the watch of time

The October issue of The Insurance & Investment Journal is bookended with short articles about advisors, the first involving mystery shoppers and the second the ‘fee for service’ model.  Taken together, they provide some updated perspective on what goes, or perhaps what should go, into the scales of advisor compensation.

In September, two major securities regulators, i.e. the Ontario Securities Commission (OSC) and Canada’s investment regulatory organization (IROC), along with Canada’s Mutual Fund Dealers Association (MFDA), released a report on a project conducted in 2014.  Acting on their behalf, a market research firm sent 27 mystery shoppers to a range of investment dealers and portfolio managers, the shoppers assuming varied profiles with investment scenarios.

Only 24 of the 88 visited locations had specific financial recommendations offered, and only 21 had specific products recommended.  According to the regulatory bodies, 18 of the latter were ‘suitable’; moreover, a little over 2/3 of the locations complied with KYC and KYP (Know Your Product) requirements, or discussed fees.  Less than 2/3 fully met compliance expectations. Of those locations offering solutions, 50% of the explanations relating the proposals to the prospect’s goals and circumstances were verbal.  Advisor compensation was discussed in 1/3 of visits.

88% of the mystery shoppers receiving recommendations felt sufficiently informed by the advisor; however, 1/3 of them did not feel the experience was satisfactory insofar as compliance expectations.

This is an interesting backdrop to the second, advice oriented article.  Here the author provides an anecdotal revelation that Canadian lawyers are looking to move from their traditional ‘billable hours’ mode of compensation to a flat fee for value.  From his viewpoint relating this issue to insurance, the author argues that this change of remuneration will be their version of a ‘fee for results’ system which is what insurance commissions represent.

He states that what legal clients want is value and results for payments, not interested in “the various amounts of work it might take to get the results”, which can be exacerbated by slow paced lawyers.  An hourly rate in ‘the knowledge business’ doesn’t equate with trades like plumbing or carpentry – either you have the knowledge to get the proper results, or you don’t.

This is similar to the life insurance business: clients don’t care how much time or effort is spent putting deals together, they just want the result, i.e. protection for (someone) or protection against (income taxes).  Whatever the time required to get the result, the compensation is the same because the value is the same.  This also applies to real estate transactions.

The life insurance commission is like a flat fee which may be higher or lower depending on the face amount of coverage and other features, determined as part of the transactional relationship.  There are different commissions or fees for different products, with different values for customers.  For example, with auto dealers the commission on the sale of a high end vehicle is greater than for a low end one.

Clearly, compensation for the financial or insurance professional advisor (and increasingly it would seem for the legal professional) is a function of how well they use their training, expertise, and service-focused approach to provide options and solutions which fit client needs, in a timely manner.  Regulators can contribute to a higher win-win ratio for both sides by exposing where gaps in performance can be identified and improved.