recommendation is that the difference in remuneration be made up by fees. That’s fine. If you want to charge a fee for all those other services that clients have been used to getting ‘for free’ then you’re going to have to add value. Lots of it. Paying lip service to your ‘value proposition’ isn’t going to cut it.
Why are Medical Aid Brokers so thin on the ground?
Medical aid premiums, as a percentage of your disposable income, has been growing every year – not even salaries have been keeping up with the double digit growth. I have come across very few people who are still on the same level of plan they were a decade ago, and more often than not that downgrading has happened several times. For many of my clients medical aid premiums are easily more than their life cover or short-term insurance – often combined. With that sort of ‘investment,’ you’d think financial advisors would be crawling over you to get the commission on the deal, but it just isn’t so. Most people have no idea who their medical aid broker is and all queries are channelled through to the call-centre.
Why is this? It boils down to remuneration (like most things). Like life insurance, the allowable commission on medical aid is capped at 3%. Where it goes pear-shaped is that this is capped at R69 (in other words as soon as the premium goes over R2300 pm, no additional commission is paid). This cap has been growing at 2.3% per annum, when medical aid premiums have been growing in the double digits. In other words, unless your broker has a substantial book of corporate clients, he or she is probably looking after your medical aid as a service – it certainly isn’t going to make them rich, in fact it probably won’t even cover the cost of looking after it for you. The major motivating factor for them looking after your medical aid is to keep out other brokers who might make a play for the rest of your (much more profitable) risk and investment portfolio.
Is it a train smash that you get ‘low or no’ advice on medical aid? I know from experience that trying to get on top of all the small print on just one medical aid is a nightmare, and it changes every year. It is almost impossible to know just what sort of cover is available for every condition, and anyway there ‘appears to be’ a large element of subjectivity involved. Claims or authorisations have been refused because the medical aid considers the member ‘too old’, the premature baby ‘too small’ or the liver transplant recipient ‘an alcoholic’. Trying to decipher the real changes in a medical aid plan every year needs Sherlock Holmes, and the average member hasn’t got a hope!
As much as we might talk about “cold hard cash”, the reality is that our relationship with money is usually highly charged. As many people are killed over money as love or both. Ironically, we hardly ever touch the stuff anymore, instead we deal with it with a few taps of a finger between the emails, mobile games and social media. In losing touch with money, perhaps we lose touch with how it flows? It behaves more like water than anything solid.
I posted one of my favourite money stories HERE a few months ago. It shows how one single note can solve the debt issues of an entire village in minutes. So how can we compare it to water? Let’s take single molecule of water, high in the clouds over Lesotho, getting caught up in a cloud and raining down over the mountains. It could run off and join a river, moving faster and faster until it lands up in a dam. A water savings. It could sink to the bottom of the dam and stay there decades, or move to the top with thermal clines and be evaporated into the air again. Withdrawing, going back into circulation only to rain down again. It could trickle through the soil and become part of a deep water table, staying there for millennia.
If it reaches the edge of the dam, then it could be pumped at massive pressure and speed into a turbine and produce energy, the start-up funding of water ecology. If the dam levels are low, then the energy stops and the ripple is felt right down the line.
Say next it gets caught up in a water pipe feeding the cities, a more modern way to transfer water, just like we have more modern ways to transfer money. It ends up coming out of a garden tap in Sandton, used to water a garden for pure entertainment and adornment. If it’s lucky, it will be absorbed by a plant, either moving right through it, or becoming part of the structure, a living water savings account, just like humans and animals. This is a vibrant water ecology. There is free transfer of water and everything is growing.
When your business = Your retirement plan
By their very nature, entrepreneurs are risk takers, and thank goodness for that. They are prepared to plough every last cent of their earnings and savings into their business and go for broke. Sometimes, yes, going broke.
- Cash-in retirement savings to start the business. This is very common when someone leaves a decade or so of a corporate career that an entrepreneur will cash in their pension or provident fund to kick start their business. Despite the tax penalties (that you never get back) it is a very tempting and quick way to get cash.
- Your business = your retirement plan and no other provisions are made. Is this realistic? If the business is small and tied up in the skills of the entrepreneur then this is a disaster looking for a place to happen. There should always be a back-up plan. Run some scenarios with your financial advisor for your minimum monthly needs at retirement – run the debit through payroll so you don’t even miss it, then everything else is a bonus.
- Not making use of Group Retirement or Life funds. Once your company gets over about a dozen people, this becomes a no-brainer. It is way cheaper than taking out the insurance yourself, promotes staff morale and reduces your potential risk if one of them (or you) become disabled while working for you. An umbrella retirement fund usually has low expenses, and because it comes straight off payroll, y u won’t miss it. Make sure the life cover is structured properly so that there is always the option of taking it out in your own name later.
- Over-confidence in investment abilities. Entrepreneurs like to do it themselves and that often includes investment, and usually, that means additional risk. When cash-flow is tight it is tempting to make your investments “work” for you and this is fraught with danger if you don’t understand the risk/return trade-off, asset allocation and a very good idea of the state of the economy. Money and emotions walk hand in hand, and it’s very difficult to control them both at the same time. Greed and Fear can do ugly things to your investment. If your advisor does nothing else but protect you from yourself, then the money is well spent.