John Lefferts' Blog

Wednesday, April 16, 2014

If it looks like a duck and quacks like a duck, is it a ?

As an Oregon State alum, the last thing a diehard Beav fan wants to be mistaken for is its archrival University of Oregon Ducks. Yet, in parts of the country where there is less familiarity with the West Coast (ie everywhere Oregon is pronounced as Ory-gone instead of Ory-gun) and I tell them I went to school at Oregon State, they say, “oh, you’re a duck” to which I sheepishly respond, “no, we’re the other one”. Similarly, every year when the financial services industry publications come out with their “Broker-Dealer Rankings”, I am dumbfounded by the make-up of the lists where it seems like folks who should know better place proprietary insurance business models as independent B/D’s. Categorized by # of reps, GDC, revenues, etc., you naturally don’t see wirehouses on the lists. Nor do you see large asset managers and RIA’s. But, as an example, in this year’s Investment News ranking of “Largest B-D’s”, 70% of the top 10 are captive statutory employee based insurance models. LPL is clearly the largest Indy B/D and appropriately ranked,  but the remainder listed in the top 10?...not so much. Among those in the top 10 on this list are Lincoln Financial, Allstate, Ameriprise, Northwest Mutual, AXA Advisors, Metlife and Mass Mutual Life. I’m not saying that they are inferior or undeserving of any list, just not this list. And I’m not singling out Investment News here since all the industry pubs such as Financial Planning, Wealth Management and On Wall Street all rank the same way.   

On this particular IN list, I noticed at #24 listed is “Signitor Investors, Inc.” which is also a statutory insurance based business model…until recently. You may have read this article from IN announcing that John Hancock (an insurance company) will be terminating its health and insurance benefits for producers where the byline states “Signator moving from career agency to IBD model”. Now, this is an example where an insurance based model like those named above is actually appropriately listed as an Indy B/D.

Why did John Hancock make this change to its distribution model? My educated guess is that they realized some time ago that due to the great expense of maintaining a “tied” sales force coupled with the probability that regulatory changes towards a fiduciary standard will render the economics of a proprietary model unsustainable, they got ahead of the curve and made the hard decision to decouple manufacturing from distribution. I’m pretty sure most who glanced at this article thought it to be a non-event. But from my perspective, this is a fairly big deal. I’ve long predicted that the proprietary based models over time are unsustainable and other than several insurers selling off their B/D’s like ING or Hartford, none have morphed from career distribution to becoming completely independent. A risky and bold but admirable decision. I have to believe that other distribution models like them are watching this carefully. Will they lose all their advisors to “brand X”? Are there legal issues? Can they pull this off?

It’s clear that the financial press is somewhat unsure how to categorize the large insurance based distribution models as the industry has evolved and I can see why. Gone are the silos of insurance only, stockbroker only, Indy only, etc. Yes, we have harmonized as an industry without the regulators doing anything. If it looks like a duck and quacks like a duck, then it must be a duck…right? Just don’t call this proud Beav a Duck!

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