Recently, the COO of a prospective client succinctly brought to light one of the primary challenges organizations face when purchasing employee benefits: How do you know your broker has your best interest in mind when he or she presents a benefits plan for your organization?
This simple question led to many more questions related to broker/client relationships and trust in the benefits evaluation and ultimately recommendations. At the core of the issue, however, is one key concept, which is that a broker’s or benefits adviser’s success should be directly linked to the success of his or her client’s success, not how much they will be paid by the insurance company for a client placement or retention with no ties to the performance of the programs or ultimately the cost (higher or lower) for the client themselves. If a broker is compensated based on the performance of a client’s benefits program, then the client can trust that their best interest is at the center of every decision. To me, this is the only way this relationship works and can be built on trust. There are two main components to this type of alignment:
- Benefits advisers should be completely transparent and open regarding how they are compensated; and
- The client needs to understand the compensation model options available and what to look for when evaluating broker agreements.
In that spirit, here is a quick overview of the three primary ways benefits professionals, also referred to as insurance brokers, consultants or advisors, are or can be compensated.
- Commission + Persistency - The most traditional way benefits professionals are paid is a standard commission-based compensation model with potential non-reportable persistency incentives from the carriers themselves. Brokers or employee benefits professionals who use this model are paid a percentage of the premium payments their clients make to the insurer (i.e. when their client’s premium increases so does their compensation) many then receive additional financial enhancements (“persistency bonuses” or “contingency payments”) when they meet carrier thresholds for maintaining a specified level of business year over year.
This inherently creates multiple competing priorities, potentially forcing brokers to choose between client success and their own bottomline. From a client perspective, which are often not disclosed to clients and not governmentally tracked and published, a commission/persistency arrangement also makes it extremely difficult for them to feel confident the benefits they are presented represent what’s best for their organization’s needs. Additionally, persistency agreements create informal alliances between advisers and insurers and can ultimately lead to one carrier being favored over another. In turn, it can limit a clients options without them even knowing and provides no direct benefit or value to their organization. There have been several class action lawsuits most notable in the State of New York where this was proven to be the case.
- Fee for Service - The second way brokers are compensated is fee-for-service. In this arrangement, an adviser is paid a set fee for the planning, administration and management services related to purchasing and maintaining benefits programs. With this straightforward model, the fee is established as part of the adviser/client agreement and is independent of the premium payment made to the insurance carrier. Therefore, it remains the same regardless of the size, scope or performance of the benefits portfolio. With fee-for-service, brokers can be paid directly by the client, which reduces the possibility for insurance carrier influence and conflicts of interest.
- Fee for Performance - Fee-for-performance is the third and newest way benefits advisers can be compensated. While this advanced payment model can be deployed in a variety of ways based on an adviser’s processes and protocols, the basic premise is that benefits professionals are paid based on the performance of their clients’ benefits programs. The fee-for-performance model links broker compensation directly to client results and ensures their goals and interests are always aligned. It’s similar to the fee for service model (number 2 above) except a portion of the advisors compensation or fees the clients pay is carved out and put at risk based on the performance of the plan. Then client and the advisor then agree on what and how the results will be measured and how it will be paid out if successful. In other words, if the methodology, controls and other processes that the advisors are recommending result in savings for the client, then the advisor then “earns” the carved out fees, if not, the fees are not paid. Advisers have to be aligned and incentivized to ensure their clients have the benefits in place that are optimized specifically for their organizations.
Understanding the ways in which employee benefit advisers are paid is an integral part to making informed decisions about healthcare benefits programs. To help guide the conversation with your broker, consider the following:
- Timing matters - begin the conversation as early as possible in your renewal process.
- Ask your broker if they can carve out the commissions received from the carrier premiums. If they can, they’ll be lowering your premium by this amount, which will give them the flexibility to use a fee-for-service or fee-for-performance model.
- To ensure independence, request that your adviser bill you directly.
- Ask your broker if they participate in “contingency” or “persistency” programs with your current carrier. Even require some proof of the non participation from the insurance carrier themselves since these are not disclosed. A very comprehensive disclosure form is located here.
- Request a copy of your adviser’s commission schedule and ask if it is standard or if they inflate it.