Each month, when you review your personal bank and savings account, you have probably seen little fees, like a checking fee, minimum balance charge, hard copy statement fee, and ATM fees. There are numerous little fees that are deducted from your account. $10 here, $1.50 there, it all adds up. But, what if those fees weren’t listed on your statement?
As a dealer principle, reinsurance is an important part of your wealth portfolio. When you made the decision to increase your profit potential, likely your biggest question was which type of profit participation model to use. You assumed your administrator would outline any fees or expenses upfront. After all, the objective was to build wealth for you and your heirs. But have you reviewed your administrator’s balance sheets lately? Do you know where your profit is going? Are you getting the most from your money?
Whenever a dealer leaves their current product provider to become an EFG Companies client, it is standard operating procedure for EFG to analyze that dealer’s reinsurance portfolio, reporting and documentation to determine the associated fee structure the dealer had previously been paying. Our analysis consistently reveals a startling number of hidden fees amounting to hundreds of dollars being funneled away from the dealer principle and into the pocket of the previous administrator. Let’s take a look at an average account transfer and see what our analysis uncovered.
Initial Balance – $1000
The example reinsurance portfolio begins with the sale of a VSC, depositing $1,000 into the account. The first hidden fee crops up with when an Inflated premium tax fee is charged, tacking on an extra 1-2 percent on top of the normal state tax. Your balance is now $990. It’s only $10 dollars – a small amount to lose. But this is just the tip of the iceberg.
Next we come across a ceding fee, which can range all the way up to 10 percent. In this portfolio, we see a six percent ceding fee totaling $60. New balance – $930. The stakes get higher with a hold-back fee – money literally held back by the administrator as a kind of “commission”. In this situation, a 1 percent fee totals $100 bucks – and now your balance is down to $830.
While that administrator “watches” your account each month, you are charged a monthly management fee. This fee is sometimes masked as a line item within the annual reinsurance company expenses and is usually around 2 percent. In this example, that fee equals $20 and your balance is down to $810. Has a claim been filed on that initial VSC? Tack on a per claim fee. This flat fee is assigned to every claim on a reinsured contract. This example reflected a $30 fee. New balance – $780. Only 78 percent of your initial $1,000 balance has been invested to generate wealth!
While this example showed several specific fees and associated costs, there are numerous other potential hidden fees:
- Performance penalty clauses
- Extended vesting periods
- Bankruptcy or security charges
- Language around access to funds
- Stop-loss fees
Our analysis of hundreds of contracts reflects this startling fact. Given the average VSC production of 100 contracts per month, there were $264,000 worth of hidden fees per year!
Protect Your Value
When pitching reinsurance, many administrators focus the bulk of their discussion on the various profit participation models and the dealer’s access to cash. Whether it be retrospective commissions, CFC or NCFC reinsurance programs, or a dealer-owned warranty company, administrators can play a slight-of-hand game with the pros and cons of underwriting. While these plan discussions are clearly important, if you are losing 22 percent of your wealth each month to hidden fees, the type of plan you choose might be a moot point.
Ask your administrator to show you examples of other similar portfolios. Demand a full accounting of all fees to be assessed per event/month/quarter/annual. If fees are assessed, what is the recourse process to dispute these fees and receive a refund?
Obviously, product administrators are in business to make money. There are some reasonable costs associated with creating and maintaining your portfolio. An upfront percentage assessed each month is much easier to account for vs. these nickel-and-dime hidden fees that whittle away your value – right under your nose!
So the next time you receive your reinsurance portfolio statement, take a close look at those little fees at the end of the statement. Do you understand them – or agree with them? Are there other fees scattered throughout that don’t make sense – or seem excessive? If you’re being hit with hidden fees, protect your value, call your administrator and demand a full accounting. Your balance sheet will thank you!