What advantages could you gain from a move away from risk commission?
This was the question I challenged myself with when the Trowbridge Report first brought the issues surrounding insurance commission to light. A pure advice model? Independent and conflict-free advice? The beginning of a professional services firm? All of these advantages and more stood out to me clearly, but none more than the cost savings I could provide to my clients. With a nil-commission model, I could focus on strategy and save my clients thousands of dollars over the long term. This was my primary motivation to redesign my advice model.
As this is a drastic shift from the conventional revenue model, an in-depth review of business practices is necessary. Here are three strategic activities that helped me transition away from risk commission.
Firstly, go back to Simon Sinek’s TED Talk classic and ask: ‘Why?’ Why do you provide advice to your clients and why do you want your clients to seek advice from you? This step is important in moving away from commissions because your value proposition needs to be crystal clear. If you can clearly demonstrate how you add value, you can charge for it. An exercise you can go through to build a strong value proposition is called ‘productisation of services’, which is a strategic activity that converts delivered services to a standard, fully tested package, supported and marketed with the character of a tangible object. Private health services are a good example of how productisation has evolved.
Once you are clear about why you provide advice, you will to need focus on how you provide that advice. We all understand the general financial planning process, but to price correctly you will need to map out every email, phone call and time spent delivering value to clients. Build a spreadsheet mapping out each productised service you will offer and the associated processes behind each service from the first contact to what you will do each year in review. For each step there needs to be a time frame recorded that is going to assist you in understanding what it costs to deliver your ‘why’.
The third strategic activity is understanding what it costs to deliver your productised services. Before you can price your services – and, essentially, determine your profit position – you need to cost your services, including each process that you identified in the previous step. Activity-based costing is an accounting exercise that is the attribution of your direct and indirect resource costs to front line service activities. The aim of this exercise is to determine your cost to service and support your clients on an hourly basis to, in turn, develop a pricing model based on the value that you add.
Like any good business strategy, once you have your value proposition and you have set your fees, you will need a marketing plan. This plan may only focus on educating your existing clients on why you want them to transition to the new service or it could involve a full review of your marketing channels. As I did myself, I would recommend seeking out specialist business advisers who are experienced in the areas discussed to assist you with both the financial and non-financial analysis of your business.
A move completely away from commissions might not be appropriate for every practice. In any case, the strategic activities discussed will encourage you to think critically of your business and challenge the status quo. It will help you to make your business more competitive, profitable and help you to stand out to your target clients. Our own experience has been rewarding, with positive feedback and increased engagement from our clients. Moving away from risk commissions might seem daunting and remains a work in progress, but I believe it is the future of advice.
Dean Van Zyl is a director and principal adviser of Wealth Elements
This article originally featured in the March issue of ifa magazine
Hi Dean, firstly I want to say I commend you on your article and “bravery” in publishing the article. I’m not trying knock you and wish you & your clients all the best…but…I can’t help but notice that your firm is operating a “full service” model? I am very interested in knowing whether the $1,200 fee for service for risk advice is profitable as a stand alone business unit? If so,how many stand alone risk only clients do you have on the $1,200 upfront fee and $0 ongoing fee arrangement you have? If they are $0 ongoing fee plans, when do you review their risk only arrangements? If the risk ony clients want a review, do you charge them $1,200 again? If so and the advice is to stay where they are is the typical client better off? If you advise them to change again, is this sustainable as a stand alone service (read profitable)? or are they subsidised knowingly as a loss leader to get them into the other planning services? Do you charge any fees for claims management for these risk only fee clients? I have adopted many of the exercises that you have mentioned and have come to the very concious conclusion that most mum & dad risk only clients (premiums sub $3k) are far better off under a commission structure (not just immediately but ongoing assuming that a review s required at least every 5 years and quite often a change insurer due to competitive nature of industry..at risk of being labelled “churner” I take my legislated BID to my client seriously) If you have managed to “crack it” in terms of stand alone rik fee for service advice I would be happy to hear and gladly pay for any consulting services. If & when insurers offer a “true wholesale” product offering (I’m t just talking about dialling down a level commission policy to zero comm but something that goes far beyond that given their own rhetoric in relation to how long a policy actually stays on the books) maybe I can see it work on a stand alone basis for the average joe punter. If you can manage to met BID and replace products according to ASIC’s guidelines for $1,200 stand alone upfront fee then more power to you…I will leave the insurance industry now and concentrate on the wealthy. Sorry Dean, lot’s of questions but I am being genuine. Cheers. Dan