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The rise and fall of direct insurance?

in Life cover, Short term Insurance Leave a comment
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?
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Value proposition – meaningless platitude?

in Financial Advisory Leave a comment
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.
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Priming for referrals – the holy grail

in Social Media Leave a comment
How to get referrals in the digital era

Most of us out there have ‘cold-calling’ fatigue – both at business and at home. It had become such a menace worldwide that laws have been put in place so you aren’t disturbed if you chose to ‘opt out’. There are even apps (right here in SA) that will inform you of who is calling you on your cell, even if they aren’t on your contact list, and give you a heads up if they’ve been tagged as spam. I don’t know about you, but I am not going to choose an estate agent, financial advisor or cell phone provider, who I am going to pay thousands to over the years, from a cold call that interrupts you just as you’re about to serve the soufflé. Spamming email is just as ineffectual and mercifully these are now caught before they hit your inbox. Traditional advertising is also way down – but all of us in business, irrespective of the industry, need new clients – so how can we do it?

We need to understand what has changed and why.

Information is freely available. The web is no longer 1000 miles wide and an inch deep, it is a billion miles wide and nearly as deep. Any information you want is out there if you have the skills and time to fish for it. This massive amount of data has led to a whole new industry called big data. From our client’s perspective this is a double edge sword. The information is there but how much of it is credible and free of vested interest, and how much time have they got to do the leg work? This is an opportunity to be the ‘industry filter’ for all that content. If you can digest the information down to bite sized chunks and communicate it in a format that is easy to understand and access you will get noticed.

It is much easier for clients to do it themselves. They need a compelling reason to use you, and probably pay more. This has seen a significant erosion in ‘sales’ jobs like estate agents, car and large ticket items and even the IT industry.

Irrespective if you work for a huge multinational or are a sole proprietor, it is your personal brand that the client is going to buy into long before he or she cares about the product and if you’re known as an industry expert so much the better.

Our clients are much better informed and markets way more crowded making it difficult to show that you have a unique selling proposition. Service and ongoing support are increasingly important, and built into the price they’re prepared to pay. Reputation management is key. If the first thing a client sees when he or she googles you or your product is a complaint, you’re going to be on the back foot. Don’t let your personal life contaminate your business credibility out there in cyberspace.

Just few words of warning:

  • Don’t try and sell your product, don’t even mention its name.
  • If English isn’t your first language (or even if it is but not your forte), get someone to proof read the content, irrespective of where you post it. Nothing says ‘lack of attention to detail’ than a post riddled with spelling and grammar mistakes. That is a death knell in most industries.
  • Manage your personal brand. Pay attention to detail on your social media profiles. These days that is often a prospective client’s first port of call before they meet you.
  • Keep your business and personal profiles separate, and tailor the profiles accordingly. Use a professional photograph in your business profile and a full profile without oversharing. Business, politics and religion just don’t mix (unless you’re a pastor or politician).
  • Be as unbiased in your content as possible. Don’t knock competition but don’t ignore them either.
  • Give actionable advice not wishy-washy opinion. Don’t be afraid to link to other sources. Give credit to someone else’s content.
  • Share other great content in your industry, think small and worry they might steal your thunder or client.
  • Be generous with your knowledge, especially when producing content, but don’t get sucked in to investing massive amounts of time on a client who is just on a fishing expedition. We’ve all had clients that will get you to spend hours getting you to do the legwork for them, only to implement the advice with someone else.
  • Once you have ‘won’ your client, the work doesn’t stop. Everyone hates the hit and run artists who sell you a product, take the commission and that is the last you see of them. If you keep communicating, keep feeding them valuable content and make them feel valued, you might just get the most valuable payment of all – referrals.
  • Some clients will be natural networkers and will refer you as soon as they are sure of your character and credentials. It doesn’t come naturally to everyone though, and it is not because you’re not doing a good job, but they may not know you are actually looking for new clients.

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Medical Aid – Low or no Advice?

in Financial Advisory, Medical Aid Leave a comment
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!
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Getting touchy feely over the folding stuff

in Behavioural finance, Financial Advisory Leave a comment

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.
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6 things entrepreneurs do to sabotage their retirement

in Behavioural finance, Group Benefits, Retirement funding Leave a comment
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.

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