Price, Cost and Value

It appears that regulators throughout the world have decided that if someone is paid by commission, some customer was violated. They seem to have reached this conclusion with minimal attention to the nature of the transaction.  Particularly not to other parts of the relationship that are present at the time of the commission and both before and after.

They have fallen into the logically incorrect position that price paid should be equal to value received. I cannot speak to investment commissions but for insurance commissions, the services extend well beyond the instant commissions are earned.

In the economically rational world, the counterpart of value is cost. Price just one part of cost. If my cost is equal to or less than the value I receive, I am indifferent to the price number.  High cost / high value is a perfectly legitimate relationship. Most people, given the opportunity, would prefer that to low cost / low value.

The regulatory attacks on commission will cause an unavoidable shift toward low price / low value transactions. On the commission earning side, no one sane will do anything other than close the deal. 

Education, guidance, followup, counselling, communicating with other stakeholders or professionals, maintaining records and templates for comparison,insight to tax, legal or other opportunities, the coach who keeps the clients emotionally level, the conscience who reminds them of their duties and original decisions, the lifeguard,  the motivator who pushes them to do what they know they should do.  ALL GONE!

Who will replace those valuable services? Certainly not the regulators.

I suppose clients could organize some of them and as long as they value their own time at $0.00 per hour, they will be free.  They cannot organize the ones that matter most. Conscience, cheerleader, lifeguard, mentor, coach and guide require experience and skills not present in their inventory.

Regulators seem to be missing the important elements of the relationship and focusing on the relative trivia of commissions. 

There is nothing free in the world. If you get a lower price you do so by having some of the value removed from the product you acquire.  If you do not know what was removed, and how you will replace that value, you are likely to lose. The eventual cost of those losses may show up at an inopportune time.

Prominent 19th century English thinker, John Ruskin, had this to say.

“Its unwise to pay too much, but its also unwise to pay too little.  When you pay too much, you lose a little money ….. that is all.  When you pay too little, you sometimes lose everything because the thing you bought was incapable of doing the thing it was bought to do.   The Common Law of business balance prohibits paying a little and getting a lot … it can’t be done. If you deal with the lowest bidder, it is well to add something for the risk you run, and if you do that, you will have enough to pay for something better.”

The salaries, benefits, and pensions of the regulators will accrue regardless of the effect their ideas have on the people. They cannot lose.  You can.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  866-285-7772

One Comment on “Price, Cost and Value

  1. HI Don,
    I have been following your blog for some time and as an Advice-Only Financial Planner I appreciate your take on this industry. Even though I bill my clients directly for my time and not by accepting any other referral fees for the client Engagement, I totally agree with the clatter that has been coming from the CSA on eliminating commissions especially in the risk model. The regulators, economists and many politicians do not live in the real world and much of this is, I have been in the financial services industry, starting in life insurance in 2006, and I understand the process and need to be fairly compensated for the services that insurance professionals provide.
    Thanks for the article,
    Alfred Feth

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