[Reader’s Contribution] Do Insurance Agents Represent Their Company Or Their Clients?

This article is written and contributed by Alvin Teo, a regular DollarsAndSense reader. Alvin is also a financial adviser with AXA. All contributed articles on DollarsAndSense are the independent opinion of the writer and do not necessarily represent the views of DollarsAndSense.

According to a Straits Times article: “the Financial Advisers Act requires that investment advice is made on a “reasonable basis”. This means that legally, financial advisers only have the duty to represent their firm’s interests, not necessarily those of their clients. Investors seeking investment advice from these advisers should be wary of how the advisers are compensated and their incentives for giving a certain type of advice.”

This sentence, on the surface at least, seems to say nothing about the clients since the advisers are supposed to represent the firms’ interest. Let’s scrutinise the term “reasonable basis”.

Sometimes, it’s hard to objectively proved that recommendations made earlier, usually a few years ago, is without reasonable basis.

Although there have been vast improvements in documentation and record keeping process starting from the need’s analysis, these forms still cannot capture every single word spoken during the entire financial advisory process. And mystery shopping has shown that there are still advisers who will have their clients sign on blank forms, with the rest of the paperwork completed in the office.

In the financial world, there are many participants, from the distributors to the actual market movers, and not everyone is involved in the actual investment decisions and/or processes. Advisers do not influence a fund manager’s investment decisions.

“Hot tips” and “Top performing funds” are lazy ways to bring value to people.

Recommend a top fund and if it goes up, kudos to the advisers themselves for providing the advice. If it’s wrong, everyone else is doing it too so they won’t look too bad. This is the same reason why some funds constantly purchase shares of the same few big companies. This is also why there is a need for fiduciary duty, so that agents are not cavalier in the advice that they give out.

However, this makes it seem like clients are on their own, given that advisers are supposed to represent their firm’s interest and not legally obliged to help their clients.

However, in many police/drug/blue collar/political crime shows, there is a simple way to crack cases, that is to…

Follow The Money $$$

When a client pays his/her premium, the premiums are paid to the insurance company. The insurance company then pays the agents their commission monies accordingly.

This brought about the line in most sales pitches that ‘Agent’s commissions are paid by the company. Not the client.’

This is true but only to a certain extent. On a technical basis, agent’s commission are indeed paid by the company (it even says so in the bank statements). However, I don’t see how commissions will be paid out if the client doesn’t pay any premiums first.

If a client chooses to pay on a monthly basis, the agent receives commission on a monthly basis. If clients pay their premiums on an annual basis, the commission will be received on an annual basis too. So, the claim that agents are paid by the company is a superficial one and doesn’t hold any weight once logic is applied to it.

So, Who Do Advisers Represent?

It seems inconclusive to the question as to who do the advisers really represent. In times like these, let’s look at a basic concept of insurance, which is Utmost Good Faith.

This is a very old concept of insurance, so old it has its own Latin phrase: Uberrimae Fidei. Opposite of caveat emptor (let the buyers beware). It states that all material information is to be disclosed in the insurance proposal as it affects the risks taken upon by the insurer.

That being said, I always believe agents should represent their client’s interest and to ensure that their financial objectives are met. If their clients’ interests are met, they will carry on paying premiums or increase coverage as needed which means the company’s figurative backs are being scratched and agents would request for reciprocal back scratching from the company.

There are situations when the agents have to represent the company’s interest and go against clients such as when there is a breach of “fidei”. For example, if a client takes up a term insurance with health underwriting and declares to be a non-smoker, when the client is actually a smoker, or fails to declare a known medical condition and consistently make medical claims for it.

And why do I say it’s in the insurer’s interest to have the clients do well? In an investment-linked plan, there are many instances of fees being charged as a percentage of the entire account value. So, if clients do well financially in these ILPs, they will be willing to pay the fees. If the insurer’s and advisor’s objective is to reduce the clients’ money by making them lose it in badly invested ILP, wouldn’t they be worse off since they have lesser fees to collect?

All in all, if an adviser gives misinformation, he is not acting in the interest of both the insurer and his clients.

Tied vs Independent FA vs Direct

Potential clients should always be cynical about everything an adviser says. There is a never-ending debate about tied vs independent vs direct.

Tied agents often have their hands “tied” because they can only offer one brand of product (exceptions for example are AXA and Aviva partnership). There are various pros and cons to this aspect. However, it’s common for tied agents to compare products between companies, trying to nicely take a dump on them while lifting their own products.

Only many years later when they change companies (because of the remuneration) will their narrative changes.

There are instances when agents change companies because of a better manager or better base of products that suit their planning. If you are a tied agent reading this, my advice is to not take the easy way out and put down other companies’ products. Try to always market yourself, rather than the products.

This way, any company’s product you market will also make sense to your customer because your personal brand has curated it. Whether you get commission or not is another matter. I know it’s hard, but the rewards will be much better.

Independent agents appear to have an edge by having access to products across most insurers. Independent agents also have to take more CMFAS exams because of the wide range of products that they market. But the skeptic in me tells me that it’s just a veiled excuse to say they are sick of losing business to other insurer’s better offerings.

Personally, I have turned people away from my recommendation after seeing that a competitor’s product offers more. But I believe in the greater good, that doing so builds the level of trust my clients have towards me. Despite saying the above, I still feel clients should have as little agents to deal with as possible. In the event of an emergency, you only need to call one person who have all your insurance details as opposed to calling several.

The point to be distilled is, you can’t catch all the fish. And sometime, releasing it back into the ocean doesn’t mean you won’t get to catch it again.

Purchasing direct seems to be the financially savvy way now. The internet does have its advantages. Direct purchases do help you save on the distribution costs otherwise borne by the consumer.

However, besides having to deal with a faceless corporation and lacking a human’s touch, buying direct means the consumer only purchases what they deem is sufficient, which may not always be enough. Another blind spot will be the claims process. In dire situations, your family members will be the one handling the claims, so it will be best if the claims process are also taken care of by an agent.

One simple way to do this is to purchase a policy that you need from an (tied is better in this case) agent, thereafter, purchase the rest direct. This way, the agent will be happy to service your claims. But do be fair to them. If you purchase a $100 per annum accident plan but requires policy servicing for a $3000 per annum term plan, it could be quite unfair for them.

Who Do You Choose?

Financial planning is all about the ability to sleep well at night, every night till the day you croak. Getting an agent is very easy, getting a good agent is not as easy. But none of them beats doing your own homework and due diligence when doing your own financial planning. The reason for this is very simple: You are accountable towards your family members and your loved ones.

By this mantra, we are not only protecting ourselves and our loved ones, we are also making it harder for bad eggs to survive in this industry. Lousy agents will not be able to survive if they keep attempting to mis-sell to savvy individuals. Good agents get sifted out and they are able to survive in the business even in the earlier years to carry on servicing their clients.

Alvin also runs a website call Agents Circle which aims to guide financial advisers in personal finance