FEES As a Marketing Tool by John H. Melchinger Life insurance practitioners throughout the world continue to grapple with the rapid change ascending upon them since the seventies. The changes in products, tax laws, market conduct standards, compliance regulations, licensing, and consumer attitudes and interests combined tocreate more than a sea change. The entirely new tidal system in personal financial services has everyone hopping and hoping to catch the right wave. One movement, for example, has been for insurance brokers to sell an increasingly wider array of products, especially mutual funds, and in many cases become what they call "financial planners". They have diversified and generalized, and life insurance sales suffer as more brokers and agents sell more mutual funds and less life insurance. They follow the path of least resistance. Oddly, however, as the image of the life insurance business--meaning both the life insurers and salespeople alike--slipped in the general consumers' eyes, little effort has been expended to raise substantially the image of the individual practitioner. Thankfully, there is much that individual life insurance practitioners can do to develop better images for themselves. They can develop marketing messages that demonstrate to their target audiences that they are better, different in an appealing way, and very professional. Using a fee schedule is just one marketing technique that helps do this. Warning: the jurisdiction(s) in which you operate are likely to have varying requirements for collecting fees for rendering advice regarding life insurance. Some jurisdictions are very strict and require special licensing; some require written agreements with clients; others regulate how you collect fees and whether or not you can offset fees and commissions. You are responsible for complying with the legal requirements in the jurisdictions in which you practice. Kinds of fees Whenever I work with a life insurance broker or practitioner on fees issues, I first try to help them understand that fees are not simply "fees for service." I distinguish clearly between fees for service, fees for advice, and fees for managing assets. Fees for service--I have always thought of life insurance renewals as fees (disbursed as commissions) that the insurer pays salespeople for servicing the products they sell. But, insurers lower commission rates as one of the many ways they lower costs to maintain their competitive position in the marketplace. When they do, renewal commissions go down. Everyone who's been in this business for more than a few years has experienced eroding commission rates. Servicing requirements, however, have not changed. For efficiency, and to large degree for quality control, more and more insurers encourage customers to call the home office toll-free for certain account servicing. Their premium notices still often name the sales agent or broker, implying or stating that customers should call that person for advice. So service means taking care of a product once it is in force. It may also mean providing reports such as life insurance portfolio current value statements, or producing net worth statements and other client-specific documentation. The customer simply needs to know whom to call when a need arises, but this should present little problem for the broker who communicates clearly and regularly with clients. Fees for advice--The word advice means opinion, especially about what seems good. In an advisory capacity, your advice about what seems best for your clients to do regarding their life insurance is what your clients most values. In many markets--contrary to popular belief--insurance buyers are willing to pay fees for good advice. They simply need to understand that the advice is good and the fees are appropriate. Thankfully, insurers that offer toll- free product servicing make it quite easy for practitioners to distinguish between home office product servicing and their own expert counsel and advice. I am not sure that home offices really understand the degree to which they are fostering this, but their actions do help. Regardless, the net effect is that the long-predicted unbundling of life insurance has begun in earnest. The product is evolving into an unbundled collection of options, plus advice and services to help the consumer make good choices about selecting and managing the product in both the short- and long-term. The insurance expert help customize the client's most suitable bundle or products and services. Universal and variable products shift the burden of making investment choices far towards the consumer, who now also bears the risks for those decisions...and in large part for the performance of the product they purchase. Another aspect of this natural evolution is towards no-load, low-load, and level commission life insurance products that compete well because they put more money up front into the product for the consumer's benefit. Low- and no-load products have been in the marketplace a number of years already, and they are developing quite rapidly. Level commission products are just around the corner. I know that many insurance business watchers still say that level premium products are not on the horizon, but I predict that competition will force the issue. Someone will begin publishing commission schedules on the web and showing why level commissions works best for the consumer, and insurance marketers will be forced to compete. Right now, life insurers and practitioners simply do not want to deal with it. In the future, to compete, they will have to. Introducing level commissions may eventually be the only way for insurers to maintain a field force and compete with no- load and low-load life insurance sold by fee- for-advice distributors (e.g., financial planners) and others who make their money from other than commissions (salaried advisors and salespeople). So how are these products eventually going to be sold and serviced? A lot by advisors who collect fees for advice and fees for product servicing. Is this all smoke and mirrors? Hardly. Financial planners collect fees for their advice, including the advice they give regarding insurance. Many already sell no-load and low- load life insurance products. As the no- and low-load products continue to improve and make better economic sense, so too will the paying of fees for advice and service make more sense to the consumer. In many cases, markets are already at this level of thinking, and they are waiting patiently for the providers to catch up. So what's the appeal about paying fees for advice? In a nutshell: Fees may be deductible as legitimate expenses, which appeals to certain markets. Consumers often consider it acceptable to pay for advice, the same way they pay their other professional advisors such as lawyers, accountants and financial planners, to which life insurance practitioners often compare themselves. Paying fees allows consumers to infer that they are getting professional objectivity without undue self-interest by the advisor. Paying fees allows consumers to infer that they are getting a higher level of advice than they would otherwise get. From the broker's perspective, establishing a fee structure may be a very effective way tohelp make sure your clientele keeps up with the marketplace and with you. Those who buy into your charging fees for certain things often appreciate being able to control when they ask you to provide advice and service. If your customers object to your charging fees, they may simply be saying either they object to paying any fees at all, or that your advice is not worth it to them. Most of the practitioners I work with want to work with clients who want to work with them, so culling their customers from their real clients is worthwhile. Establishing fee schedules helps do this. Fees for managing assets--Assets under management is a financial planning, not an insurance topic. I mention it only to make the point that this type of fee is usually not so much for managing the client's money directly, but for managing the money managers on behalf of the client. The money managers make the day to day decisions about a client's investment portfolio, and the planner helps the client choose and manage the money manager(s). These fees are usually set as a percentage of assets under management, thereby providing a built-in incentive for managers to manage effectively and grow the asset. Fee schedules Your fee schedule should be a simple statement of what you charge and how you do it. The possibilities are so many that listing them here is impossible. The general rule I advise is to keep it as simple as possible. The more structured and complex you make your fee schedule, the more confusing it will be...to everyone. Some brokers provide a "free" threshold before charging fees. They offer every client a certain amount of "free" time (advice and service) before the fee schedule applies. Again, this gives clients control over what services and advice they seek from their insurance advisor. It helps keep clients from abusing the provider with constant and/or unreasonable requests. It also subdues arguments about whether recommended products pay commissions, and if so, how much. The other thing I like about all this is that it makes the practitioner define the practice in terms the consumer can understand, which requires focusing the practice as a business. The fees--The amount of time the advisor spends working for the client is usually the basis for the fee. The number of hours worked is multiplied by an hourly fee (rate). Services provided by the practitioner's support staff may be charged at a lesser rate than the advisor's. Another approach is to charge flat fees for certain services and advice, or you can charge either. The choices are yours. Just keep it all simple and easy enough for your clients and prospects to understand. The marketing impact The art of marketing is as much creating new markets as finding ones that already exist. By establishing a fee schedule for your services and advice, you place a stated value on what you provide to your clients. You must state what you do and what it costs to have you do it. By doing this, you will raise the image many people have of you. You also raise the bar for your performance, stating that your competence is such that buyers should pay your fees to get your good counsel, advice and services. By establishing fees, you also compare favorably to those who do not, and by inference allow people to draw the conclusion that free advice is worth what you pay for it, so paying a fee is probably better. If insurance planning is what you really do, then charging a fee for writing the plan can be very wise. Most planners I know who do this establish that the planning fee is for writing and delivering the plan, but not for implementing it. At that point, it is simply the client's decision how, when and with whom to implement the plan. This provides reasonable assurance to the client of the advisor's objectivity. Retaining the choice of how to implement the plan gives the client control. Contrary to the common belief of salespeople, buyers actually most often ask the person who created the plan they've bought into also to help them implement the plan. At this point it no longer matters what products the advisor recommended because the plan--and the plan's objectivity--have been paid for. The plan is believed and agreed upon. The advisor might offset the fee against commissions (if this is legal in that jurisdiction) or accept the fee and any commissions paid for the products placed. In the end, advisors who charge fees for advice and certain professional services satisfy the objection that commissioned salespeople have a built-in bias of self-interest that could act against the best interests of the buyer. They also set themselves up to operate at a higher standard of performance, for more will be expected of people who charge fees. John H. Melchinger coaches personal financial services advisors how to market their professional practice to high income and high net worth affluents. Effective market identification, segmentation, selection, penetration and development, with compelling packaging and promotion, make his clients among the best in the business. His marketing techniques, how-to books, articles and presentations have become classics in private practice marketing. John donates one day per month to non-profit organizations that request his support for workshops, seminars and fund- raisers John is available on the Internet at jhmco@ix.netcom.com, by telephone appointment at (403) 459-1472, by fax at (403) 419-2936, and by mail John Melchinger 3 - 11 Bellerose Drive, Suite 117 St. Albert, AB T8N 5C9 Canada Web Sitehttp://www.MROline.com