If you’ve taken out an insurance or investment policy you’ll probably remember that your broker received a payment for advising you on the right package and guiding you through the process of signing the forms. What you may not realise is that quite often the broker receives a commission from the insurer or financial services company on every policy that is signed. What is the difference between a broker’s fee and a commission, and what have you been paying in the past?
Fees vs Commission
As an experienced professional in the financial services industry, a good broker is entitled to payment for the services he or she renders. A broker’s fee is a type of consultation fee that clients pay their brokers in exchange for the specialised advice and consultations they receive before signing their policies.
This is a legitimate payment and is similar to the consultation fees you would pay a doctor, lawyer, or any other professional.
A commission differs from a broker’s fee, because this amount is paid to brokers by insurance companies and investment firms for each policy they “sell” to clients. Of course, this commission is ultimately paid by you, the consumer.
The difference between broker’s fees and commissions is an important one, and understanding what you are paying is extremely important if you’re going to take out any form of insurance or investment policy.
Why you should choose a broker who charges fees, not commission
When you pay fees to a broker, you are receiving a service in return – a good broker will assess your financial situation and help you to choose the best possible policies from the best insurers and investment firms.
On the other hand, brokers who work on commission may not feel the need to advise you objectively. Since brokers who work on commission are encouraged to sign as many clients as possible, you may end up being advised to take out unnecessary policies that you will struggle to pay for each month.
At Northwood, we have a strict company policy that prevents any of our team from taking commissions from insurers or financial institutions. We operate on a brokerage fee basis, charging our clients a reasonable fee in exchange for the advice we provide.
The future of broker’s commissions
The situation around broker’s commissions has come under the attention of the government, and it’s possible that in years to come this practice may become illegal. The new Insurance Laws Amendment Act may contain clauses that do away with commission on insurance policies.
Time will tell whether this law comes into effect, but consumers are well advised to steer clear of paying commission. Rather opt for a broker who charges a flat fee and serves your best interests.