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The word ‘churned’ sounds like it should fit better with making butter than with financial advice, yet this is a term used to describe an unethical practice that you may have been subject to in the past.
Churning is the constant replacement of financial products, such as mortgages and insurances, for the financial benefit of the financial adviser – or ‘broker’ as they commonly refer to themselves. It usually happens every two or three years and is presented in the guise of finding you a better deal. What’s really happening however is that the ‘broker’ in question is looking to receive upfront commissions over and over again. Personally, I’m quite in favour of commissions as payment for some financial services as I’ve worked here and in Australia on both commission and fee for service models and fee for service makes advice quickly unaffordable for many. Churning clients for extra commissions, though, is wrong.
Here’s an example of how it works: I sit with a client and establish their insurance needs. I analyse my findings, complete an analysis of what’s best and prepare written recommendations for presentation to my client. After the presentation I apply for the insurance on their behalf and negotiate the most favourable terms. I then get paid a commission by the insurer and the client doesn’t have to pay me a cent. Let’s say I get paid $2000 so I’m happy and the client is happy they didn’t have to pay me directly. Every year after that, I am expected to be there for my client should they require help with claims or adjustments to their cover so the insurer continues to pay me $100 every year as compensation. It should end there but I get greedy and decide to ‘churn’ my client, so I revisit them after two years and tell them I’ve found a better insurer and move them, earning another $2000 payment to me.
So it goes something like that and I’d really like to see it stop. We’re about to see some regulation changes take effect but we need public awareness if we’re actually going to stop this behaviour. I’ve heard of many small operators doing this but also really big insurance groups too. Their approach could be much smoother than my example above, so let’s ask them why the insurer or the lender they recommended the first time isn’t good anymore. Let’s ask them to write down the benefits to you of moving, and maybe it’s time we started asking just how much commission they’re being paid. After all, financial advice is about putting the client’s interests first – not the interests of the broker.
The opinions and information expressed above are not a financial recommendation. Contact a financial adviser for written recommendations that are suited to your personal situation.
