Auditing the adviser business model in a fiduciary era

Most employers are overpaying for healthcare by about $4,000 per employee each year, and the first step in reclaiming that lost profit is establishing proper governance and oversight. However, even the most robust fiduciary committee charter is only as effective as the adviser who guides it. 

For the professional adviser, fulfilling the role of a trusted advocate requires an honest audit of our own revenue models. We must ensure our financial incentives are aligned with the client's bottom line rather than the carrier's premium. That alignment is no longer theoretical — it's required. 

Finance and HR teams typically operate at maximum capacity and rarely have the bandwidth to navigate the forensic nuances of healthcare compliance. They rely on our specialized expertise to protect their blind spots and manage their healthcare spend. Yet, a fundamental conflict exists when an adviser's compensation is tied to the volume of the premium through traditional commissions or undisclosed overrides, a structure that directly rewards higher costs. Moving into the fiduciary era requires a transition to a compensation structure that eliminates these conflicts.

Friction of market-derived income

Market-derived income — encompassing contingent bonuses, carrier overrides, loans and lines of credit, and per-script fees — acts as a barrier to effective governance. When advisers are paid by vendors rather than clients, their alignment with the best interests of plan beneficiaries is structurally compromised. It becomes difficult to advocate for the high-performance strategies necessary to reclaim waste if those strategies result in a direct pay cut for the adviser's firm.

To lead a fiduciary committee with integrity, we must move toward a transparent, fee-based model. This shift allows the adviser to act as the specialist guide who can objectively audit vendors without regard for how those decisions impact a commission check. In addition to being a regulatory requirement, transparency is a prerequisite for fostering the trust needed to manage a multimillion-dollar corporate asset.

Plan sponsors are fiduciaries – legally required to act in the best interest of plan participants and beneficiaries.  A broker's true commitment to alignment with their clients can and should eventually move from a verbal promise to a contractual reality. The proper vehicle for this transition is a contractual promise to act in the best interest of the plan. By contractually promising the plan sponsor that they will act in the best interests of the plan, the adviser legally binds themselves to provide expert recommendations that are solely in the best interests of the plan and its participants.

Professional alignment requires a nuanced approach to various lines of coverage within a benefits program. This alignment adds true value to the adviser-employer relationship. While a fiduciary standard is essential for the core group health plan – including both medical and pharmacy — certain ancillary or voluntary benefits are often employee-funded. In these scenarios, a commission-based brokerage model may remain the most practical delivery mechanism to avoid the administrative burden of invoicing individual employees.

The key to maintaining integrity in this hybrid environment is a compensation and revenue model matrix. This tool allows the adviser and client to explicitly define which lines carry heightened alignment status and which remain on a traditional brokerage basis. Where heightened standards apply, the adviser must ensure compensation is level and any carrier-mandated commissions that cannot be removed should be credited 100% back to the client.

Performance-based compensation

Performance-based compensation is a powerful tool for aligning incentives with outcomes, provided the definition of savings is clearly established in advance. Total visibility is essential for the client to ensure the benchmark is fair and verifiable. Advisers also must be mindful of the client's friction threshold. If compensation relies too heavily on a percentage of savings, there is a risk of pushing a client through the maturity model at a pace that exceeds their bandwidth. A recommended standard is that performance-based compensation should not exceed a minority portion of the total available compensation and should be measured over a timeframe that accounts for natural claim fluctuations. 

The architect's standard of care

Auditing our own revenue models is an essential component of the new standard of care. If we expect the C-suite to take on the personal liability associated with a fiduciary charter, then we must provide them with a conflict-free partnership. This alignment allows us to protect their balance sheets and manage the plan with the same rigor applied to a retirement fund.

By moving to a transparent, fee-based structure and formalizing our alignment with plan fiduciaries, we change what we are capable of delivering for our clients. We move from being a retailer of a product to a guardian of the client's future.

In our next installment, we will look at how to execute this upgrade for your clients without causing disruption or "noise" in the transition.