Demystifying Compensation | Integrated Planning Video Series
January 19, 2023
Prudent financial planning has never been more important than it is now. In our recent Integrated Planning video series, WealthCo’s Vice President of Insurance and Estate Planning, Jeff Dyck, takes us through the integrated approach to financial planning. We’ve included a synopsis below.
In the insurance industry one of the most interesting things that we run into is that Insurance products are thought of as just that - products. They're not thought of as services that would be part of an ongoing Integrated Advisory delivery service. When products are being purchased an assumption is being made that compensation is being paid, however that compensation is rarely disclosed. However, as it stands in Canada today, commission disclosure on insurance products is not a requirement.
Why We Believe in Transparent Compensation
Within the Integrated Advisory community, we choose to let our clients know exactly how much compensation is being earned on their contract. We view insurance as a service, rather than a product, and given that we are delivering an ongoing service as part of a client’s overall holistic planning process, we believe that clients need to be asking themselves some important questions to be as educated as possible. Questions like:
- Is what I am looking at purchasing appropriate?
- Do I need it?
- How is it being structured?
- When or where does it pay out?
- To whom does it pay out?
By asking these questions upfront, clients are better aware of whether or not they are acquiring something of value.
Being deeply committed to the professionalization of the insurance industry, we let our clients know exactly how much is being earned on their policy. Doing so sets up the expectation that ongoing service is going to be provided in concert with their financial planner.
An Example of Insurance Commissions in Action
Life insurance commissions are typically derived as a result of a percentage of the premium that is being paid into the insurance contract. For example, if a $1,000 premium is being paid on an annual basis in that first year roughly 35% - 45% of that premium (or $350 - $450) would be returned to the advisor in form of compensation. That's stage one of the compensation, and there are multiple stages in terms of how compensation is paid.
The second piece comes from the distributor of the insurance contract. In addition to what the insurer would pay the distributor of the insurance product, they may pay an additional percentage of the insurer's commission that has already been paid. That percentage can vary, but for the purposes of this example let's say it's 100%, meaning that in addition to the $350 - $450 that's been paid from the insurer, another $350 - $450 would be paid from the distributor resulting in a total commission of $700 - $900. So, in total on your $1,000 premium, the insurance advisor has earned $700 - $900.
By providing transparency around these commissions, the client is better empowered to determine whether sufficient value is being delivered to justify the commission earned. If proper planning has been done along the way and the client feels that the need that has been established is sufficient to make them and their family comfortable - then fantastic! The likely benefit down the road is going to be a multiple of what that commission is; for a $1,000 annual premium it could very well result in a death benefit in excess of $500,000. The benefit will of course vary by age and the type of product used, but the return on investment is very significant, and guaranteed.
Empowering our Clients Through Compensation Transparency
In terms of relative compensation, when you consider that the insurance broker is determining their compensation based on the future value of a policy, that makes it easier to understand for the client. However, it also incentivizes poor behaviour, as the upfront payment may mean that the broker will simply move on after the transaction is complete and the commission is paid.
The Integrated Advisory model dispels this by understanding that life isn't linear and that situations change. If your insurance broker isn't around to assist during changing times (perhaps job changes, marriages and divorces, deaths in the family, etc.) the client will have to start all over again. The beauty of the Integrated Advisory network is that the client benefits from insurance being simply one of the elements in their broader integrated financial strategy.
For that reason, without question, we are happy to let our clients know exactly what their advisors are earning, because they truly deserve that level of transparency.
The Integrated Advisory Network consists of progressive CPA firms, along with best-in-class professional advisors, service, and product specialists, who work together to deliver an elevated and holistic client experience. One that optimizes both their personal and professional lives with an integrated financial strategy designed to help their clients reach their goals. Reach out to your Integrated Advisory accountant if you have any questions or want to have a deeper conversation about your financial plan.
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