Friday, January 31, 2014

(No.256) Canadian financial services dogma: some immaculate misconceptions

"Immaculate misconceptions: some dogma about 
the Canadian financial services business"

by Alastair Rickard

A reality few people outside the life insurance business understand (nor do many executives employed within it) is the huge difference affecting life insurance distribution between
(1) life insurance companies 'sponsoring' the life insurance licences of people in financial services in return for whatever business they may put their way, and
(2) the very many fewer companies engaged in selecting, training and developing people new to life insurance selling, people who can actually make their careers as professional advisors in a difficult business.

Also important is this reality: it is a more difficult task to find, select and recruit people who can be successful beyond a few weeks in making the harder sales of client-resistant individual life insurance compared with recruiting asset product sales people the core of whose very important role revolves around selling savings products most people actually want and tend to recognize they should buy. 

Agents who can succeed in a life insurance sales career have different skills and characteristics from sales people who do not. As the Duke of Wellington once observed: the fact that kittens are born in a kitchen doesn't make them biscuits.

It is not a major hill to climb to have dual-licensed life insurance agents make the easier sales of asset products, mutual funds in particular. For example: at one point the Mutual Life/Clarica Life career agency distribution system which Sun Life had acquired was generating 2/3 of the year's net mutual fund sales of CI Financial (the outfit for which Sun Life had traded its own mutual fund business plus the larger one built by Mutual/Clarica in return for a 1/3 ownership interest, since sold to the Bank of Nova Scotia).

However people recruited to sell asset products do not constitute the mirror image of this sales equation: trying to get them to make the harder life insurance sales with any sort of quantitative success can be a steep slope indeed. One of the best Canadian illustrations is the Investors Group mutual fund sales force -- an excellent branch office/managerial career agency-type distribution system but one that Investors has never been able to make into a distribution system in which even a significant minority of its advisors make their own life sales in any sort of quantity.

In the Canadian market-place today there are a variety of intermediaries and organizations involved in the sale of financial services products of all kinds. They are commonly referred to as financial advisors or financial planners -- and many are well qualified to provide advice, some are not. 

One sees enthusiasm expressed, often in the Globe and Mail's Report On Business, for what is actually a fantasy version of the financial services business in this country, i.e., that those who sell products and receive commissions should not be allowed to hold themselves out to the public as financial planners.

As a former board chair of the Financial Planning Standards Council I regard this sort of attitude as unrealistic and too precious by half. Whether, for example, a CFP-qualified financial planner receives (directly or indirectly) commission income from the sale of financial products should not disqualify that person as an advisor provided the expertise is there and is used to benefit the client. 

Rather this merely reflects the reality of a market place in which genuine fee-only financial planning remains a boutique segment of the financial services business and, since most Canadians show no inclination to seek nor willingness to pay for fee-only advice, it is likely to remain so.

Were it not for the financial advice being provided to Canadians by tens of thousands of licensed financial services intermediaries, including life insurance agents,  there would be a huge shortfall in advisory support as well as in the acquisition by Canadian consumers of problem-solving financial products.

But if today's recruiting or sponsoring life insurance company or agency does little more for the agent new to the business than the equivalent of what was mainly done 50 years ago -- that is, sponsor a licence, hand the new agent a rate book and inform the new agent that he (and agents then were virtually all men) would sink or swim financially based on sales from day one, then the odds against becoming a successful life insurance professional are high indeed.

Agents who sell life insurance make a valuable contribution to their communities and to society. Their market in Canada today is not "saturated" despite the use of this self-serving codswallop by life insurance company executives seeking camouflage for the latest corporate acquisition or lagging sales result and by members of the financial services paparazzi who merely repeat what they don't understand about the distribution of life insurance. In fact the market for individual life insurance in Canada today is neither saturated nor adequately served.

I have long been a supporter of the active agency system, especially the career agency distribution system, not out of some emotional attachment but because I value the social and economic benefits to society and to individuals of their having adequate individual life insurance coverage.

Society as a whole and not merely those in the life insurance business have a direct interest in whether or not Canadians are adequately insured and therefore -- whether they realize it or not -- they also have an interest in its effective distribution to Canadians, i.e., in the provision of genuine (real world) 'opportunities to buy' this core financial product.

Perhaps the hoariest cliche of the North American life insurance business holds that life insurance is not bought, it is sold. But cliches customarily attain their status because they encapsulate a truth.

Today's active agency system is involved with the distribution and sale of a product most Canadians will not take the initiative to purchase either at all or in the right amount at the right time. 
But in my experience nothing has weakened the potential growth of the active agency system in Canada as much as the poor stewardship of that distribution system by most of the life insurance companies with which it was partnered for decades.

The life insurance agent has long been the subject of a prejudice against commission-based selling that is today the stock-in-trade of those in the financial services commentariat who apparently believe that distributing financial products should be undertaken as some sort of philanthropic activity, one unrelated to anyone earning anything from it lest the member of the public be harmed by a distributor's financial incentive to put life insurance coverage in place.

Among such members of this segment of the media's chattering classes there is of course an implied exemption for fee-based activity which appears to occupy a holy place among those willing to ignore certain relevant facts. For example: that so-called 'fees' can be and often are de facto commissions however disguised (e.g., as 'referral' fees paid to 'fee only' financial planners).
One needs to calibrate the impact of these and other such industry misconceptions on a realistic understanding of how most individual life insurance coverage gets put in place; how and by whom it is sold, serviced, retained, upgraded and where necessary replaced.

I have low expectations of the ability and willingness of many media financial services pundits and self-appointed advocates when it comes to real understanding of the important role and contribution of life insurance agents to the public good as well as that of the various forms of the active, i.e., prospecting/selling agency distribution system to which they belong.

Such 'experts' enjoy the luxury available to pundits of leaving the life insurance industry's complexity and nuance to others. Indeed their attention to the subject, however superficial, is routinely uninformed or idiosyncratic or both. But like the common cold they are around for the long haul.




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