The investment component in universal life policies requires insurance advisors to keep in regular contact with their UL clients. Many advisors would like to see the compensation structure of UL contracts reflect the work required to maintain them. Some companies are providing long-term compensation, and advisors are hoping this will become standard throughout the industry.

“I like getting lifetime service fees on UL,” says Susan St. Amand, president of Ottawa-based Sirius Financial Services. “UL is a lot of work. You need to keep reviewing it.”

To keep the door open, she says, it would be nice to be compensated accordingly by UL manufacturers. There is also more liability risk in selling UL products, because of the investment component, she notes.

At present, “heaped compensation” is more common with UL contracts. Generally, 40% of premium commission is paid in the first year and, from Year 2 to Year 5, about 3% is paid annually.

Heaped compensation is supposed to reflect payment for maintaining the contract over its lifespan, but a contract could go on for many years. And it still needs to be served, says Ashley Crozier, president of Toronto-based Crozier Financial Group. When nothing is paid after Year 5, there is no revenue coming in and the advisor’s book isn’t worth anything, he says. That it makes it hard for advisors to sell their books.

St. Amand agrees. “When you look at it from a succession-planning perspective, why [would another advisor] take over your book when there is no revenue and [there is nothing to do but] serve your clients,” she says.

There needs to be more service fees to address these concerns, adds St. Amand.

The industry may be coming around again, says Keith Pike, president of Paradigm Financial Advisors Inc. , a London, Ont.-based managing general agent. Pike, who has been in the business since 1966, says that under the career system, firms regularly paid lifetime renewal fees of 2%-5%, or more. But when the industry shifted away from this system, so did the compensation structure.

“The industry has gone from one extreme to the other,” he says. Like advisors, he’s all for lifetime renewal fees: “Every chance I get, I promote it with manufacturers.
Ultimately, it will benefit the client with better service.”

One company that pays lifetime renewal/service fees is Waterloo, Ont.-based Clarica Financial Services Inc. , says Pike.

Toronto-based PPI Financial Group — a national MGA that has been heavily involved in product and compensation design — is also a proponent of lifetime compensation. “We believe it makes sense for both clients and their advisors to have compensation spread out,” says Kevin Wark, senior vice president of business development at PPI.

The latest example of a manufacturer responding to advisor concerns is Transamerica Life Canada. Toronto-based Transamerica is changing the compensation structure tied to its EstateAdvantage UL product, which targets the estate-planning market, says Joe Kordovi, assistant vice president of life product development and marketing: “We are extending the deposit-based compensation period from five to 10 years, paying a new service fee starting starting in Year 11 based on the insurance deductions coming out of the UL fund, and removing the asset-based trailer.”

Transamerica hasn’t changed its other UL product, WealthAdvantage UL, targeted toward wealth accumulation for younger clients. It has a five-year deposit-based renewal, and pays an asset-based trailer starting in Year 6, which is more typical of UL contracts.

The change in the estate-planning UL policy is an important shift, notes Ray McKenzie, Transamerica’s regional vice president for Central Canada.

The benefits to advisors are two-fold, he says. Advisors will be compensated as long as the contract is in place, which also helps them build credibility with their clients. “They can legitimately say to clients that they have a vested interest in continuously serving their needs,” he says.

And the ongoing revenue stream helps advisors provide an accurate valuation of their books of business, he adds: “This allows advisors to show they have X number of clients and X revenue. They can sell for a multiple of the service fee.”

Transamerica was inspired to make the change as a result of a Webcast about product development it held this past March. More than 400 advisors logged in, and a principal concern was compensation structure, says McKenzie.

Most advisors would like to see service fees as part of the product contracts, says Les Herr, vice president of individual distribution and strategy at Empire Financial Group, based in Kingston, Ont. Empire provides service fees from the end of the five-year renewal period on all its life and critical illness insurance products for advisors who deal directly with the company. (The same deal is not available for advisors who deal with Empire through MGAs. But, Herr says, that can vary, depending on the manufacturer.)

@page_break@When compensation is heaped at the beginning of the contract, says Herr, advisors find themselves “on a treadmill,” always looking for new contracts. They would prefer to see some kind of service fees built into their practices, he notes.

However, he says, a shift in remuneration will mean some compensation “will have to come off the front end to provide for more at the back end.”

This will not result in what is known as “levellized compensation” over the life of a contract. The heap at the front will be smaller. “But advisors will see more income going forward,” Herr says.

It also makes it easier for advisors to disclose to clients that, over time, they will be compensated to service their contracts, says McKenzie.

Theoretically, with compensation that is heaped up front, advisors are paid for maintenance work down the road. In practice, says Herr, getting a service fee for the life of a contract will be explicit recognition that advisors are getting paid for the
maintenance work they do. IE