The average policy on the books in New Zealand is a little under seven years. Which means that going a pendulum commission model generally means you have a hard row to hoe as you establish this revenue model, about ten years, and there is a good chance a significant portion of that doesn't make it to the upfront break-even point.

Mostly from experience, this is higher value clients and the business client having changes and reducing or removing significant parts of their cover as their wealth accumulates and they reduce their insurance needs. Not to mention the 50 plus age group who find premium increases hefty and reduce and drop protection.

When I was a BDM with Sovereign, we talked pendulum to help flatten the curve and help advisers build better cash flow because it made a lot of sense then.

Year 1 upfront commissions were about 170% for the established producing adviser, but the trail was 2.5% for level benefits and 4% for indexed covers. This is circa 2006.

When Sovereign pushed their 7.5% trail model through not long before I left, this changed the pendulum landscape considerably.

On the same upfront commission model, it now made pendulum as an option have a break even point of year 8 when compared to upfront, longer than the average policy lasted... And on top of that, you still had the establishment pain to get through.

The harsh reality, starting at $0 book value, running at $100,000 new business API with a 170% commission rate and a 92% persistency, you're only looking at a $43,000 per annum difference in income, less than 10% in the 10th year.

If you look at total income over that time, pendulum commission has a net $200,000 lower revenue level in that first ten years. A considerable amount of income to give up when we look at the running costs of our businesses. After that, yes, it is better, however, only if your average policy is greater than eight years, contrary to the industry averages.

If fast forward to today and look at the landscape today, it is quite different again.

Now I'm using a persistency calculation that excludes new business. Because it is the inforce book that determines your trail and renewals, not the inforce plus new business. So this is more the Sovereign persistency calculation than the others... The others are about measuring your value in terms of API revenue to the insurer, and measures little real understanding of inforce book, outside taking total API and removing New Business premium in the last 12 months, which they don't do.

Now if I am to work through the same model as above, but use the Partners Life comms model, 180% comms, $100k of new API, a book persistency of 92% and pendulum at 25% rather than 20% in the previous model, we get to a different place.

Break even year is year 7, the ten-year income earning rate is much the same at $43,000 more for pendulum than upfront. However, the difference in earnings for the business across this time is now $300,000 less on pendulum than taking the upfronts.

I don't know about you, but most businesses work on a three-year revenue projection, not a ten year one, banks and lenders look at the previous 2 -3 years and don't care about the future.

So building a business on future earnings projections ten years out is somewhat of a challenge and even then, there is so much that can get in the way.

If you are an adviser in your 50's, then it's going to be your 60's before you reap the benefits of taking on the pendulum model.

Which is going to coincide with the bulk of your client base hitting their retirement years and dropping their covers. It's more likely that you won't achieve the projections because of the localised age of adviser clients to the advisers' age. +/- 10 years of the adviser age.

So what do you do?

The Partners Life option of pendulum 75 is a middle ground approach that class the total revenue gap to $200,000 over ten years and is more in line with what I talked about above for the 7.5% trail model with Sovereign.

Another approach is to look at how you structure your upfront commissions. If you were to look at discounted premiums, you're going to maintain the affordability for clients for a longer period of time, including increased loyalty discounts with those providers that have them.

If you presently have an 89-90% persistency rate, this could lift it to a 93-94%, or better, persistency rate. This alone will add $40k per annum to your trail earnings over the same ten-year timeframe.

However, you do trade off higher annual upfront earnings for that bump in more longer-term passive earnings, which over ten years could be $700,000. However, the upfront earnings are assuming that you have a genuine 89% persistency of the book, not a propped up calculation based on new business which in reality could be significantly lower than the real persistency.

What's the right answer?

I don't know, but it's not fees and no commission. That doesn't do clients any favours at all.