Pearl Parties
Early on in COVID (sorry to bring it up), I recall talking with my sister about some of the crazy things we were seeing on the internet. She asked me, “Have you ever seen a pearl party?” I replied, “I’m sorry…a what?”
We ended up watching pearl party videos for the next half an hour.
For the uninitiated, here’s how a pearl party works:
- You buy a piece of jewelry from your consultant (probably a friend or acquaintance),
- They host a live “pearl party” online,
- The consultant shows off a fresh oyster to the camera, reads off your name, and shucks that oyster with gusto
Ta-da! It’s the pearl for your new necklace!
I was transfixed. Who is this woman hosting a pearl party? How did she get all these oysters? Where did the jewelry come from? How are these pearls such vibrant colors? Is this her job?
Well, it turns out that the woman selling the pearls online had to purchase them for herself first. Then, she sold them to whoever would buy them (friends, family, acquaintances, followers, etc.). Hopefully she made a profit in the process because, again, she had to buy the merchandise from the company first. Oh, and she was probably also recruiting other pearl enthusiasts to join her downline so she could compete for sales incentives. In other words…this was a Multi-Level Marketing (MLM) company.
There are lots of businesses out there that follow this model (you might be able to think of a few). And the resounding question that just rings in my ears when I encounter these kinds of business models is, “but…how are you paid?
For some industries there’s an obvious answer. When I sold my house last year, my realtor was paid a commission (read more about home financing hacks here). When I ordered pizza last weekend, the delivery driver was paid an hourly wage (plus tip!) for providing his pizza delivery services.
But the pearl party lady? That one isn’t quite as obvious.
Like many industries, people in financial services are paid in a variety of ways. And asking the same question could impact who you buy insurance from, who you trust for financial advice, and where you choose to direct business.
So…how are you paid?
The pearl party reminiscence reminds me of a frequent occurrence in my own life. Here’s what happens: my phone buzzes with an unfamiliar number. If I’m lucky, I let it go to voicemail. Then, I check my voicemail later:
This is a quick message from [Insurance Company]. Our records show you recently got your life insurance license, and I wanted to make sure you know what’s possible now that you’re licensed. We’ve helped 1000s of new agents plug into real leads, top mentorship, and earn up to 133% contracts, all through a proven system.
Dodged a bullet there! Delete.
Then, I get a text message on my cell phone with basically the same message. But this time there’s a clever addition – the caller’s headshot! I’m as confused as ever…is this supposed to entice me to make you my boss?
Then, I log in to LinkedIn, only to see posts geared towards me with more promises.
Commission bonus – get 20% more commission for selling XYZ product – this month only!
Free life insurance sales consultation!
Here’s why the government doesn’t want you to know [XYZ thing] about life insurance.
Here’s something most financial advisors won’t talk about: [insert 300 words about why whole life will solve all your problems].
And again, I ask myself: “How are you paid?”
In the insurance world, there are a few ways agents are paid, and it ranges from easy to challenging for the consumer to figure out which is which. Let’s look at a few examples.
The one who blows up your phone
We’ve talked about this person already. Just like the consultant throwing pearl parties, there are insurance agents that make money by recruiting new agents to sell insurance, too. And the person who recruits you makes more money with you on their team because you become part of their downline.
There are a couple of companies I can think of that work under this model. Most often, when I see their name, it’s either because one of their agents (recruiters) is calling me asking me to join their team, or I see a video on LinkedIn highlighting their sales training events. I have literally seen videos of a hundred men shouting at the top of their lungs and rolling around in the dirt all in the name of…professional development?
But funny enough, finding information about the products these agents distribute is…challenging. It’s not front and center. I know they sell life insurance, but I have no idea what type or design or anything. In fact, the LinkedIn page for one of these companies doesn’t even USE the word “insurance” in their company overview.
Incentives don’t lie. I can’t tell you exactly how some of these compensation plans work, but I know through experience (i.e., the phone calls I receive) that a big part of the business is signing up new agents. And if an agent is focused primarily on signing up new agents to sell products so they can participate in the revenue from their future sales, how much time are they devoting to understanding their company’s products? And can they even sell products from other companies (mostly no)? And how much time do they even spend with clients?
So, how are they paid? For selling insurance, but they’re incentivized to recruit people like me to sell more insurance policies.
The one-store agent
The previous example is probably the spiciest. The insurance game gets a little less flashy from there.
One of the other models out there is the captive agent model. These can be harder to pick out of the crowd because many of their agents are also financial advisors. Maybe they’re a CFP®, or they hold their securities licenses, so they are held to a fiduciary standard.
But what was their recruitment and training like?
Often, in a captive agent setting, a young agent will come into a full orientation and training program to teach them about the insurance company’s product line and sales story. They have to get insurance licensed, and they may start their career with a whole cohort of aspiring insurance professionals. There’s definitely excitement in the air (even if they aren’t rolling around in the dirt…).
Next, they are often asked to write down the names of 100 people they know. Then, they have to call all of those people and ask to talk to them about insurance, reading the company-provided script. At a lot of these companies, selling insurance products is really the only thing a young agent can do to kickstart their career in financial services. They aren’t yet licensed to sell or advise on securities, but they can sell a fixed annuity or life insurance policy to that friend from high school they haven’t talked to in a decade. In some ways, this is a good safety guardrail for the consumer, and it definitely feeds into the competitive nature of many of those starting in the industry.
This young professional may go on to become more seasoned and get more credentials along the way that make them a fiduciary, but at the end of the day, they work at an insurance company. And what does the insurance company want them to do? Sell insurance.
When it comes to insurance, they’re very highly incentivized to only sell their company’s products. There are some circumstances where they can sell a product from another company, but it is never Plan A. They’ll try to get a client through insurance underwriting at their own company first, but sometimes the rates just come back unfavorably. Their first recourse is to ask the underwriters for an exception. And if that doesn’t work, someone has the name of a broker they can call to get access to someone else’s products for the client.
The captive agent gets paid better to sell an insurance policy from their company’s lineup than investing your money in a brokerage account or placing coverage with another carrier. And when you get paid more to sell a specific kind of product, well…that product can start to look like the solution to most of your clients’ problems.
I have worked at a firm like this, and like any other company, there are good eggs and bad eggs. There were agents I would have taken advice from, and there were agents I would have run away from as fast as I could.
But, again begs the question: how are you paid? Well, they’re paid the best by selling their company’s insurance products.
The broker (full disclosure: this is me)
At The Bahnsen Group, we are affiliated with a broker. What does this mean?
Well, my team and I are insurance product distributors, and we can sell products from most life insurance companies selling products in the United States. I am definitely biased in my views here, but I think this model lends itself most naturally to objectivity. Though it’s not a given.
And how are we paid?
Think about it from the insurance company’s perspective. Companies can shell out big dollars for marketing and ads to get their name out there. But the best delivery mechanism for an insurance company is someone sitting across the table (or Zoom screen) from the end consumer. So, companies pay agents to distribute their products to consumers, because, at the end of the day, insurance policies are a product. The payments the carrier makes when an agent places one of their policies are called commissions.
This is the model we work under, but we’re not incentivized to just sell one company’s products. This distribution model gives us the freedom to select policies for what benefits the client most. Who has the strongest financials? Who offers the best pricing? Who will look at our client most favorably from an underwriting standpoint?
But we all know that “independent” is not the same thing as “objective.” Like anything else, there are varying degrees of quality here. Some brokerage firms essentially funnel their producers to one specific kind of insurance with things like overrides. They pay you more to sell certain types of products (this model, by the way, is under scrutiny by regulators).
The focus of these “insurance shop funnels” varies widely, and it can be hard or impossible for a consumer to see. They can focus on things like IUL accumulation sales, premium financed life insurance, “infinite banking” with whole life insurance, fixed indexed annuity sales, etc. If all of this is a bunch of mumbo jumbo to you, then…well, it proves my point that this is hard to suss out as a consumer.
So, don’t just ask if your insurance agent is independent. Everyone in this group will say yes. Ask something more like: if I brought you five different problems, would I walk out with five different solutions, or five versions of the same one?
And agents who work with a broker…how are you paid? Commissions for selling insurance policies.
Who’s hosting this pearl party anyway?
Here’s what I don’t want you to walk away thinking: “Insurance sales are bad! Ignore everything I’ve heard about insurance because someone is getting paid to sell it to me.”
No.
Insurance is a useful tool in financial planning for risk mitigation. We implement insurance planning with many of our clients, and we make sure our advisors know what kinds of products are out there so they’re informed about what might be useful for their clients.
The payment itself is not inherently bad. But you should understand who’s “hosting the party” for the sale.
Here’s the thing that the pearl party lady and the guy blowing up my phone have in common: the product was never really the point. The recruiting was. The overrides were. The “how they get paid” was.
This doesn’t mean every recruiter is a crook or every captive agent is steering you wrong or every broker is only looking at their earning potential when recommending a product. There are good eggs everywhere. I have and do work alongside them. It just means that a really useful question for you to ask as a consumer isn’t just “do I trust this person?” It’s the same question nagging my brain when I see a call from a recruiter or a pearl-shucking party:
How are you paid?
Ask it out loud. Ask it early. A good agent (any of the three kinds mentioned above) will answer without flinching. And if the answer sounds more like a pearl party than a plan? Well…you’ll know which oyster not to buy.
Sarah Leitzke
Director, Integrated Planning
Trevor Cummings
PWA Group Director, Partner
