NEXT time your broker or bank adviser gives you the hard sell on a new investment product or life insurance policy, ask how much commission he'll get if you take up his offer — and if he'll get any bonus commission for meeting sales targets on the product he’s trying to sell you.
Some brokers are pocketing commissions of as much as twice the amount you pay into a life insurance policy in the first year while others could be pushing a particular investment because they'll hit a sales target by doing so — and bag a hefty commission. The bonus pocketed by a broker could leave you worse off by €20,000 — or even more.
Term life insurance — which is basically an insurance policy which pays out a lump sum to your dependents should you die while the policy is in force — is particularly lucrative for brokers, according to one life insurance expert, who did not wish to be named. With term life insurance, you will usually pay a high commission in the first year of your policy — known as the initial commission, and a smaller commission every year after that — known as the renewal commission.
“The average initial commission on term life insurance is usually about 90 per cent of the first year's premiums — but in some cases, the commission can be as high as 200 per cent in the first year,” said the expert.
The Sunday Independent asked the main life insurance companies how much commission they paid to brokers. Canada Life, New Ireland and Zurich Life refused to disclose this information. Irish Life said it paid brokers who sold its term life insurance up to 100 per cent commission in the first year — and up to 11 per cent renewal commission a year in the first seven years of a policy. Aviva and Friends First said they paid brokers up to 90 per cent commission in the first year. Therefore, if you buy term life insurance from Aviva or Friends First through a broker, the broker could pocket as much as 90 per cent of what you pay into your policy in the first year in commission. Aviva pays renewal commission of up to 8 per cent — depending on the initial commission chosen by the broker. With Friends First, it is up to 3 per cent.
“Our products are structured to allow a higher commission to be paid in the first year of the policy — primarily to cover set-up costs,” said a spokeswoman for Friends First.
The Professional Insurance Brokers Association ( PIBA) said that brokers could charge between 120 and 180 per cent commission on life term insurance, mortgage protection and income protection products. However, a spokeswoman said such commissions would have “no impact on the value of a consumer’s investment or life assurance policy”. “These higher commission rates are typically associated with clawback, where the higher commission rate is spread over a set period of time — usually up to five years.
There is a clawback (on this commission) if a policy is switched or moved to another provider within a short period of time.”
If you have a lump sum to invest for a few years, you will usually pay commission of between 3.5 and 5 per cent of what you invest, according to John Geraghty, managing director of the online brokers, LABrokers.ie. This commission, known as the initial commission, will be paid upfront. You may also have to pay a trailer commission to the broker each year. Trailer commission, which brokers say is charged for ongoing advice and investment services, is often between 0.25 and 0.5 per cent of the value of your investment.
Not all brokers charge trailer commissions however — and if yours does, ensure you are getting the advice and services that justify such an annual charge.
An initial commission of about 5 per cent might not seem that scary. However, if you have €100,000s to invest over 10 or 20 years, a broker who charges 5 per cent commission could easily hit you with a €10,000 fee — or more. A charge like that could leave you with €20,000 less to cash in after 10 years than had you not paid the commission (see Panel).
Brokers, of course, do not work for free. “Brokers are financial professionals and their advice needs to be paid for just like any other professionals,” said Ciaran Phelan, chief executive of the Irish Brokers Association (IBA).
You may be able to negotiate a lower upfront fee with your broker. When doing so, bear in mind that he may have a choice of commission rates he can charge you. With Zurich Life's buy-out Matrix bond for example, a broker has a choice of 20 different prices which he can charge the customer. These range from a price structure with no initial commission and a trailer commission of 0.5 per cent — to one that charges a 5 per cent initial commission and no trailer commission. There is no difference in the product being sold — the only difference is the price charged. “The broker decides at which price he's going to sell at and the consumer is completely oblivious to the fact that there are 20 different prices for the product he is about to buy,” said one industry source. “This is not new and is not unique to Zurich Life — but it seems to be growing in popularity.” A spokesman for Zurich Life said: “Insurers provide full disclosure to customers when a policy is issued.”
The IBA insists that there is “full transparency” in the broker market “with all broker income being fully disclosed in the documents provided to the client”. However, there are “definitely bad practices out there” said Karl Deeter, head of customer advice with the financial advisers, advisors.ie. “These practices are sometimes created by the insurers through certain incentive schemes such as ‘over-ride' which is an invisible form of remuneration that doesn't show on any client documentation,” said Deeter.
With over-ride, companies pay higher commissions to brokers who meet sales targets. “Companies are always doing special deals for brokers — on top of the average commissions paid,” said one industry source. “It's an awful murky dark business.”