G19 – Who has something to hide?

Please forgive yourself if you don’t know what G19 is (was).  It was a guideline published by the Canadian Life and Health Insurance Association regarding Compensation Disclosure in Group Benefits and Group Retirement Services.  I say ‘was’ because the guideline was just withdrawn after years of effort to bring it to life. (I am focused here on the retirement industry but many of the comments that I make are also relevant to the group benefits industry).

Disclaimer:  I work with many insurance brokers who did not like the guideline and will undoubtedly be happy the guideline has died just days before its effective date.  I also work with many of the insurance companies that are members of the CLHIA and hope to maintain good working relationships with them.  With that said, you know I call it like I see it.

Compensating Brokers

When I was in school, we learned of the broker model.  Essentially insurance companies compensate brokers for selling insurance products but in fact these brokers are not employees of the insurer but are ‘agents’ of the purchaser of the insurance.  When I first learned of this compensation model I was surprised it worked because it seemed wide open for conflicts of interest.  As I have worked for 30+ years I have seen the positive side of the brokerage model. 

I grew up at Mercer in a fee-for-service world.  Every job was billed by the hour – and if you worked slowly you made more money.  This model was my downfall in the mainstream industry.  I would work in a focused manner for about 6 hours a day but then needed breaks and was never as highly regarded as those who could sit still for 10 hours – whether those 10 hours were productive or not.  Large clients struggled to measure value for hours and price sensitivity was low when fees were paid from pension fund surplus.

When I started my own firm, I had the chance to obtain an insurance license and receive commissions.  I declined for two reasons.  First, it was a pain as insurers didn’t really want a small agent like I was going to be.  Second, the Rules of Professional Conduct for actuaries require the disclosure of all direct and indirect compensation (good rule) and so any commissions would be disclosed and just reduce other fees that I could charge.  Commissions weren’t going to help me.

But that is not to say that I think paying commissions is a bad idea.  Our firm spends a lot of time and money every month sending out invoices trying to explain the value that we have created for clients and the amount we would like them to pay us.  We then wait for payment and sometimes follow-up a few times (eventually we always get paid).  In contrast, brokers develop relationships with clients and value is measured by outcomes rather than time – which to me is a better model.  Brokers don’t spend time invoicing, although they do have to make an effort to reconcile the commission cheques the insurers send them.

G19 – Good and Bad

G19 was an attempt by the CLHIA to force brokers to disclose to their clients the compensation that they receive in commissions.  On the surface this doesn’t sound offensive at all and frankly I am a little suspect of brokers hiding commissions since clients can’t measure value if they don’t know what they pay.  As I understand it, the guideline had its roots in negative experiences insurers had with brokers pressuring for substantial undisclosed commissions to ‘keep’ business the insurer already had.  I have no evidence this is true, but it seems plausible.

If an insurer didn’t like the compensation being demanded by brokers why not say no?  Answer: in this world where everyone is competing for market share there is no room to push work away to a competitor that is a little more comfortable with the proposed commission.  Unless the industry could band together and force disclosure from all providers – one provider couldn’t do it alone.

Unfortunately, the industry’s solution to the problem, G19, was an almost unworkable and unfair system of disclosure.  One problem was the fact that broker compensation includes commissions directly related to client policies as well as bonuses based upon overall volumes.  These bonuses rewarded large brokers because they provided insurers with volume often by overseeing multiple agents and they also provided a little extra compensation in respect of a large collection of small clients that might not be profitable otherwise.  Another problem was that many insurers did not have systems to provide the necessary compensation disclosure to brokers, so that it could be passed along to clients.  It isn’t very clear to brokers how these bonuses break down by client, so you already have a math problem that is hard to solve.

Add on that there are all sorts of non-cash compensation that must be considered.  I will be golfing this summer with brokers and insurers.  Sometimes I will be paying for golf and sometimes someone else will pay.  Anyone who knows about my obsession with golf will know that being able to ‘work’ and golf at the same time is a dream come true.  Like it or not, golfing is also a place where you do build relationships and trust which is super handy when you are at your desk and you need to call for help.  People like to help people that they like.  How does all of this get calculated in my compensation and how do we value the asset created for our clients by spending time with others?  My first decade in practice I was mostly at my desk.  I can promise you that I am much more effective today due to the strong industry connections that I have built in my second decade.  If it makes readers feel better, no one called me to go to last night’s Raptor’s game.

Finally, the CLHIA only serves a small segment of the retirement business.  Mutual fund dealers and stock brokers are regulated elsewhere and without a unified set of rules the insurance industry was just giving themselves a handicap in the competition for retirement programs sponsored by employers.

Doing it right

If someone wants to do this right then you will need one set of laws that oversee any retirement product regardless of provider.  I am not holding my breath.  In my mind, all clients need good advisors and while not perfect, I think that over time clients find advisors that meet their needs effectively.  I wrote a little about this here.

To me it was interesting that the CLHIA wanted all broker compensation disclosed but saw no reason whatsoever for its member insurers to disclose their net compensation or amounts paid to other industry participants such as the investment managers whose funds they offer to their end client through the broker (or the golf outings with those ‘partners’).  My father’s ethics test was always ‘what’s good for the goose is good for the gander’.  G19 failed this basic test.

I can’t tell if this was a poorly thought out disclosure strategy or a focused attempt to embarrass brokers the industry didn’t like.  Either way the withdrawal is a good outcome for the industry as a whole.  Now the responsibility for commission disclosure is back on the shoulders of brokers and deciding the value of the work provided is squarely on the shoulders of clients.  Before you scream at me about the brokers not disclosing commissions ask yourself about the clients that aren’t asking.  If clients aren’t paying attention to what their brokers do for them and the value that they receive for the commissions they pay then shame on them.



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