Why I do not offer free consultations

Five points for people with 30 seconds to spare

1. By the time it’s clear whether you’re actually going to buy anything at all, nine to fourteen hours of work have already been put in. One to just under two working days.
2. Under the commission model, none of this is paid for if no deal is ultimately signed.
3. And even the signing of a deal offers no certainty. The commission remains subject to liability for five to nine years. After tax, a claim for repayment could leave the adviser in the red.
4. The 2.5 per cent acquisition costs listed in the cost sheet are not a cost cap. They are an accounting limit. In reality, more is paid out, and you are the one footing the bill.
5. That is why sales pressure is not a character flaw. It is built into the system. That is precisely my argument against this model.

The long version, perfect for one or two cups of coffee.

In the first part, I described why you so rarely get your pure status quo. Now I’m turning the perspective around and looking at the other side of the table.

I have worked within this model for fifteen years, in partnerships, and I have been through everything I describe here. Not out of malice. Out of convenience and ignorance, and that is not a pleasant realisation.

What it costs just to tell you where you stand

I actually worked this out properly for my own business once. Not just an estimate, but written down step by step.

Depending on the case, this amounts to nine to fourteen hours, and this invoice does not cover any sales, changes or signatures. It is purely a review of the current situation and ‘advice’. This is because the consultation and the consultation session are already included in this figure. The work that the term actually refers to has been completed in full at this stage and remains entirely unpaid.

The comparison is the aspect that is most often underestimated. With property insurance, it is not the premium that counts, but the terms and conditions, and these change over the years, even with the same insurer. When it comes to pension provision, you need to know where your money is going and what alternatives are actually available under the policy. In the case of occupational disability cover, the application submitted at the time is assessed against the state of health at that time. Clients and former intermediaries have not always been entirely accurate with the health questions, and an error at this stage does not simply disappear on its own. It becomes apparent when a claim is made, precisely when it matters most. Anyone who conscientiously takes over the management of existing policies therefore checks these retrospectively. If a client brings in a comprehensive medical record, this alone takes two and a half hours.

And if you really want something to happen afterwards

Let’s say, after the analysis, you say, ‘I don’t want it like that, what’s the alternative?’ That’s when the second half begins. Research, product selection, calculating quotes, assessing risk appetite, building an investment portfolio that suits you, and preparing the documentation. Two to three hours. On top of that, a further one-hour consultation and half an hour to draw up the minutes.

Add another three-and-a-half to four-and-a-half hours on top of that.

Altogether, this amounts to between twelve and just under nineteen hours. One and a half to just over two working days for a single client.

Two cases, and only one is paid for

Case one. You want to know where you stand. You receive your analysis; it’s good; you don’t change a thing. Nine to fourteen hours’ work; no fee.

Case two. You’re putting something into practice. Money is now coming in, and only now.

In the commission-based model, scenario one does not exist economically. It is not prohibited; it is simply unaffordable. And a model in which the most honest scenario is the only one that is not paid for produces precisely the behaviour that everyone later complains about.

He has not yet received the commission

You might now think, ‘Well, he’s just selling, so that’s fine by him.’ But it isn’t.

Let’s take a pension plan with a commission of 5,000 euros. This is fully taxed in the year it is paid out. If you assume a tax rate of forty per cent, that leaves 3,000 euros.

If the client cancels the policy after one year or suspends premium payments, the clawback liability applies. With a five-year liability period, around eighty per cent is due after one year, i.e. 4,000 euros. The amount reclaimed is based on the gross sum, not on what remains.

Yes, that will be offset against future profits for tax purposes. But the offset takes place in your tax return, whilst the loss is shown on your account. And it happens immediately.

Added to this is an effect that hardly anyone is aware of. If the policy is a dynamic one, that is, one with an annual premium increase, each of these increases gives rise to a separate, new liability. The repayment from the original policy diminishes over the years, but the dynamic policies are added on top of it. You never quite grow out of it.

And that is why, in the early years, you will often find yourself dealing with an adviser who takes conspicuously good care of you. Not because the service there is better conceived, but because the contracts need to be free of liability. In my old world, within partnerships, client retention services were focused exclusively on preventing clawbacks, rather than on doing something useful for the clients. Entire strategies were developed for this purpose. This is not a criticism of individual people. It was the logic of the system, and it was clear to everyone.

And now work that out

Five thousand euros constitutes a contract. Things get interesting when it comes to the big deals.

Anyone who manages retirement provision schemes for entire workforces does not have just one contract on their books, but dozens, and they are all linked to the same company. If that company applies for short-time working or has to make redundancies, the claims for reimbursement come in a bundle. The coronavirus pandemic was the stress test for this. Suddenly, tens of thousands of euros are on the table, and you have to be able to absorb that.

I’ve seen people who earned a great deal in one year and found themselves with nothing the following year, because the clawbacks came just when things were already difficult. Some lived beyond their means, and that’s their own problem. But the system forces you to keep selling, even after decades, because otherwise you’ll fall into exactly that trap.

I am writing this without any sense of satisfaction. I have seen people broken by this, and that is the real reason why I am writing about this topic in the first place.

The 2.5 per cent that isn’t really 2.5 per cent

In almost every consultation, the phrase ‘the acquisition costs amount to 2.5 per cent’ is mentioned. That is actually true, but it means something different from what everyone thinks.

The figure is set out in Section 4(1) of the German Actuarial Reserve Regulation, officially under the heading ‘Maximum Zillmerisation Rates’. It states that an insurer may charge a maximum of 25 per mille of the total premium as one-off acquisition costs against an individual policy when calculating its provisions. This figure has applied since 1 January 2015; previously, the limit was 40 per mille.

This is an accounting limit. It is not a commission limit nor a cost cap. Anything exceeding this is not prohibited; it is simply accounted for differently.

I can illustrate just how big the gap is using my own figures. For standard retirement provision products, I currently receive a commission of between four and 4.8 per cent of the total premium paid on the open market. Even in my previous role, I received three per cent, and the firm received its share on top of that.

You read ‘2.5 per cent’ and think that’s the answer to the question of what the contract will cost you. In fact, it’s the answer to a completely different question.

What you need to take away from this is simple. In reality, more is paid out, and no company pays this out of its own pocket. It is paid for by you, the client. Always.

The cycle that sustains itself

And so we’ve come full circle, and this is what it looks like.

The client assumes a rate of 2.5 per cent. The actual costs are higher, so over the years the policy does not perform as well as the client had expected. This leads to dissatisfaction. Dissatisfaction leads to cancellation. The cancellation triggers a claim for repayment from the intermediary. And the claim for repayment forces him to sell the next policy to plug the gap.

Anyone who enters the market with such a lack of transparency, claiming to want to resolve concerns about retirement provision of all things, and then repeatedly disappoints people, should not be surprised by the reputation of this sector. The reservations that many people have about us are, to a large extent, justified.

And no, not everyone does it this way

I know colleagues who work cleanly and transparently within this very system. Who tell their clients exactly how it is, who say the uncomfortable things and still make a living from it. They do exist.

The problem is not the person in the model. The problem is a model that forces the good people to work against their own remuneration.

Why I stuck with it for fifteen years

The question is obvious, and I’d rather answer it myself than have it put to me.

Formally, I was self-employed. In reality, I was very much like an employee. I realise that now. I was an entrepreneur, if anything, in terms of risk, not in terms of profit. The best evidence of this is quite simple: I didn’t own a single client. You worked for the firm, and that has little to do with true entrepreneurship.

The system takes a lot of the work off your hands, which is why you rarely question things. There are so many rules to follow that your job boils down to going out and selling. The terms and conditions were known. You don’t discuss them; you just work with them.

At some point, you hear stories, then another one, and then you start asking questions. I was late to start doing this because it didn’t affect me for a long time. When it did affect me, I took a closer look. And once I’d understood what I was seeing, I took action.

Call it negligence, call it naivety. Both are valid, and I’m not ashamed to put it up for discussion. However, I am also the one who speaks it out loud. Many know it but don’t say it.

A moment of contrition is justified at first. After that, I speak openly about it and resolve the issues for those who place their trust in me.

To my colleagues reading this

You’ll recognise every figure in this text, and perhaps you have worse ones.

Break free from this. Not for moral reasons, but because it’s destroying you. Move away from chasing a few thousand euros in commissions, towards a model that pays for your working hours. You’re putting the pressure on yourselves, and it is this pressure that forces you to keep selling, time and time again. This is precisely what gives the client the feeling that the meeting is about signing the deal, rather than about them.

What follows from this

After fifteen years in this line of work, my answer is not that we need better people. We’ve had them for a long time. I work with some of them, and I’ve left behind those who aren’t.

We need a different model. One in which analysis, intermediation and service each have their own price, which you know in advance. One in which the scenario where you don’t buy anything is a normal outcome, not a financial disaster. And one in which the client portfolio belongs to the person who manages it.

This is no heroic feat. It is a decision that anyone can make, and I have made it.

Want to know how this works in practice? Then book a free introductory call. And if you’d like to understand first what the old model costs you in euros, you’ll find that in Commissions vs. Fees.

This series: Free advice

1. Part 1What ‘free advice’ really costs
2. Part 2Why I do not offer free consultationsYou are reading