Sunday, June 26, 2011
97, 98, 98, 100 - WHAT IF YOU LIVED THIS LONG? COULD YOU AFFORD IT?
Good genes can be a curse
There is a financial solution to the need for lifetime sustainable income
The Annuity
Plan to live to 100? There are 6,000 centenarians in Canada, projected to hit 20,000 by 2035.
But improved longevity and low investment returns pose a vexing problem for healthy people with good genes. If worried about outliving your money, consider taking out some longevity insurance, better known as annuities.
Life annuities purchased from life insurance firms provide streams of guaranteed income for as long as you live. Those in employer-provided defined benefit (DB) pensions have extensive annuity protection, as do those collect-
ing Canada Pension Plan or Old Age Security.
But if most of your wealth is exposed to stocks through defined-contribution pensions, RRSPs, TFSAs or non-registered investments, you may need some annuities or newfangled "finsurance" products finance professor Moshe Milevsky describes in How to Pensionize Your Nest Egg.
"If you have the insurance from your employment or job (e.g. DB pension), there is no need to buy more." But those lacking such insurance or worried about longevity risk may need to at least partly annuitize.
Annuities are as old as the hills but are being rediscovered by a new generation of investors scarred by stock-market losses in 2008. The current Barron's profiles a recent retiree, now 67, who bought annuities in 2007, in time to dodge the crash. He no longer frets about outliving his money.
Annuities are more popular in the United States because variable annuities - which add a stock-market kicker - are better and cheaper. With interest rates near historic lows, most Canadian advisors view age 67 as too young to buy life annuities. They suggest waiting until rates rise, when the interest component will be lower and the mortality premium makes up a bigger chunk of the return.
Milevsky doesn't worry that insurance firms can foot the bill if too many reach 100 because they are also. on the other side of the bet, through life insurance. "They will perform handsomely if we all live forever."
In The Only Guide to Alternative Investments You'll Ever Need, Larry Swedroe rates fixed annuities as"good" but variable annuities as "flawed." In an interview in Toronto this week, he warned you need a very long lifetime for variable annuities to pay off.
He's keener on payout annuities or SPIAs (single premium immediate annuities), especially for those in their seventies. ''It's the only asset class that can get you in effect equity-like returns without taking equity risk."
Annuity critics don't like the loss of control or the fact they leave little for heirs. But that applies only if you die young, Swedroe says. "If you live longer than you expect, You're saving the estate's money."
In Canada, Some variable annuities are called segregated funds. Clay Gillespie, managing director of Vancouver's Rogers Group Financial, prefers fixed annuities but suggests clients wait until 78 or 79 before buying.
At 60 or 65, the pickup in yield over regular bonds is only 0.5% or so. but by your late seventies mortality credits make up 80% of the return so low interest rates are less of a concern.
Michel Fortin, vice-president of Standard Life, says the lower interest rates are, the more expensive fixed annuities are, and the younger you are, the higher their cost. Most annuity buyers are between 60 and 70. The annuitization question often arises at 71, when RRSPs must be deregistered. You can also annuitize non-registered assets with tax-efficient "prescribed" annuities. Gillespie is not a fan of another type of variable annuity known as GMWB (guaranteed minimum withdrawal benefit). As structured in Canada, I don't believe they're the soluton:' Gillespie says, ''but I would use them in the U.S."
Asher Tward, vice-president of Toronto's Tridelta Financial, says GMWB fees are "way too high" at 3% or 4%, with the funds mostly balanced or fixed incQme. With SPIAs, you know what you get and can arrange for inflation indexing or term guarantees by accepting lower payouts. He suggests investing conservatively for a few years, then laddering into annuities as interest rates start to rise.
Not all annuities provide longevity insurance. Vancouver advisor Diane McCurdy uses five-year term-certain annuities to bridge clients to retirement. Some may require just five years of income while waiting for employer or public pensions to kick in at 55, 60 or 65. By the time the term is up (terms can also be 10 or 20 years), the rest of your portfolio may have grown.
These are purchased with non-registered funds: One reason McCurdy recommends clients build up non-registered savings. Jonathan Chevreau
Wealthy Boomer
Financial Post
June 26, 2011 jchevreau@nationalpost.com
Sunday, May 15, 2011
CANADIAN CERTIFIED FINANCIAL PLANNERS APPROACH A FIDUCIARY STANDARD OF CLIENT RESPONSIBILITY
Proposed changes to CFP code of ethics
The changes would bring the Canadian CFP practice standards and code of ethics in line with the global CFP principles
CERTIFIED FINANCIAL PLANNERS will face an explicit expectation to put their clients' interests first at all times under proposed changes to the CFP designation's code of ethics.
The Toronto-based Financial Planning Standards Council is seeking comments on updated versions of the CFP practice standards and code of ethics. The proposed changes aim to bring the FPSC's standards in line with global CFP principles and standards, which were updated a year and a half ago by Denver-based Financial Planning Standards Board Ltd. The FPSB works with member organizations in 24 territories to develop international competency, ethics and practice standards for CFP professionals.
"The changes' are relatively small," says John Wickett, senior vice president of standards and certification at the FPSC. "In a few places, we wanted to clean up the language a little bit, tighten it up, make sure it was very dire'ctive to CFP professionals but also very clearly protecting of clients."
The most significant change is the addition of a new "client first" principle to the code of ethics, which states that "a CFP professional shall always place the client's interest first" and must "place the dient's'interests ahead of their own."
Although the code of ethics has always been implicitly client centric, this addition would make the principle explicit, Wickett says: "[There was] a desire to hit that issue head-on. Instead of not speaking to it directly, it's time to just say it outright."
The Toronto-based Canadian Foundation for Advanceme'nt of Investor Rights (a.k.a. FAIR Canada), which has called for regulations that would require all financial advisors to put their clients' interests first when providing investment advice, lauds the proposed principle.
"We think it's a step in the right direction," says Marian Passmore, FAIR Canada's associate director. "We will be interested to see how it will be enforced in practice."
FAIR Canada would like to see the FPSC add even more clarification to its code of ethics on the importance of putting clients first. Specifically, Passmore says, the principle should explicitly state that CFP professionals must not only place the client's interests ahead of their own, but also ahead of the interests of.the firm with which the CFP is associated. FAIR Canada plans to make this recommendation in the comments that it will submit as part of the consultation process.
Canada is one of many countries that recently have been engaged in a debate around the prospect of imposing a fiduciary duty on financial advisors as a way of enhancing investor protection. The proposed "client first" principle would bring CFPs in Canada one step closer to facing this type of standard.
"Really, we're not asking anything more of a CFP professional than is asked of a lawyer or a physician or anyone else put in that kind of position," says Wickett. "If you're a professional, you're a professional- and this is how you have to conduct yourself,"
Another of the FPSC's proposed changes would make the CFP code of ethics enforceable in all professional dealings by a CFP - not just in situations in which a CFP is providing financial' planning servi,ces. For instance, when a CFP is engaged in the sale of a financial product or another activity that's not, strictly speaking, financial planning, the CFP would still be expected to adhere to the ethical principles.
"That's just to make sure," says Wickett, "that there's no avoiding being held accountable to the code of ethics based on what may be a technicality."
"Conduct that contravenes these principles "may be subject to disciplinary action by [the] FPSC's enforcment department," the proposed code of ethics says.
Meanwhile, the CFP practice standards have been tweaked only modestly. Introduced in 2003, these standards outline the process that CFPs are obliged to follow when engaged in comprehensive financia! planning. For instance, the standards stipulate that financial planners must provide clients with a letter of engagement that dearly articulates the scope of services.
The proposed changes include primarily minor adjustments to the language in order to add clarity, Wickett says: "There's no shift in what is expected of a CFP professional."
Wickctt doesn't expect that the proposcd changes to either document would have much of an impact on the day-to-day activities of most CFPs; most CFPs, he says, already conduct themselves in a compliant manner.
"I don't think it's going to have a major effect on most," he says. "But I think it sends a very important message to industry, to CFP professionals and to the public that this is what's expected."
The FPSC's code of ethics and practice standards are reviewed by the council every five to eight years, and usually the changes are minor.
"You don't expect ethical principles to change that much over time," says Wickett. "But how you describe them can shift a bit as the landscape changes."
The process of revising the current standards was conducted by two task forces composed of FPSC staff, CFPs and representatives from the FPSC's seven member organizations. This last group includes the Montreal-based Institut quebecois de planification financiere, which is currently reviewing its own code of ethics. The FPSC and the IQPF aim to keep their ethical standards as consistent as possible.
The deadline for feedback on the FPSC's proposed changes by financial services industry members and the public is May 16.
Megan Harman
Investment Executive
May 2011
Saturday, May 14, 2011
THE 2ND 30 - 40 YEARS - LIFETIME RETIREMENT - HOW WE GOT FROM THERE TO HERE
1960 - 1990
FINANCIAL PLANNING WAS DONE BY THE CORPORATION - NOT THE EMPLOYEE. EMPLOYEES BUDGETED INCOME - EXPENSES.- THAT'S IT! THE EMPLOYEE TRADED HIS OR HER FINANCIAL TIME FOR A GUARANTEED LIFETIME AT RETIREMENT.
The first demographic group who were targeted were those in their mid 50's. Why? Because it is costly to fund a lifetime retirement with 10 years left (i.e. 55 - 65). This left those affected with only one choice - do it on your own. A $100,000 / year retirement income requires $2,000,000 in capital assuming a 5% rate of return on the capital - that's $200,000 / year in retirement funding. That sum speaks for itself. Most corporations did not start the retirement funding early.
Once a corporation removes a guaranteed pension for all intents and purposes an employee becomes self employed. The only advantage anyone has financially in a large institution is the opportunity to receive a pension and retire with peace of mind. Once you are on your own you are acting as an independent entrepreneur and not an employee. Loyalty cuts both ways.
That's the background that has resulted today in 60% of all working Canadians not having a defined benefit pension plan which would allow them to sleep soundly throughout the 30 - 40 years of their retirement (from as early as 55 to as late as 95 - look around you in your own family.)
Ask public servants why they work for the government from a financial point of view - their defined benefit pension.
Financial planning was done by the corporation - not the employee. Employees budgeted – income – expenses – that’s it. The employee traded his or her financial time for a guaranteed lifetime income at retirement.
Employees bought financial products for their individual accumulation purposes but had very little certainty whether they would be able to transition their accumulated savings capital into a sufficient and sustainable lifetime retirement income.
That brings us to 2011 where 14,000,000 boomers in Canada are preparing to retire and are inadequately aware of which professional financial practitioner can replace the corporate financial management team who once upon a time designed and implemented their defined benefit retirement plans......
That's where we are today.
Friday, May 13, 2011
LIFE WITHOUT A SUSTAINABLE LIFETIME PENSION IS NOT SIMPLY TOUGH - IT IS UNCONSCIONABLE
LACK OF PENSIONS A GROWING CONCERN
It will be the 'biggest social issue we're going to be debating in our society'
Talking about pensions may seem deadly boring but it will likely emerge as a much bigger issue in the years to come.
That's because of several colliding factors - aging baby boomers, low interest rates and weak stock market returns.
Plus more companies, especially small and medium-sized businesses, don't offer pension plans. Those that do are switching from defined benefit programs, with guaranteed . payouts, to defined contribution plans, which are based on accumulated contributions.
A number of pension plans have been damaged severely by the last recession or corporate bankruptcies. Nortel pensioners have engaged in a high profile public fight for their benefits, which have been compromised by the company's demise.
"Pensions will be the biggest social issue that we're going to be debating in our society over the next 10 years:' said Rick Robertson, an associate professor at the Ivey School of Business.
Statistics Canada reported this week that about 6 million Canadians were in registered pension plans as of Jan.1, 2010. Of those, 3.02 million work in the public sector as bureaucrats, nurses and teachers.
Nearly 60 per cent of working Canadians have no company pension, StatsCan says
Those working in the private sector know fewer employers offer pension plans, and more companies are switching to defined contribution plans from defined benefit plans. Some only offer defined contribution plans to new hires.
Air Canada is trying to switch newemployees to these cheaper plans. Its 3,000 pilots, who have reportedly balked at the idea. are in the midst of a ratification vote on a tentative deal. Statistics Canada says nearly 60 per cent of working Canadians - or 12.3 million peopIe - have no company pension.
While government supports are in place the Canada Pension Plan for all working Canadians, Old Age Security for all Canadians and the Guaranteed Income Supplement for low-income Canadians - it's the middle earners who are feeling the pinch.
A defined benefit plan has one huge advantage: people don't go to sleep at night worried when they have retired," said Robertson. ''It leads to very different lifestyle choices."
With these latest statistics, he believes it's only natural for governments to try to pull back on pensions, though it would lead to a very tough fight with unions.
"There are some pretty powerful unions.
Think of the teachers. Everyone says, 'Take them on: but as soon as somebody's kid doesn't have a place to go that day, then they say, 'Just solve it;" Robertson said
Any move to introduce pension changes would not solve immediate fiscal problems, but some U.S. states, where unions are weak or non-existent, have already done it
Newly hired state workers in VIrginia are now on a retirement savings program instead of the traditional defined benefit plan.
Paul Forestall, senior partner at Mercer, a human resources consulting firm, believes there will be growing pressure on governments here to move toward defined contribution plans.
The Statistics Canada data shows about 143,000 government workers were on defined contribution plans in 2009, compared with 2.8 million on defined benefit plans.
''Pensions are a big part of compensation in the public sector. Changing it won't be easy;' he said, adding public sector employees like teachers also make significant contributions to the plans. Given the decline in manufacturingjobs, Forestall is not surprised public sector workers now make up more than half of those with pension plans.
Ultimately, any changes may be dependent on government action.
While Finance Minister Jim Flaherty has expressed concern Canadians aren't saving enough for retirement, efforts to reform CPP have been thwarted by certain provinces, notably Alberta
Flaherty has floated the idea of a privately administered, voluntary program designed to help mainly the self-employed and workers at small businesses.
"I think it would be a positive change if implemented, but I'm not sure it will be enough to address coverage," Forestall said
If government reforms offer tax advantages to companies or make it easier to offer pensions, companies may start to offer defined contribution plans, though probably not defined benefit plans, he added.
Vanessa Lu, Business Reporter
Toronto Star
May 13, 2011
Thursday, April 21, 2011
NO OPTION: RBC POLL FINDS RETIREMENT IS NOT A CHOICE FOR MANY CANADIANS
Careers ending earlier than expected, retirees seeking other income
TORONTO, April 20 /CNW/ - There are surprises in store for Canadians who are expecting to retire on a date of their own choosing, according to the 2nd Annual RBC Retirement Myths & Realities poll.
While the vast majority (83 per cent) of "pre-retirees" aged 50 plus believe they will retire on the date of their choice, almost half (41 per cent) of those who have already retired report that their retirement date was unplanned. The top three factors cited for early retirement: employer's request (18 per cent), health reasons (14 per cent) or reaching mandatory retirement age (6 per cent).
"We're finding that even Canadians who think they are well-prepared for their retirement years have not taken the unexpected into consideration," explained Lee Anne Davies, head, Retirement Strategies, RBC. "When their job disappears suddenly, they struggle with financing the added years in retirement that they hadn't counted on. This is where financial advice can ensure all aspects of retirement are explored, including the unexpected."
The RBC poll also found in the past 12 months, there has been a significant rise in the number of retirees returning to the workforce because they need the income (41 per cent in 2011 compared to 32 per cent in 2010), as well as a drop in the number of Canadians retiring debt-free (56 per cent in 2011; 61 per cent in 2010).
Fully retired Canadians, when asked what they would do if at some point their retirement income is not sufficient to support their lifestyle, responded that they would either stay in their present homes but live frugally (89 per cent); move out of their present homes to downsize or rent (87 per cent); or stay in their present homes and sell off assets (65 per cent).
"There are a number of ways to plan out how your retirement years can look," added Davies. "Seeking out good advice before retirement from financial planners can help you determine what you can do now to support your future lifestyle in retirement."
The annual RBC Retirement Myths & Realities Poll compares the perspectives of both retired and not-yet-retired Canadians, aged 50 and over. Related data charts can be accessed via www.rbc.com/newsroom/2011/0420-myths-wave1.html.
About RBC's retirement planning and other financial advice and interactive tools
Your Future by Design® is RBC's distinctive approach to help Canadians identify, plan, and realize their goals for retirement. With the guidance of RBC financial planners and investment planners and retirement planners, Your Future by Design helps Canadians create a blueprint for a successful lifestyle and financial plan for retirement based on what is truly important to them in key areas in life, including family, health, home, lifestyle, work/business, mind and spirit, and legacy.
About the RBC Myths & Realities Poll
The 2nd Annual RBC Retirement Myths & Realities Poll, which examines Canadians' expectations and experiences in retirement, was conducted by Ipsos Reid from February 25 - March 7, 2011. For this survey, a national sample of 2,245 adults aged 50 and over with household assets of at least $100,000 from Ipsos' Canadian online panel was interviewed online. A survey with an unweighted probability sample of this size and a 100 per cent response rate would have an estimated margin of error of ±2 percentage points 19 times out of 20 of what the results would have been had the entire population of adults in Canada been polled. All sample surveys and polls may be subject to other sources of error, including, but not limited to, coverage error and measurement error.
Rogers Yahoo Finance
April 20, 2011
Wednesday, April 13, 2011
70 OR BUST! THE ECONOMIST'S CASE FOR RAISING THE RETIREMENT AGE TO 70
The Economist
The cover story on the newest edition of The Economist, published online Thursday and probably not in “dead-tree” editions until early this week, is entitled 70 or bust!
The influential weekly British newspaper argues “current plans to raise the retirement age are too timid. Governments must go much further.”
By further, it means raising the retirement age to 70, which is a good half-decade beyond the “traditional” retirement age of 65 and 15 years longer than the magic 55 enjoyed only by a handful of fortunates who joined Defined Benefit pension plans early in life and stuck with it.
The lead editorial blames “demography and declining investment returns” as factors conspiring to keep workers chained to their desks longer than most expect or hope.
It notes the life expectancy of the typical 65-year old has improved by four or five years since 1971, a prospect that hit home this week in news stories about centenarian teachers who have collected pensions for more years than they paid into them.
That’s not mentioned by The Economist‘s package of pension stories but there is another oblique reference to Canadian pensions. A sidebar notes the most siblings to reach pension age were 7 sons and 12 daughters born to the Theriault family in Canada between 1920 and 1941: all were still collecting Government pensions in 2007, at which point their ages ranged from 66 to 87.
In another telling sidebar, it says the first American to receive a monthly Social Security cheque was Ida May Fuller, who paid in just $24.75 and had received $22,888.92 by the time she died at age 100.
Secure DB pensions eclipsed by risky DC ones
There’s familiar coverage of the steady decline of Defined Benefit pensions and the corresponding rise of Defined Contribution plans that put more market risk on the shoulders of workers. It concludes workers will need to “fend for themselves,” particularly the massive middle class.
It ruefully reminds us the rich don’t need to worry about retirement while the poor will be supported by the state. Those in the middle used to rely on lifelong employment with firms hosting DB plans but few can do so in modern times. Unfortunately, the amount most have saved in DC pensions or their equivalent (the Canadian RRSP or American IRA) has been woefully inadequate, and what little has been stashed away has suffered from disappointing investment returns.
3 reasons for working longer
Hence the inevitable if depressing conclusion: keep working. The magazine suggests Europeans should raise the retirement age to 70 by 2040 while a slightly younger America could afford to “keep it a smidgen lower.”
Society reaps three big advantages by raising the retirement age: workers get more years of relatively higher wages; the government gets all that extra income tax revenue on those earnings and simultaneously pays out less in benefits; and the economy grows faster.
The challenge, it concludes, is to have high enough state pensions that the elderly who failed to save can survive “without penalizing those who have been thrifty. That is the least people deserve in return for toiling until they are 70.”
That goes right to the heart of the pension debate now occurring in the Canadian election. All three major parties promise to hike the Guaranteed Income Supplement for poor seniors who failed to save. Meanwhile, at the other extreme, the Conservative government is trying to help those who do work and save by doubling contribution amounts in Tax Free Savings Accounts.
The DB vs DC pension debate is also central to the election, since the Liberals want to expand the DB-like Canada Pension Plan but also offer an RRSP-like publicly administered DC plan. The Conservatives want to make it easier for smaller companies to offer workers “pooled” Registered Pension Plans that will likely be DC-like.
No doubt many will conclude private-sector taxpayers should keep working till 70, even as politicians and public-sector workers enjoy full retirement a good ten years before that.
Jonathan Chevreau
National Post
Apr 12, 2011
Monday, February 28, 2011
MGA SYSTEM UNDER FIRE IN CANADA - GLOBE AND MAIL SERIES SPARKS STONG INDUSTRY REACTION
The Globe and Mail’s article, “Through Canada’s insurance loophole,” published Dec. 18, 2009 elicited strong reaction from the insurance distribution channel. The article opened by citing the case of a 96-year-old Vancouver woman who cashed in a $200,000 segregated fund and invested it in her insurance agent’s company, leaving the woman’s disabled 71-year-old son without the inheritance he’d counted on.
It went on to blame the growth of the MGA system for severing the chain of oversight between insurers and independent agents. The report claimed to have uncovered “a gaping hold in Canadian insurance regulation…nearly half of all individual life insurance policies in Canada are now being transacted through MGAs, which often undertake little – if any – oversight of agents in the market.”
“To equate the plight of a 71-year-old man hooked up to an oxygen tank with the emergence of MGAs is ridiculous,” said Paul Brown, CEO of Worldsource Insurance Network, a Vancouver-based MGA. “The issue was a financially desperate advisor acting outside of her insurance licensing.”
The report stated that the Canadian Council of Insurance Regulators, the umbrella group of provincial regulators, “became aware of the MGA issue at least two years ago and assigned a group of officials to look into it. However, the group has yet to report or take any action.”
Carol Shevlin, the CCIR’s Toronto-based policy manager, said the group has indeed been looking at MGAs, and has just released a paper titled Managing General Agents: Life Insurance Distribution Model. But she added that the CCIR’s review of MGAs was not a response to any known problems, but rather the first in a series of reports the CCIR is planning. “We’re looking at the various things that have grown up in recent years between the insurance companies and policyholders, and whether there is anything to be concerned about. It’s all part of our risk-based approach to market conduct regulation.”
Accountability
Accountability of MGAs is among the issues explored in the CCIR paper, she added. The paper’s release was eagerly awaited by the industry where accountability to consumers for the actions of rogue or negligent agents is a hot-button issue.
Peter Lamarche, president of the Canadian Association of Independent Life Brokerage Agencies (CAILBA) that represents MGAs, said there is ongoing discussion among insurers, MGAs and regulators about who is responsible for agent oversight. CAILBA’s position is that the agent is the person primarily responsible for product suitability. “The decision about which product the client will purchase is a decision reached between the agent and the client,” he said. “We, in turn, are responsible for knowing our agents. Just from a business risk point of view, we need to know who our agents are, and take care in the hiring process with screening and background checks.
“And if, for example, a new advisor sold 50 of the same type of product to members of the same community, generating commissions of more than $100,000, the onus would be on the MGA to investigate this advisor.”
Insurance companies also have a responsibility to the consumers who buy their products. When a consumer buys insurance, he buys it from the insurance company, not the agent, noted Allan Bulloch, president of Independent Planning Group Inc., an Ottawa-based MGA. He gave an example from his own practice of a client who was facing a deadline to convert an insurance policy.
“We were advised by the insurance company, we advised the agent, the agent discussed the matter with the client, who agreed to convert the policy,” he said. “But nothing happened and the deadline passed. The client professed that he had communicated his intentions to the agent and showed us his e-mails. The insurer reviewed the case and agreed that the right thing was to allow the client to do what he’d intended and convert the policy.”
“Insurance policies are held directly with the insurance company,” CLHIA’s Ms. Hope said, “and it will stand behind its policy. The insurance company is the party that is accountable to clients.”
In a letter to the editor of The Globe and Mail, Jim Rogers, founder and chairman emeritus of Vancouver-based Rogers Group Financial Ltd., said insurance companies should be held liable for the actions of both their MGAs and the agents who put their business through these MGAs.
“The companies should be held vicariously liable,” he added in an interview, “meaning they should be held liable by reason of their association with the MGA. If I’m going to be held vicariously liable, I’m going to have a pretty tight contract with my MGA in place.”
In a posting on his blog, RickardsRead.com, Alastair Rickard, a former life insurance company executive with Mutual Life, Clarica Life and Sun Life Financial, and founding editor of the Canadian Journal of Life Insurance, echoed this: “Life companies should not be allowed to shelter from accountability to clients for deficient actions by those who sell their products behind a wall [legal and/or regulatory] comprised of those who facilitate the sale of the company’s financial products…whether those salespersons are MGAs, individual agents placing business directly with a brokerage company or via an MGA or a company’s career agent.”
At present, that would be difficult to enforce. “Each province has its own regulator that is responsible for oversight of life agents, and each province has an insurance act and regulations that govern some training and supervision requirements,” Harold Geller, a lawyer with Doucet McBride LLP said. “But the extent of responsibilities on insurers as a result of the acts or regulations varies among provinces. Some provinces, like Newfoundland, have a reasonable level of supervision. Some provinces, like Ontario, have supervision wording that is outdated and has little, if any, practical application.
“Quebec is unique in Canada,” he added, “and has much higher standards for the advice and sale of financial products. These standards provide a much higher level of consumer protection and advisor professionalism.”
“MGAs in the main do not exercise the same level of interest/compliance supervision as do those life companies with their own career agents,” Mr. Rickard said in his blog.
But the career agency system is not immune to fraud either. “The outright defrauding of clients, relatively infrequent, can and has occurred involving licensed life insurance intermediaries in all parts of the active agency system, including the best managed and supervised career agency systems of the very best life insurance companies – as I know as a matter of first-hand knowledge,” Mr. Rickard added.
Mr. Brown said the Globe and Mail article failed to point out that MGAs have been instrumental in bringing better products and services to Canadian consumers through independent brokers.
“Years ago, when I first got into the business, I was a captive agent and sold the insurer’s products exclusively,” Mr. Bulloch said. “Today I can offer more choice and, thus, better represent my clients.”
The Dec. 18 article implied more regulation of MGAs and agents is needed. “The MGAs are trying to stave off regulation, worried that new rules will be bad for the bottom line,” it said.
CAILBA strongly disagrees with this statement, Mr. Lamarche said, “as evidenced by our actively participating with the CCIR and other provincial regulators.” And he disagrees with the implication “that regulators are powerless and have done little in the area of compliance,” citing the CCIR’s recent work on understanding the MGA distribution channel, with input from CAILBA.
More disclosure, not more regulation, is needed, said Randy Reynolds, president of Financial Advisors Brokerage Group Inc., a Vancouver-based MGA. “The higher the level of disclosure, the more confidence the consumer will have in the insurance system. I believe in disclosing compensation and any conflicts of interest to the client. Perks such as conferences and travel should be disclosed. And commissions need to be disclosed.”
Mr. Geller said the provinces have “a checkerboard approach” to disclosure. “Ontario has weak disclosure requirements…There are no meaningful requirements with respect to disclosure of conflicts of interest, compensation, limited shelves [that an agent can only get or chooses to offer contracts from a limited number of insurers] or the impact of these issues on the agent’s representations, competitiveness and objectivity.”
Compensation disclosure
CLHIA members, making up 99% of Canadian insurers, require agents to disclose method of compensation, the companies they represent and conflicts of interest to the consumer.
“To my knowledge, no court has considered these as informative or binding,” Harold Geller said, “nor can the CLHIA disclosure requirements be considered to require meaningful disclosure understandable to the average purchaser of life insurance.”
Mr. Rogers said he would like to see a disclosure document provided to the client by the agent that lists the services the client will get, how and what he’ll pay for them, the agent’s qualifications (education and experience) and the procedure for making complaints.
Some MGAs are taking steps to protect themselves and the agents who work with them from liabilities that could arise from transactions with clients. Gary Goldshmidt, president of Stone-Hedge Financial Group Inc., a Toronto-based MGA, put a compliance regime in place when he set up his company a few years ago. Agents who work through his MGA have to document the client’s suitability for the policy or investment, and Mr. Goldshmidt has developed a guide to measure risk tolerance. Agents also provide clients with a disclosure document making them aware of the fees they are paying, and a privacy protection document. “Agents need to view compliance as an asset rather than a liability,” he added, “because agents as well as dealers can find themselves on the line.”
CAILBA is developing its new Compliance Toolbox (See The Insurance and Investment Journal, November/December 2010) to help MGAs set up compliance regimes. The first phase, being launched this spring, will supply MGA members with a generic set of compliance documents. Use of the toolbox won’t be mandatory, Mr. Lamarche said, “but rather part of suggested best practices.”
A series of articles that ran in The Globe and Mail in December on the Canadian life insurance industry has sparked debate in the insurance industry. Some call the articles misguided, misinformed and exploitative. Others say they pinpoint major problems in the in¬dustry. And still others say that, while elements may be misleading and exaggerated, they turn the spotlight on a number of troublesome issues, and some good may result from it.
The Dec. 22 article in the series entitled, "What your broker doesn't want you to know," claimed that commissions, bonuses and free trips often factor into an agent's decision to recommend certain policies to clients. These incentives, the report said, are paid by insurance companies to keep brokers coming back to them, and they take three forms: upfront commissions when the sale is made; bonuses based on the volume of business a broker does with that insurer; and perks such as trips to promote loyalty and encourage brokers to bring as many clients to that insurer as possible.
The fact that life insurance companies compete for the business of agents is com¬mon knowledge in the industry. Insurance companies provide incentives to agents to encourage clients to stay with them, said Lawrence Geller, president of L.I. Geller Insurance Agencies Ltd. in Campbellville, Ont. "Book bonuses for life agents are based on how large the agent's book of business is, and how much business the agent did with the insurance company that year," he noted.
Proper disclosure
The Canadian Life and Health Insurance Association, representing 63 Canadian insur¬ers, said it doesn't get involved in its members' incentive practices. "It's a competitive issue among companies, like pricing," said Wendy Hope, CLHIA's Ottawa-based vice-president, external relations. "What we're concerned about is that there's proper disclosure of incen¬tives to the consumer, and we're constantly upgrading our disclosure guidelines."
And only a small percentage of agents qualify for junkets in terms of the sales they generate. "Trips are for high-flying agents," said Bradley Sumner, a financial planner and independent life agent with Investment Planning Counsel in Kingston, Ont., "But I don't think those who take them are compromising themselves. Agents work with companies because they like their products and the service they provide to back them up. And we need these opportunities to network with others in the industry."
Some people work with a company because they appreciate the ease in dealing with it, Lawrence Geller added. "With today's older population requiring a lot more health care than in the past, we're seeing a lot of products on the market. It can be important for an agent to be able to speak to the underwriter."
A free trip may not appear to compromise an agent's ability to work in the client's best interest. After all, there is an educational component, and the cost of the trip is taxable in the hands of the agent.
But according to Dan Zwicker, principal with Toronto-based investment consultants First Financial Consulting Group, compensation of this kind is reflective of the conflicts of interest inherent in the financial services industry.
"In a product-driven, financially incentivized industry, the agent's choice of product is somewhat less than unbiased," he said, "and unless there is total compensation transparency, the client is never absolutely sure that he has received unbiased advice. Every decision the advisor makes has two dimensions to it:
Is this in the client's interest? And is this in my interest? Within a professional practice context the two considerations are sometimes incompatible."
The insurance industry is geared towards keeping people who deal with consumers in the role of salespeople rather than insurance professionals, according to Harold Geller, a lawyer with Doucet McBride LLP in Ot¬tawa who specializes in the financial services industry. "There are different standards of care governing an advisor selling mutual funds and a life insurance agent," he said. "The fact that there is no KYC obligation on the part of the insurance agent suggests that insurance products are somehow inferior, not requiring the same level of professionalism as mutual funds.
"And insurance agents are not required to have the same level of entrance standards, training and continuing education as other professionals in Canada," he added. "Yet insurance is a profession that has perhaps the greatest impact on the consumer of any profession. Today people need significant resources for retirement and they turn to financial advisors for expertise."
In a letter to the editor of the Globe and Mail, Jim Rogers, founder and chairman emeritus of Vancouver-based Rogers Group Financial Ltd., past two-term chairman of the Canadian Association of Insurance and Financial Advisors (now Advocis) and past president of the Million Dollar Round Table, said the "lack of accountability problems" cited by The Globe and Mail reporters "are pretty well as they have laid out."
Many elements go into the cost of an insurance policy, he noted in an interview with The Insurance and Investment Journal. "For every $1 a consumer sends an insurance company, how much of it goes to cover the risk, towards administrative costs, towards distribution? What's wrong with the consumer asking how much you're getting paid out of it? saying, 'Tell me what you're doing for your 20%'."
"Every time an agent recommends a prod¬uct that brings him more compensation, he should be required to disclose the difference in compensation he would have earned from competing like products," Harold Geller added. "And he should be required to disclose the differences between the like products, both the benefits and the downsides. If not, there is a definite conflict of interest."
Consumer awareness
The Globe and Mail articles may have started a process of consumer advocacy, Harold Geller said, that could result in profound change. "Groups like CLHIA and the Joint Forum of Financial Market Regulators wave their hands in the direction of consumer interests, but routinely undermine efforts to bring about a level playing field for consumers."
Mr. Rogers applauded the articles for "shining some light on these issues. Some public good may come of it."
And Alastair Rickard, a former life insurance company executive with Mutual Life, Clarica Life and Sun Life Financial, and founding editor of the Canadian Journal of Life Insurance, praised the Globe and Mail "for devoting serious and extensive attention to life insurance agency distribution in Canada and related issues. I cannot recall a single article in any Canadian daily newspaper presenting such an extensive look at life insurance agency distribution."
"Articles like these are a wonderful oppotunity for the industry to look itself in the face and ask, 'Are we doing a comparable job to the professionals in other industries?' The answer would have to be no," Harold Geller said.
It went on to blame the growth of the MGA system for severing the chain of oversight between insurers and independent agents. The report claimed to have uncovered "a gaping hold in Canadian insurance regulation ... nearly half of all individual life insurance policies in Canada are now being transacted through MGAs, which often undertake little¬if any - oversight of agents in the market."
"To equate the plight of a 71-year-old man hooked up to an oxygen tank with the emergence of MGAs is ridiculous," said Paul Brown, CEO of Worldsource Insurance Network, a Vancouver-based MGA. "The is¬sue was a financially desperate advisor acting outside of her insurance licensing."
The report stated that the Canadian Council of Insurance Regulators, the um¬brella group of provi ncial regulators, "became aware of the MGA issue at least two years ago and assigned a group of officials to look into it. However, the group has yet to report or take any action."
Carol Shevlin, the CCIR's Toronto-based policy manager, said the group has indeed been looking at MGAs, and has just released a paper titled Managing General Agents:
Life Insurance Distribution Model (see page 3). But she added that the CCIR's review of MGAs was not a response to any known problems, but rather the first in a series of reports the CCI R is planning. "We're look¬ing at the various things that have grown up in recent years between the insurance companies and policyholders, and whether there is anything to be concerned about. It's all part of our risk-based approach to market conduct regulation."
Accountability
Accountability ofMGAs is among the issues explored in the CCIR paper, she added. The paper's release was eagerly awaited by the industry where accountability to consumers for the actions of rogue or negligent agents is a hot-button issue.
Peter Lamarche, president ofthe Canadian Association ofIndependent Life Brokerage Agencies (CAILBA) that represents MGAs, said there is ongoing discussion among in¬surers, MGAs and regulators about who is responsible for agent ovcrsight. CAILBA's position is that the agent is the person primar¬ily responsible for product suitability. "The decision about which product the client will purchase is a decision reached between the agent and the client," he said. "We, in turn, are responsible for knowing our agents. Just from a business risk point of view, we need to know who our agents are, and take care in the hiring process with screening and background checks.
"And if, for example, a new advisor sold 50 of the same type of product to members of the same community, generating commissions of more than $100,000, the onus would be on the MGA to investigate this advisor."
Insurance companies also have a respon¬sibility to the consumers who buy their products. When a consumer buys insurance, he buys it from the insurance company, not the agent, noted 1\llan Bulloch, president of Independent Planning Group Inc., an Ottawa-based MGA. He gave an example from his own practice of a client who was facing a deadline to convert an insurance policy.
"To equate the plight of a 71-year-old man hooked up to an oxygen tank with the emergence of MGAs is ridiculous."
"We were advised by the insurance company, we advised the agent, the agent discussed the matter with the client, who agreed to convert the policy," he said. "But nothing happened and the deadline passed. The client professed that he had communicated his intentions to the agent and showed us his e-mails. The insurer reviewed the case and agreed that the right thing was to allow the client to do what he'd intended and convert the policy."
"Insurance policies are held directly with the insurance company," CLHTA's Ms. Hope said, "and it will stand behind its policy.
The insurance company is the party that is accountable to clients."
In a letter to the editor of The Globe and Mail, Jim Rogers, founder and chairman emeritus of Vancouver-based Rogers Group Financial Ltd., said insurance companies should be held liable for the actions of both their MGAs and the agents who put their business through these MGAs.
"The companies should be held vicariously liable," he added in an interview, "meaning they should be held liable by reason of their association with the MGA. If I'm going to be held vicariously liable, I'm going to have a pretty tight contract with my MGA in place."
In a posting on his blog, RickardsRead.com, Alastair Rickard, a former life insurance company executive with Mutual Life, CIa rica Life and Sun Life Financial, and founding editor of the Canadian Journal of Life insurance, echoed this: "Life companies should not be allowed to shelter from account¬ability to clients for deficient actions by those who sell their products behind a wall [legal and/or regulatory] comprised of those who facilitate the sale of the company's financial products ... whether those salespersons are MGAs, individual agents placing business directly with 'a brokerage company or via an MGA or a company's career agent."
At present, that would be difficult to enforce.
"Each province has its own regulator that is responsible for oversight of life agents, and each province has an insurance act and regulations that govern some training and supervision requirements," Harold Geller, a lawyer with Doucet McBride LLP said. "But the extent of responsibilities on insurers as a result of the acts or regulations varies among provinces. Some provinces, like Newfound¬land, have a reasonable level of supervision. Some provinces, like Ontario, have supervi¬sion wording that is outdated and has little, if any, practical appl ication.
"Quebec is unique in Canada," he added, "and has much higher standards for the advice and sale of financial products. These standards provide a much higher level of consumer protection and advisor profes¬sionalism."
"MGAs in the main do not exercise the same level of interest/compliance supervision as do those life companies with their own career agents," Mr. Rickard said in his blog.
But the career agency system is not immune to fraud either. "The outright defrauding of clients, relatively infrequent, can and has occurred involving licensed life insurance intermediaries in all parts of the active agency system, including the best managed and supervised career agency systems of the very best life insurance companies - as I know as a matter of first-hand knowledge," Mr. Rickard added.
Mr. Brown said the Globe and Mail article failed to point out that MGAs have been instrumental in bringing better products and' services to Canadian consumers through independent brokers.
"Years ago, when I first got into the business, I was a captive agent and sold the insurer's products exclusively," Mr. Bulloch said. "Today I can offer more choice and, thus, better represent my clients."
The Dec. 18 article implied more regulation of MGAs and agents is needed. "The MGAs are trying to stave off regulation, worried that new rules will be bad for the bottom line," it said.
CAILBA strongly disagrees with this statement, Mr. Lamarche said, "as evidenced by our actively participating with the CCIR and other provincial regulators." And he disagrees with the implication "that regulators are powerless and have done little in the area of compliance," citing the CCIR's recent work on understanding the MGA distribution channel, with input from CAILBA.
More disclosure, not more regulation, is needed, said Randy Reynolds, president of Financial Advisors Brokerage Group Inc., a Vancouver-based MGA. "The higher the level of disclosure, the more confidence the consumer will have in the insurance system. I believe in disclosing compensation and any conflicts of interest to the client. Perks such as conferences and travel should be disclosed. And commissions need to be disclosed."
Mr. Geller said the provinces have "a checkerboard approach" to disclosure. "Ontario has weak disclosure requirements ... There are no meaningful requirements with respect to disclosure of conflicts of interest, compensation, limited shelves [that an agent can only get or chooses to offer contracts from a limited number of insurers] or the impact of these issues on the agent's representations, competitiveness and objectivity."
Compensation disclosure
CLHIA members, making up 99% of Canadian insurers, require agents to disclose method of compensation, the companies they represent and conflicts of interest to the consumer.
"To my knowledge, no court has considered these as informative or binding," Harold Geller said, "nor can the CLHIA disclosure requirements be considered to require meaningful disclosure understandable to the average purchaser of life insurance."
Mr. Rogers said he would like to see a disclosure document provided to the client by the agent that lists the services the client will get, how and what he'll pay for them, the agent's qualifications (education and experience) and the procedure for making complaints.
Some MGAs are taking steps to protect themselves and the agents who work with them from liabilities that could arise from transactions with clients. Gary Goldshmidt, president of Stone-Hedge Financial Group Inc., a Toronto-based MGA, put a compliance regime in place when he set up his company a few years ago. Agents who work through his MGA have to document the client's suitability for the policy or investment, and Mr. Goldshmidt has developed a guide to measure risk tolerance. Agents also provide clients with a disclosure document making them aware of the fees they are paying, and a privacy protection document. "Agents need to view compliance as an asset rather than a liability," he added, "because agents as well as dealers can find themselves on the line."
CAILBA is developing its new Compliance Toolbox to help MGAs set up compliance regimes. The first phase, being launched this spring, will supply MGA members with a generic set of compliance documents. Use of the toolbox won't be mandatory, Mr. Lamarche said, "but rather part of suggested best practices."
Rosemary McCracken
The Insurance Journal
February 2011
It went on to blame the growth of the MGA system for severing the chain of oversight between insurers and independent agents. The report claimed to have uncovered “a gaping hold in Canadian insurance regulation…nearly half of all individual life insurance policies in Canada are now being transacted through MGAs, which often undertake little – if any – oversight of agents in the market.”
“To equate the plight of a 71-year-old man hooked up to an oxygen tank with the emergence of MGAs is ridiculous,” said Paul Brown, CEO of Worldsource Insurance Network, a Vancouver-based MGA. “The issue was a financially desperate advisor acting outside of her insurance licensing.”
The report stated that the Canadian Council of Insurance Regulators, the umbrella group of provincial regulators, “became aware of the MGA issue at least two years ago and assigned a group of officials to look into it. However, the group has yet to report or take any action.”
Carol Shevlin, the CCIR’s Toronto-based policy manager, said the group has indeed been looking at MGAs, and has just released a paper titled Managing General Agents: Life Insurance Distribution Model. But she added that the CCIR’s review of MGAs was not a response to any known problems, but rather the first in a series of reports the CCIR is planning. “We’re looking at the various things that have grown up in recent years between the insurance companies and policyholders, and whether there is anything to be concerned about. It’s all part of our risk-based approach to market conduct regulation.”
Accountability
Accountability of MGAs is among the issues explored in the CCIR paper, she added. The paper’s release was eagerly awaited by the industry where accountability to consumers for the actions of rogue or negligent agents is a hot-button issue.
Peter Lamarche, president of the Canadian Association of Independent Life Brokerage Agencies (CAILBA) that represents MGAs, said there is ongoing discussion among insurers, MGAs and regulators about who is responsible for agent oversight. CAILBA’s position is that the agent is the person primarily responsible for product suitability. “The decision about which product the client will purchase is a decision reached between the agent and the client,” he said. “We, in turn, are responsible for knowing our agents. Just from a business risk point of view, we need to know who our agents are, and take care in the hiring process with screening and background checks.
“And if, for example, a new advisor sold 50 of the same type of product to members of the same community, generating commissions of more than $100,000, the onus would be on the MGA to investigate this advisor.”
Insurance companies also have a responsibility to the consumers who buy their products. When a consumer buys insurance, he buys it from the insurance company, not the agent, noted Allan Bulloch, president of Independent Planning Group Inc., an Ottawa-based MGA. He gave an example from his own practice of a client who was facing a deadline to convert an insurance policy.
“We were advised by the insurance company, we advised the agent, the agent discussed the matter with the client, who agreed to convert the policy,” he said. “But nothing happened and the deadline passed. The client professed that he had communicated his intentions to the agent and showed us his e-mails. The insurer reviewed the case and agreed that the right thing was to allow the client to do what he’d intended and convert the policy.”
“Insurance policies are held directly with the insurance company,” CLHIA’s Ms. Hope said, “and it will stand behind its policy. The insurance company is the party that is accountable to clients.”
In a letter to the editor of The Globe and Mail, Jim Rogers, founder and chairman emeritus of Vancouver-based Rogers Group Financial Ltd., said insurance companies should be held liable for the actions of both their MGAs and the agents who put their business through these MGAs.
“The companies should be held vicariously liable,” he added in an interview, “meaning they should be held liable by reason of their association with the MGA. If I’m going to be held vicariously liable, I’m going to have a pretty tight contract with my MGA in place.”
In a posting on his blog, RickardsRead.com, Alastair Rickard, a former life insurance company executive with Mutual Life, Clarica Life and Sun Life Financial, and founding editor of the Canadian Journal of Life Insurance, echoed this: “Life companies should not be allowed to shelter from accountability to clients for deficient actions by those who sell their products behind a wall [legal and/or regulatory] comprised of those who facilitate the sale of the company’s financial products…whether those salespersons are MGAs, individual agents placing business directly with a brokerage company or via an MGA or a company’s career agent.”
At present, that would be difficult to enforce. “Each province has its own regulator that is responsible for oversight of life agents, and each province has an insurance act and regulations that govern some training and supervision requirements,” Harold Geller, a lawyer with Doucet McBride LLP said. “But the extent of responsibilities on insurers as a result of the acts or regulations varies among provinces. Some provinces, like Newfoundland, have a reasonable level of supervision. Some provinces, like Ontario, have supervision wording that is outdated and has little, if any, practical application.
“Quebec is unique in Canada,” he added, “and has much higher standards for the advice and sale of financial products. These standards provide a much higher level of consumer protection and advisor professionalism.”
“MGAs in the main do not exercise the same level of interest/compliance supervision as do those life companies with their own career agents,” Mr. Rickard said in his blog.
But the career agency system is not immune to fraud either. “The outright defrauding of clients, relatively infrequent, can and has occurred involving licensed life insurance intermediaries in all parts of the active agency system, including the best managed and supervised career agency systems of the very best life insurance companies – as I know as a matter of first-hand knowledge,” Mr. Rickard added.
Mr. Brown said the Globe and Mail article failed to point out that MGAs have been instrumental in bringing better products and services to Canadian consumers through independent brokers.
“Years ago, when I first got into the business, I was a captive agent and sold the insurer’s products exclusively,” Mr. Bulloch said. “Today I can offer more choice and, thus, better represent my clients.”
The Dec. 18 article implied more regulation of MGAs and agents is needed. “The MGAs are trying to stave off regulation, worried that new rules will be bad for the bottom line,” it said.
CAILBA strongly disagrees with this statement, Mr. Lamarche said, “as evidenced by our actively participating with the CCIR and other provincial regulators.” And he disagrees with the implication “that regulators are powerless and have done little in the area of compliance,” citing the CCIR’s recent work on understanding the MGA distribution channel, with input from CAILBA.
More disclosure, not more regulation, is needed, said Randy Reynolds, president of Financial Advisors Brokerage Group Inc., a Vancouver-based MGA. “The higher the level of disclosure, the more confidence the consumer will have in the insurance system. I believe in disclosing compensation and any conflicts of interest to the client. Perks such as conferences and travel should be disclosed. And commissions need to be disclosed.”
Mr. Geller said the provinces have “a checkerboard approach” to disclosure. “Ontario has weak disclosure requirements…There are no meaningful requirements with respect to disclosure of conflicts of interest, compensation, limited shelves [that an agent can only get or chooses to offer contracts from a limited number of insurers] or the impact of these issues on the agent’s representations, competitiveness and objectivity.”
Compensation disclosure
CLHIA members, making up 99% of Canadian insurers, require agents to disclose method of compensation, the companies they represent and conflicts of interest to the consumer.
“To my knowledge, no court has considered these as informative or binding,” Harold Geller said, “nor can the CLHIA disclosure requirements be considered to require meaningful disclosure understandable to the average purchaser of life insurance.”
Mr. Rogers said he would like to see a disclosure document provided to the client by the agent that lists the services the client will get, how and what he’ll pay for them, the agent’s qualifications (education and experience) and the procedure for making complaints.
Some MGAs are taking steps to protect themselves and the agents who work with them from liabilities that could arise from transactions with clients. Gary Goldshmidt, president of Stone-Hedge Financial Group Inc., a Toronto-based MGA, put a compliance regime in place when he set up his company a few years ago. Agents who work through his MGA have to document the client’s suitability for the policy or investment, and Mr. Goldshmidt has developed a guide to measure risk tolerance. Agents also provide clients with a disclosure document making them aware of the fees they are paying, and a privacy protection document. “Agents need to view compliance as an asset rather than a liability,” he added, “because agents as well as dealers can find themselves on the line.”
CAILBA is developing its new Compliance Toolbox (See The Insurance and Investment Journal, November/December 2010) to help MGAs set up compliance regimes. The first phase, being launched this spring, will supply MGA members with a generic set of compliance documents. Use of the toolbox won’t be mandatory, Mr. Lamarche said, “but rather part of suggested best practices.”
A series of articles that ran in The Globe and Mail in December on the Canadian life insurance industry has sparked debate in the insurance industry. Some call the articles misguided, misinformed and exploitative. Others say they pinpoint major problems in the in¬dustry. And still others say that, while elements may be misleading and exaggerated, they turn the spotlight on a number of troublesome issues, and some good may result from it.
The Dec. 22 article in the series entitled, "What your broker doesn't want you to know," claimed that commissions, bonuses and free trips often factor into an agent's decision to recommend certain policies to clients. These incentives, the report said, are paid by insurance companies to keep brokers coming back to them, and they take three forms: upfront commissions when the sale is made; bonuses based on the volume of business a broker does with that insurer; and perks such as trips to promote loyalty and encourage brokers to bring as many clients to that insurer as possible.
The fact that life insurance companies compete for the business of agents is com¬mon knowledge in the industry. Insurance companies provide incentives to agents to encourage clients to stay with them, said Lawrence Geller, president of L.I. Geller Insurance Agencies Ltd. in Campbellville, Ont. "Book bonuses for life agents are based on how large the agent's book of business is, and how much business the agent did with the insurance company that year," he noted.
Proper disclosure
The Canadian Life and Health Insurance Association, representing 63 Canadian insur¬ers, said it doesn't get involved in its members' incentive practices. "It's a competitive issue among companies, like pricing," said Wendy Hope, CLHIA's Ottawa-based vice-president, external relations. "What we're concerned about is that there's proper disclosure of incen¬tives to the consumer, and we're constantly upgrading our disclosure guidelines."
And only a small percentage of agents qualify for junkets in terms of the sales they generate. "Trips are for high-flying agents," said Bradley Sumner, a financial planner and independent life agent with Investment Planning Counsel in Kingston, Ont., "But I don't think those who take them are compromising themselves. Agents work with companies because they like their products and the service they provide to back them up. And we need these opportunities to network with others in the industry."
Some people work with a company because they appreciate the ease in dealing with it, Lawrence Geller added. "With today's older population requiring a lot more health care than in the past, we're seeing a lot of products on the market. It can be important for an agent to be able to speak to the underwriter."
A free trip may not appear to compromise an agent's ability to work in the client's best interest. After all, there is an educational component, and the cost of the trip is taxable in the hands of the agent.
But according to Dan Zwicker, principal with Toronto-based investment consultants First Financial Consulting Group, compensation of this kind is reflective of the conflicts of interest inherent in the financial services industry.
"In a product-driven, financially incentivized industry, the agent's choice of product is somewhat less than unbiased," he said, "and unless there is total compensation transparency, the client is never absolutely sure that he has received unbiased advice. Every decision the advisor makes has two dimensions to it:
Is this in the client's interest? And is this in my interest? Within a professional practice context the two considerations are sometimes incompatible."
The insurance industry is geared towards keeping people who deal with consumers in the role of salespeople rather than insurance professionals, according to Harold Geller, a lawyer with Doucet McBride LLP in Ot¬tawa who specializes in the financial services industry. "There are different standards of care governing an advisor selling mutual funds and a life insurance agent," he said. "The fact that there is no KYC obligation on the part of the insurance agent suggests that insurance products are somehow inferior, not requiring the same level of professionalism as mutual funds.
"And insurance agents are not required to have the same level of entrance standards, training and continuing education as other professionals in Canada," he added. "Yet insurance is a profession that has perhaps the greatest impact on the consumer of any profession. Today people need significant resources for retirement and they turn to financial advisors for expertise."
In a letter to the editor of the Globe and Mail, Jim Rogers, founder and chairman emeritus of Vancouver-based Rogers Group Financial Ltd., past two-term chairman of the Canadian Association of Insurance and Financial Advisors (now Advocis) and past president of the Million Dollar Round Table, said the "lack of accountability problems" cited by The Globe and Mail reporters "are pretty well as they have laid out."
Many elements go into the cost of an insurance policy, he noted in an interview with The Insurance and Investment Journal. "For every $1 a consumer sends an insurance company, how much of it goes to cover the risk, towards administrative costs, towards distribution? What's wrong with the consumer asking how much you're getting paid out of it? saying, 'Tell me what you're doing for your 20%'."
"Every time an agent recommends a prod¬uct that brings him more compensation, he should be required to disclose the difference in compensation he would have earned from competing like products," Harold Geller added. "And he should be required to disclose the differences between the like products, both the benefits and the downsides. If not, there is a definite conflict of interest."
Consumer awareness
The Globe and Mail articles may have started a process of consumer advocacy, Harold Geller said, that could result in profound change. "Groups like CLHIA and the Joint Forum of Financial Market Regulators wave their hands in the direction of consumer interests, but routinely undermine efforts to bring about a level playing field for consumers."
Mr. Rogers applauded the articles for "shining some light on these issues. Some public good may come of it."
And Alastair Rickard, a former life insurance company executive with Mutual Life, Clarica Life and Sun Life Financial, and founding editor of the Canadian Journal of Life Insurance, praised the Globe and Mail "for devoting serious and extensive attention to life insurance agency distribution in Canada and related issues. I cannot recall a single article in any Canadian daily newspaper presenting such an extensive look at life insurance agency distribution."
"Articles like these are a wonderful oppotunity for the industry to look itself in the face and ask, 'Are we doing a comparable job to the professionals in other industries?' The answer would have to be no," Harold Geller said.
The Globe and Mail's article, "Through |
It went on to blame the growth of the MGA system for severing the chain of oversight between insurers and independent agents. The report claimed to have uncovered "a gaping hold in Canadian insurance regulation ... nearly half of all individual life insurance policies in Canada are now being transacted through MGAs, which often undertake little¬if any - oversight of agents in the market."
"To equate the plight of a 71-year-old man hooked up to an oxygen tank with the emergence of MGAs is ridiculous," said Paul Brown, CEO of Worldsource Insurance Network, a Vancouver-based MGA. "The is¬sue was a financially desperate advisor acting outside of her insurance licensing."
The report stated that the Canadian Council of Insurance Regulators, the um¬brella group of provi ncial regulators, "became aware of the MGA issue at least two years ago and assigned a group of officials to look into it. However, the group has yet to report or take any action."
Carol Shevlin, the CCIR's Toronto-based policy manager, said the group has indeed been looking at MGAs, and has just released a paper titled Managing General Agents:
Life Insurance Distribution Model (see page 3). But she added that the CCIR's review of MGAs was not a response to any known problems, but rather the first in a series of reports the CCI R is planning. "We're look¬ing at the various things that have grown up in recent years between the insurance companies and policyholders, and whether there is anything to be concerned about. It's all part of our risk-based approach to market conduct regulation."
Accountability
Accountability ofMGAs is among the issues explored in the CCIR paper, she added. The paper's release was eagerly awaited by the industry where accountability to consumers for the actions of rogue or negligent agents is a hot-button issue.
Peter Lamarche, president ofthe Canadian Association ofIndependent Life Brokerage Agencies (CAILBA) that represents MGAs, said there is ongoing discussion among in¬surers, MGAs and regulators about who is responsible for agent ovcrsight. CAILBA's position is that the agent is the person primar¬ily responsible for product suitability. "The decision about which product the client will purchase is a decision reached between the agent and the client," he said. "We, in turn, are responsible for knowing our agents. Just from a business risk point of view, we need to know who our agents are, and take care in the hiring process with screening and background checks.
"And if, for example, a new advisor sold 50 of the same type of product to members of the same community, generating commissions of more than $100,000, the onus would be on the MGA to investigate this advisor."
Insurance companies also have a respon¬sibility to the consumers who buy their products. When a consumer buys insurance, he buys it from the insurance company, not the agent, noted 1\llan Bulloch, president of Independent Planning Group Inc., an Ottawa-based MGA. He gave an example from his own practice of a client who was facing a deadline to convert an insurance policy.
"To equate the plight of a 71-year-old man hooked up to an oxygen tank with the emergence of MGAs is ridiculous."
"We were advised by the insurance company, we advised the agent, the agent discussed the matter with the client, who agreed to convert the policy," he said. "But nothing happened and the deadline passed. The client professed that he had communicated his intentions to the agent and showed us his e-mails. The insurer reviewed the case and agreed that the right thing was to allow the client to do what he'd intended and convert the policy."
"Insurance policies are held directly with the insurance company," CLHTA's Ms. Hope said, "and it will stand behind its policy.
The insurance company is the party that is accountable to clients."
In a letter to the editor of The Globe and Mail, Jim Rogers, founder and chairman emeritus of Vancouver-based Rogers Group Financial Ltd., said insurance companies should be held liable for the actions of both their MGAs and the agents who put their business through these MGAs.
"The companies should be held vicariously liable," he added in an interview, "meaning they should be held liable by reason of their association with the MGA. If I'm going to be held vicariously liable, I'm going to have a pretty tight contract with my MGA in place."
In a posting on his blog, RickardsRead.com, Alastair Rickard, a former life insurance company executive with Mutual Life, CIa rica Life and Sun Life Financial, and founding editor of the Canadian Journal of Life insurance, echoed this: "Life companies should not be allowed to shelter from account¬ability to clients for deficient actions by those who sell their products behind a wall [legal and/or regulatory] comprised of those who facilitate the sale of the company's financial products ... whether those salespersons are MGAs, individual agents placing business directly with 'a brokerage company or via an MGA or a company's career agent."
At present, that would be difficult to enforce.
"Each province has its own regulator that is responsible for oversight of life agents, and each province has an insurance act and regulations that govern some training and supervision requirements," Harold Geller, a lawyer with Doucet McBride LLP said. "But the extent of responsibilities on insurers as a result of the acts or regulations varies among provinces. Some provinces, like Newfound¬land, have a reasonable level of supervision. Some provinces, like Ontario, have supervi¬sion wording that is outdated and has little, if any, practical appl ication.
"Quebec is unique in Canada," he added, "and has much higher standards for the advice and sale of financial products. These standards provide a much higher level of consumer protection and advisor profes¬sionalism."
"MGAs in the main do not exercise the same level of interest/compliance supervision as do those life companies with their own career agents," Mr. Rickard said in his blog.
But the career agency system is not immune to fraud either. "The outright defrauding of clients, relatively infrequent, can and has occurred involving licensed life insurance intermediaries in all parts of the active agency system, including the best managed and supervised career agency systems of the very best life insurance companies - as I know as a matter of first-hand knowledge," Mr. Rickard added.
Mr. Brown said the Globe and Mail article failed to point out that MGAs have been instrumental in bringing better products and' services to Canadian consumers through independent brokers.
"Years ago, when I first got into the business, I was a captive agent and sold the insurer's products exclusively," Mr. Bulloch said. "Today I can offer more choice and, thus, better represent my clients."
The Dec. 18 article implied more regulation of MGAs and agents is needed. "The MGAs are trying to stave off regulation, worried that new rules will be bad for the bottom line," it said.
CAILBA strongly disagrees with this statement, Mr. Lamarche said, "as evidenced by our actively participating with the CCIR and other provincial regulators." And he disagrees with the implication "that regulators are powerless and have done little in the area of compliance," citing the CCIR's recent work on understanding the MGA distribution channel, with input from CAILBA.
More disclosure, not more regulation, is needed, said Randy Reynolds, president of Financial Advisors Brokerage Group Inc., a Vancouver-based MGA. "The higher the level of disclosure, the more confidence the consumer will have in the insurance system. I believe in disclosing compensation and any conflicts of interest to the client. Perks such as conferences and travel should be disclosed. And commissions need to be disclosed."
Mr. Geller said the provinces have "a checkerboard approach" to disclosure. "Ontario has weak disclosure requirements ... There are no meaningful requirements with respect to disclosure of conflicts of interest, compensation, limited shelves [that an agent can only get or chooses to offer contracts from a limited number of insurers] or the impact of these issues on the agent's representations, competitiveness and objectivity."
Compensation disclosure
CLHIA members, making up 99% of Canadian insurers, require agents to disclose method of compensation, the companies they represent and conflicts of interest to the consumer.
"To my knowledge, no court has considered these as informative or binding," Harold Geller said, "nor can the CLHIA disclosure requirements be considered to require meaningful disclosure understandable to the average purchaser of life insurance."
Mr. Rogers said he would like to see a disclosure document provided to the client by the agent that lists the services the client will get, how and what he'll pay for them, the agent's qualifications (education and experience) and the procedure for making complaints.
Some MGAs are taking steps to protect themselves and the agents who work with them from liabilities that could arise from transactions with clients. Gary Goldshmidt, president of Stone-Hedge Financial Group Inc., a Toronto-based MGA, put a compliance regime in place when he set up his company a few years ago. Agents who work through his MGA have to document the client's suitability for the policy or investment, and Mr. Goldshmidt has developed a guide to measure risk tolerance. Agents also provide clients with a disclosure document making them aware of the fees they are paying, and a privacy protection document. "Agents need to view compliance as an asset rather than a liability," he added, "because agents as well as dealers can find themselves on the line."
CAILBA is developing its new Compliance Toolbox to help MGAs set up compliance regimes. The first phase, being launched this spring, will supply MGA members with a generic set of compliance documents. Use of the toolbox won't be mandatory, Mr. Lamarche said, "but rather part of suggested best practices."
Rosemary McCracken
The Insurance Journal
February 2011
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