Commission Still a Preferred Mode of Compensation
For insurance brokers, questions of the mode of compensation, whether commission, fee-for-service or a combination of the two, have become more pressing as FOFA reforms alter the payment landscape.
Marc Fabris, National Manager for Sales Strategies at Zurich Life Australia, leans toward the commission model, although Zurich provides for commission and fee-for-service alternatives in its own business. In a recent interview with insuranceNEWS.com.au, Fabris noted that dealer groups plan to preserve the commission approach as a practical, time-tested option. The commission option can be flexible, since brokers can reduce their fees when appropriate, and it compensates advisers for the substantial work that goes into establishing a policy.
At the same time, according to the interview, Fabris sees potential drawbacks in certain situations. For one, he acknowledges that the practice of rebating up-front commission may mean that the client pays no premium when the policy is inaugurated. When next year’s premium is due, the unexpected news comes as an unpleasant surprise.
In the interview, Fabris also addressed the choice of compensation mode in different types of claims. Speaking of the fee-for-service model, he acknowledged that compensation in the form of a percentage makes sense when the claim is paid in a lump sum. When claims are paid in a series of smaller, ongoing payments, however, as is typical of income protection policies, he questioned the utility of the fee-for-service model. In that case, according to Fabris, those payments become an unnecessary burden for clients. With that in mind, Fabris argues that the commission approach works best for clients, who would prefer to avoid making “extra payments” to their advisers, and for advisers themselves, since the client relationship could be harmed when the adviser collects a fee during the claims process.
Commission rebates have additional pitfalls, according to Chris Wookey, Director of Taxation Consulting at GMK Partners, this time arising from their tax consequences. Wookey, in another interview with insuranceNEWS.com.au, said that a rebated up-front commission would not qualify as a deductible expense. Instead, it would constitute income taxable to the client.
Wookey did not think it likely that a rebate would adversely affect the client’s tax bracket. Instead, the problem arises when the additional income affects the client’s qualification for programs that are subject to strict income limitations. To the extent that the additional income is unexpected, Wookey worried that its disqualifying consequences would not be detected until it was too late.
Wookey also noted that the problem does not affect trail commission, since that rebate can qualify as a fee for continuing review of tax matters on the client’s behalf.