With few exceptions, the topic of consultant compensation receives limited public discussion within the structured settlement and settlement planning communities.
A quick review of the websites of three national associations whose members sell structured settlement annuities, NSSTA, AASC, and SSP, appears to indicate only SSP even mentions the word “compensation.”
The SSP references to “compensation” appear twice in the “Settlement Planning Practice Standards” both times in explanatory notes (related to Standards 2 and 8) and both times focused solely on “disclosure” of compensation to clients.
Compensation disclosure is indeed an important settlement planning issue. Independent Life has addressed compensation disclosure previously both directly and tangentially in multiple articles, here, here, and here.
Structured settlement and settlement professionals, however, arguably should be discussing consultant compensation in other contexts as well as disclosure. For examples: changing market conditions; unique market applications; and new competitive developments.
Structured Settlement Compensation Model(s)
Anti-trust concerns might explain why compensation models and compensation issues are rarely, if ever, featured as topics at industry conferences. If, however, anti-trust concerns explain why “compensation” issues are not discussed more openly within our industry, how do we explain the longstanding uniformity of structured settlement compensation?
Until Independent Life introduced “duration based compensation” in 2021, virtually every structured settlement annuity provider offered the same 4% compensation model on every case for the past 40 years – irrespective of case facts, market changes, payout characteristics or numbers of agents involved.
Under Independent Life’s compensation plan, durations are identified by the weighted average life (WAL) of the periodic payments. The associated commissions are: (1) 2% of funds received with a WAL of less than seven years; (2) 4% of funds received with a WAL of less than fifteen years but at least seven years; and (3) 6% commission of funds received with a WAL of at least fifteen years.
The result of this singular compensation innovation, in our opinion, has been an improved commission model that creates a more sellable offering for customers and increased revenue for the brokerage community.
Status Quo is Not an Option
The point being, in a stagnant structured settlement market, and especially in a competitive settlement planning market, innovation is essential for growth and innovation should include compensation. Why? Because market conditions have changed, one compensation model does not fit all cases and our competitors appear to be innovating their compensation models to our potential disadvantage. Looking at the future landscape, the status quo should no longer be an option.
Who are our competitors? In the traditional structured settlement world, plaintiff brokers might have been viewed as competitors. Today, for many annuity-based settlement planners, assets under management (AuM) arguably represent their most serious competition. The traditional annual fee for asset managers has been 1% of AuM regardless of the amount of assets. However, that compensation model appears to be changing.
Simon-Kucher Research Paper
As highlighted in a 2018 Research Paper titled “The Future of Fees: Real Life Pricing Innovations in Wealth Management” written by Matthew Jackson and Wei Ke, PhD. (Research Paper), the traditional AuM compensation model has, in fact, been changing (sometimes dramatically) for several years.
The Research Paper, available for download on the Simon-Kucher website, provides a detailed analysis of eight emerging alternative wealth management compensation models. The value of this Research Paper for annuity-based settlement planners is not only a better understanding of our competition but also a thoughtful commentary about shared issues and some potentially relevant ideas.
The Research Paper consists of two primary parts.
Section 1 – Eight Compensation Models
Each of the models discussed represents an alternative to the traditional wealth management compensation model charging an annual fee of 1% of AuM. For each model, an example practitioner who has successfully implemented that model is featured.
Each analysis of each model considers some variation of: 1) key learnings; 2) what’s great about the model; 3) what’s the rationale; 4) who is the target client; 5) what are the challenges with the model; 6) how do you make the model work; 7) is this model the future?
The eight compensation models discussed in the Research Article:
- Charging by the Hour
- The 3-part Model
- Fixed-fee Only
- The McDonalds Model
- The ‘Gen X’ Model
- The Subscription Model
- The Super-Retainer
- Modular AuM-based Pricing
Among many observations about these models, specific as well as general, the authors observe: “The diversity of fee models in this report illustrates the fact that there is no ‘new fee model’, but the future is simply likely to be more diverse. This diversity reflects the need of wealth managers to adapt to non-traditional segments.” Perhaps the same is true for settlement planners.
Section 2 – The Road to Innovation
Section 2 consist of three parts: 1) Stages of Innovation; 2) a Dialogue titled “The Case Against Innovation”; and 3) Framework for Innovation. It is comparatively brief and offers business value for a general audience beyond the issue of compensation.
Having already written about the need for industry innovation as part of our recent business evaluation of the structured settlement market, we will consider instead why this Research Article is timely and relevant to structured settlement and settlement planning compensation models.
Application to Structured Settlements
Just as the Research Article includes a subsection titled “The Case Against Innovation” (of the Wealth Management Compensation Model), some readers may ask “why” and “how” the traditional structured settlement compensation model should change? And, therefore, why is this Research Article relevant to structured settlement professionals?
Independent Life’s duration-based compensation model offers one response to these “why and how” questions. Currently, on shorter duration cases, lower interest rates make 4% commission products uncompetitive. In longer duration cases (which are frequently larger, more complex and involve greater knowledge and more work for the agent), higher investment returns produce competitive products even with higher commissions.
Other “why” answers which should encourage structured settlement interest in compensation innovation: a mass tort case is totally different, for example, than a workers’ compensation MSA – and may require a different compensation model. Likewise, an annuity-funded multi-product settlement plan is different from the traditional “cash and structure” structured settlement. For an expanded “how” answer: Independent Life promises we will continue to work with our agents to innovate and grow the structured settlement market.
Application to Settlement Planning
As Independent Life suggested in our 3-part analysis of the recently published study “Future Financial Planning for People with Disabilities,” the structured settlement and settlement planning markets can benefit from studying parallel markets.
What follows are a few selected general comments from the Research Article paraphrased for settlement planners. Changes appear in [brackets].
- ‘Like it or not, [settlement planning] is in a constant state of change.”
- “This is currently driven largely by regulation, which requires advisors (who have not yet done so) to move from ‘Suitability’ to ‘Fiduciary’ standards, and technology, which is driving them to expand beyond investment [advice] towards holistic planning.”
- “Given all this change, new fee structures are only to be expected.”
- “In practice it is likely that the majority of [settlement planning] clients are effectively paying a single commission-based fee.”
- “There are multiple reasons to expect this to change rapidly in the near future.”
- “There has probably never been a worse time than now to be unclear about your value proposition and how much it is worth.”
- “Looking at the future advisor landscape – “no change” is not an option.”
- “The First Movers have already moved.”
For more than 40 years, the structured settlement industry has offered its agents one compensation model regardless of the case or client application. In a market where “we are all becoming settlement planners,” innovation is required to remain competitive and to regain growth. That innovation should encompass products, services, processes, and yes, even compensation models. The Simon-Kucher Research Paper provides a stimulating resource for thinking about new and better ways to compensate consultants to better match their products and services with specific clients and markets.