To Fee or Not To Fee
This morning as we walked through the RIAview with a client, the question came up—“What is this brokerage fee all about?” This individual had broken away from LPL and found a local insurance broker to place their E&O as it was time-sensitive at the time. The insurance was actually fairly well-structured, and with a solid carrier, but it had a $425 brokerage fee tacked on to it, leading my client to inquire what it was. At the end of the review we’d found a number of flaws and errors in the coverage, and the client expressed: “So why do I have the pleasure of paying more to get less here?” Now, in this insurance agent’s defense, the answer to that question is—because the agent had to more legwork in determining what coverage was suitable for the advisor, and felt $425 was a justifiable charge for that extra effort. The problematic thing about that ethos is that it isn’t at all fiduciary—it assumes that more activity equals more value creation, which is a treacherous assumption.
There’s only one person that should truly define the value of any work: the client for which that work is done. Now, the pricing of insurance contracts themselves is outside of our control, but we should never be incurring expenses for clients for work that does not add value. In fact, when we can add value and charge less, we all win. That’s a rant for another day, as today my goal is to add some clarity around fees.
The need-to-know on fees is—“it depends,” and that’s primarily due to the fact that the structure of insurance lines is regulated at the state level and thus varies per state. With that said, there are some broad conclusions that it makes sense to acknowledge.
If the coverage you select is on “Non-Admitted” paper, then you can expect additional taxes and fees. You’ll frequently see two types of taxes assessed—a “surplus line” tax and a “stamping tax,” or stamping fee. The third item you’ll almost always see with these first two is a “broker filing fee.” When you see the broker filing see, just know that that is a fee that is assessed by the insurance broker on a discretionary basis. The reason given for these fees is because the broker is required by the state to do some extra work to file that policy with the state. Some states have maximum limits for fees, but most do not. In effect, most broker filing fees on Non-Admitted filings range between $150-$300. This is one reason that, in a vacuum, we often prefer Admitted coverage.
These broker fees are the key you really want to keep an eye out for, because, again, these are the ones that can be added to the policy at the discretion and judgment of the broker. Sometimes these fees are passed down from a wholesale broker (an intermediary for the intermediary). In either case, what you’re dealing with is essentially a situation where the agency feels that they aren’t making enough on a particular policy or a particular type of insurance, and need to bump up their revenue on it. It’s very common for the broker to have a minimum profit target for each client. Now, I don’t view this model as inherently malicious or morally bankrupt—it’s just that, a model, one of many within which a business could choose to operate. Here at BPI we’ve chosen the diametrically opposite model—we work to increase transparency and reduce and remove these additional fees. We’re empowered to do this because of the specialism of our work—it’s not “extra work” to understand financial services companies, it’s our entire work.
The history of the insurance industry, in my humble but candid opinion, is one of barriers of control through opacity. We have a long way to go but we’re trying to break down these barriers. You can actually help us break these barriers by getting to know us, and working with us if we can add value, and we’re a good fit to serve you. The power of scale is no secret—the more we grow, the more barriers we can beat down.
And we all win
Written By: Chad Ramberg
Today’s BPI Advice: Fees are sometimes required and sometimes discretionary. We recommend working with a broker who is actively working not only to make your life easier, but also has a process of continual improvement that results in increased transparency and reduced fees and costs. Isn’t that the fiduciary way?
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