The sales commissions, bonuses and other incentives that insurance advisors receive are coming under scrutiny. Regulators have begun to express concerns about the conflicts of interest that these sales incentives can create. In response, some advisors are apprehensive about what that will mean for their paycheques.
"[The possibility of doing away with such incentives] is of concern for our members," says Susan Allemang, head of regulatory and policy affairs with the Independent Financial Brokers of Canada in Mississauga, Ont. "[Working with specific insurers] is how [advisors] make their living."
The Autorité des marchés financiers (AMF) recently published a paper entitled Managing Conflict of Interest Risk in Relation to Incentives that highlights all forms of compensation and other incentives that insurance advisors receive - such as salary, commissions, bonuses and contests. The paper then evaluates the potential for each item to influence advisors when they recommend products to clients.
The goal of the initiative, jointly sponsored by the AMF and the Canadian Council of Insurance Regulators (CCIR), is to gather input from members of the insurance industry on ways of mitigating the risk that incentives could interfere with the fair treatment of clients.
"Consumers must be confident that recommended products truly meet their needs," the AMF paper states.
The CCIR also identified "incentives management" as a topic it plans to assess in its 2017-20 strategic plan, which was released in July. That move suggests other provincial regulators are likely to address this issue in the near future.
Harold Geller, lawyer and associate with law firm McBride Bond Christian LLP in Ottawa, lauds the regulators for addressing this topic: "This is a starting point for an industry that, in Canada, has not looked at the harm caused to consumers by incentives compensation."
Any form of compensation that rewards an advisor for choosing one product over another has the potential to affect consumers negatively, he adds.
"The way that insurance companies try to sell through agents is that [insurers] use incentives to make selling their product more attractive financially for the agent," Geller says. "The Canadian Securities Administrators' [CSA] published research shows this is statistically known to distort advice and result in bad outcomes."
The incentives that pose the greatest conflict of interest risk, according to the AMF paper, include bonuses, contests and other benefits that are tied to the volume of business that an advisor produces.
"Achieving a performance threshold puts pressure on representatives and intermediaries," the paper says. "Representatives might be tempted to place their own interests before those of the client and recommend an insurance product that does not meet the client's real needs."
Geller agrees that bonuses and contests are problematic: "All of a sudden, [advisors] are working toward a sales target as opposed to what's in the best interest of each of those clients."
Meanwhile, the AMF classifies commissions as a "medium risk" incentive, noting that advisors could be motivated to sell a product that would generate a higher commission even if it were not the most suitable product for the client. Salary-based compensation is classified as low risk, as it does not factor in sales volume or performance.
The insurance regulators' investigation into incentives comes at a time when commissions are a "hot button" issue elsewhere within the financial services sector. Specifically, recent CSA consultations contemplating a ban on embedded commissions in investment products have generated heated debate.
Any possible changes to compensation on the life insurance side of the business are likely to elicit a similarly passionate response, particularly from advisors who have been in the industry for many years and have built their practices based on the current compensation structure.
"The implementation of any wide-scale change would have to be very carefully considered in terms of the many people who have been in this business for more than 20 years," Allemang says. "It's their livelihood."
Many advisors have planned for their retirement based on the trailer fees or service commissions they expect to receive, she adds.
Daniel La Tour, an independent insurance advisor in Kirkland, Que. says he considers the existing compensation structure to be fair. Incentives such as sales contests and travel rewards aren't a consideration when he recommends life insurance, he says: "It's the furthest thing from my mind. I look at the best interest of the client."
La Tour suspects that's the case for a majority of advisors. "If you have the mindset that you want to succeed, I don't think a contest would make a big difference," he says. "It may for some, but I don't believe it's the majority."
The potential conflicts of interest associated with incentives is an issue that's already on the radar of the insurance industry. Last year, Ottawa--based Canadian Life and Health Insurance Association Inc. (CLHIA) acknowledged in a paper it published that certain incentives for insurance advisors could contribute to a perception of conflict of interest.
Specifically, the CLHIA paper highlighted a common practice among insurance carriers of providing "all expenses paid" trips to conferences hosted in desirable locations for advisors who meet certain sales targets. The CLHIA paper recommended that insurers change the parameters of those programs so that independent advisors pay their own costs to travel to conferences that carriers host in order to avoid perceived conflicts of interest.
Following that recommendation, many life insurance companies took such action voluntarily and announced plans to discontinue their sales incentive conferences.
Regarding other forms of compensation and incentives, however, the CLHIA has not observed any problems.
"We are not aware of other arrangements that could contribute to the perception of conflicts of interest nor are we aware of any issues or concerns with incentive programs," states Wendy Hope, vice president, external relations, with the CLHIA, in an email to Investment Executive, adding that the industry is focused on improving disclosure to manage conflicts of interest and guiding "appropriate behaviour" in distribution.
However, more substantial changes are necessary, Geller opines: "Regulators have to begin investigating breaches and enforcing conflicts of interest protections. Conflicted compensation has to be eliminated."
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