Introduction
Many people do not realise that we provide advice on financial protection products, such as:
- Term assurance (short term life insurance)
- Critical illness cover
- Income Protection
- Whole of life insurance
Principled are holistic financial planners. That means we look after every aspect of your finances.
It’s never enjoyable to discuss illness, incapacity, or even an early death. However, it’s so important to consider these eventualities, particularly if you have a family, or a mortgage, or if you are running your own business.
Unlike standalone life insurance brokers, we are holistic financial planners. Before recommending any protection products to our financial planning clients, we consider all of your assets, liabilities, and your future plans, before we recommend any cover for you.
If you do not need any extra financial protection, we’ll tell you.
If you don’t need any cover, we won’t try to sell you any.
We do not earn our money by commission, so we have no incentive to “sell” protection products when they are not needed. After all – no one wants to pay unnecessary insurance premiums.
Can advisers receive commission?
Most financial advisers choose to receive commission when recommending a protection product.
In the bad old days, financial advisers were paid by commission from the providers of all the products they recommended.
However, in 2012, new rules came into force which banned commission from most investment products.
Whilst this worried many financial advisers at the time, with hindsight few people would argue that banning commission was a bad thing. This, along with other reforms introduced in 2012, have served to improve standards, increase consumer confidence, and has driven growth in financial planning as a true profession.
The new rules however did not apply to non-investment products, such as life insurance, critical illness cover, and income protection.
What is the difference between commission and fees?
Be cause the new rules did not apply to these products, many firms continue to take commission rather than charge a fee, when advising on protection.
We can certainly see the attraction in doing this. A fee is paid directly by the client, and so the client has to agree to the fee. Commission, however, is paid to the adviser by the product provider, and so the client does not need to agree to this.
However, Principled prefer to charge fees for protection work. The only reason we do this – we think it is much fairer to the client.
We could certainly make more money by taking commission, but that’s not what we are about at Principled. The clue is in the name!
The commission paid to advisers is based on a number of factors, but mostly, it is based on the size of the monthly premium for the policy. So, the more you pay each month for your policy, the more commission for the adviser.
To us, this feels like a conflict of interest.
Different product providers calculate their commission in different ways, which can mean that for two similar policies from different providers, one may be offering significantly more commission than another.
This is another reason why we feel that commission creates a conflict of interest.
Furthermore, if we are recommending a life policy, the amount of work we need to do to research, recommend, and implement a policy is very likely to be the same, regardless of whether your premium is £25 a month, £50 a month, or even higher. We therefore think our remuneration should be the same, too.
Benefits of paying a fee
There are various benefits of paying fees for the advice you receive, rather than allowing your adviser to receive commission.
Firstly, you know that none of the conflicts of interest will be present in the adviser’s decision.
Secondly, paying a fee up front is likely to save you money over the long term.
When advisers receive commission, the policy providers are not giving this money away from the goodness of their hearts!
When a provider has paid commission, the provider then increases your monthly premium in order to claw back the money over time.
These higher premiums often leave you paying thousands of pounds more over the policy term, compared to paying the fee upfront, and then benefitting from reduced monthly premiums.
Example of how paying a fee saves you money
We recently obtained quotes for income protection for one of our clients. The exact same policy was offered at £52.36 a month with the adviser receiving commission of £1,232 initially, with another £263 paid over the course of the policy.
Alternatively, we could have recommended this policy with a premium of £39.79 per month, with us receiving nil commission.
If we were to take commission, the client would need to pay an extra:
- £12.57 a month, which is:
- £150.84 a year, which equated to:
- £3,129.93 over the policy term
At the time, our fee for this work would have been £750.
Therefore, paying a one off fee of £750, would save you £3,129.39 in premiums, if you help the policy for the full term.
Summary
We hope you now understand why we charge fees for our advice on protection products. It’s not because we can make more money this way, we actually lose out by doing this. However, we do this because we feel it is right.
At Principled, we are driven by our values. We prioritise what is best for our clients, rather than looking to earn a quick buck at the client’s expense.
We’ll post more about the types of protection products we advise on over the coming weeks.
In the mean time, if you have any questions about life insurance, financial protection, or anything else mentioned in this blog, please contact us using hello@principled.eco.