I recently saw this statement in big bold letters on the last page of a report issued by one of our competitors. I agree, independence can be a real game-changer. But what is “independence” in this context?
Relative to a captive insurance agent, a broker is more independent. However, they are both “producers” or contracted insurance sales representatives. A captive agent has an employment contract with one insurance company (i.e., State Farm), while a broker has a producer (or sales rep) contract with multiple insurance companies.
Does being able to sell more than one insurance company’s products make someone independent? From an employment perspective, yes, but from an advisory perspective, no. In fact, publicly available through the aforementioned broker’s website is a disclosure statement describing (in legalese) that it may receive incentive payments, allowances, and/or trips from the insurance companies it represents based upon the volume, profitability, and persistency of the business it produces.
This incentive or “contingent” compensation is specifically designed to motivate the broker to not be independent, and to sell one insurance company’s product over another’s. No matter how much integrity a broker has, the incentive money is so significant that it can’t be ignored.
Do these programs work? You bet they do! Which is why they have existed for years, and I’ve seen brokers “swing” their books (customer base) to take advantage of them. In the short run, the changes are presented as savings opportunities to their customers. But over the long term, they generate more money for the brokers, more money for the insurance companies, and more expense for their customers.
So, what kind of independence really does change everything? It’s the kind that rejects insurance company sales incentive programs. It’s the kind where an advisor only gets paid the amount a client knows about and agrees to ― an amount not dependent (or even influenced by) which insurance company gets the sale (or the renewal).
It is the kind of independence we adhered to when I worked for a Big 4 public accounting firm. We were so independent that I couldn’t even own a share of stock in our client Coca-Cola, even though I didn’t work on the account, didn’t work in the same office, didn’t work in the same practice, and wasn’t a partner in the firm. Not even the potential appearance of a lack of independence was acceptable. And it isn’t for our firm either.
Now that kind of independence does change everything! That’s how clients can be assured they are with the right vendor and under the best contracting terms. That’s how you know what you are getting, and what you’re paying for it. That’s how you achieve and maintain excellence ― and manage with confidence!
Are you getting the independent guidance you think you are?