When the Canadian Life and Health Insurance Association rolled out its proposed compensation disclosure guideline in January 2018, it quickly inflamed tensions with group benefits and retirement advisors.
The guideline, G19, stipulated that all of the CLHIA’s insurer members begin disclosing to plan sponsors the fees, commissions and bonuses they paid to advisors. Facing backlash from multiple advisors and industry groups, which identified conflicts of interest, the CLHIA made several amendments and initiated cross-country consultations before ultimately withdrawing the guideline in May 2019.
“Following extensive discussions with market players, including advisors and their associations, and careful consideration of what we heard, we have decided to withdraw this industry guideline,” said Stephen Frank, the CLHIA’s president and chief executive officer, in a statement at the time. “Our industry is still strongly in favour of market transparency and plans to work closely with regulators and other stakeholders on these matters going forward.”
The CLHIA declined Benefits Canada’s request to comment further for this article.
Despite the controversy, G19 drew attention to a longstanding debate in the advisor community over whether and how to disclose their compensation to plan sponsor clients.
“People have been pushing for disclosure way longer than this was around,” says Dave Patriarche, president of Mainstay Insurance Brokerage Inc. and founder of the Canadian Group Insurance Brokers. “A lot of advisors are terrified of disclosure, because they know if their clients found out how much they were paid they would freak out because they don’t see the value. What I try to instill with advisors is, [you should] show your value, earn your money and you won’t have a problem.”
Benefits and retirement advisors are compensated in two ways. Larger plan sponsors will often work with major brokerages that charge a fee-for-service and invoice them directly. For smaller and mid-size groups, advisors are often compensated in the form of commissions, as well as bonuses paid by insurance companies for things like the plan sponsor’s years with the insurer, new business brought in by the advisor and a plan sponsor’s profitability to the insurer.
Advisors set their own commissions based on factors like the number of plan members in the group and the services they provide. But plan sponsors don’t see that number — unless advisors choose to share it — because it’s paid by the insurer and then amalgamated into their total bill. G19 would have changed that, presenting advisors’ compensation directly to the plan sponsor client.
However, before the CLHIA scrapped the guideline, it reversed its plan to disclose bonuses paid to advisors and also suggested limiting compensation disclosure to commissions, notes Patriarche.
The guideline’s critics also drew attention to potential conflicts of interest for insurers; for example, in direct-to-client sales, insurers wouldn’t be required to disclose their own fees to plan sponsors.
Another strong view from advisors was that the CLHIA was the wrong body to require disclosure. “A trade association either developing or significantly influencing matters that fall under the regulators is not appropriate,” says Todd Stephen, president of OMG Benefits Consulting Inc. and the lead of the advocacy committee of the Benefits Alliance Group.
Patriarche suggests any mandated fee disclosure comes from provincial regulators overseeing group benefits and pensions, such as Ontario’s Financial Services Regulatory Authority. To date, however, none have expressed interest in developing regulations.
Disclosure regulations exist in other countries. Both Australia and the U.K. have moved exclusively to fees for service, which eliminates the secrecy of the commission structure. However, says Patriarche, this approach could prove disadvantageous to smaller plan sponsors, which either wouldn’t be able to afford the model or wouldn’t generate a bill large enough to make it worth advisors’ while.
One viable option is an industry-wide guideline developed by several stakeholders, including plan sponsors, insurers, third-party advisors and advisor organizations, says Stephen. “Stakeholder groups working together to address concerns in the marketplace certainly is always a productive way to get issues on the table.”
Despite the lack of formal rules, the Benefits Alliance provides fee disclosure templates for its members. The document sets out the services offered by an advisor as well as its commission. “It’s around a more holistic approach to this, which says, ‘Here’s what we do and here’s how and what we’re paid,’ in a manner that contextualizes that relationship,” says Stephen.
And while there’s no standard for the amount advisors should be charging, the CGIB has developed an online calculator to help plan sponsors and advisors get a sense of an industry average. The calculator uses the Crown Scale, a commission structure developed by Crown Life Canada Ltd., that sets out a 10 per cent cut of the first $50,000 of annual premium, followed by 7.5 per cent on the next $50,000, five per cent on the next $150,000 and so on. “The idea is, as your group grows, your percentage goes down, but the dollar value obviously is going up,” says Patriarche.
He’s tested the calculator in his own business and has heard from several other advisors that say it makes sense. “It seems to be holding up pretty well. I’m not implementing any standard, no insurance company has to follow this, but if [employers] want to [know what’s fair], it’s really hard to find what people charge.”
Open and transparent
Compensation disclosure doesn’t have to be a fraught process. For example, the Arthritis Society learned about its advisor’s commission in its submission to the society’s request for proposals. “They came in with a full fee disclosure upfront and did not alter their fees since,” says Cheryl McClellan, the organization’s chief operating officer.
The Arthritis Society’s advisors, Benchmark Benefit Solutions Inc., takes a commission that’s one per cent less than any other advisor the company had previously worked with or approached. It also worked hard on the company’s behalf in negotiating lower rates with its insurer and holds two meetings per year on the society’s ongoing claims experience. “We’ve reaped enormous benefit in terms of . . . [comparing] what the insurance company is proposing for renewal and what our broker has been able to negotiate down.”
Since there’s no standard commission for advisors, it’s especially important for plan sponsors to be aware of what they’re paying, says Patriarche, though he notes the commission isn’t inherently the issue. “If I’m a high-service advisor and I charge more, that’s fine. If I’m a super specialist and I’m better at it than anybody else and I charge more, that’s fine. You can charge whatever you want, as long as the client understands what they’re paying for.”
Kelsey Rolfe is a former associate editor at Benefits Canada.