John Lefferts' Blog

Thursday, January 28, 2016

Career Life Insurance Distribution: A shock to the system

As the financial media reports on the potential fallout in the independent broker-dealer community should the DoL proposal go forward as it appears to be headed, it seems like their definition of an independent platform is “not one of the four major wirehouses”. Of course, it’s far more nuanced than that. There are B/D groups like Cetera, networks owned by PE firms like Ladenburg Thalmann, regional B/D’s like Stifel and those that are insurance company owned B/D’s such as the ones affiliated with Jackson National. There is no question that the DoL proposal will impact them all in a big way since it has been reported that the new rules will cover up to 60% of investable assets. With the reduction or loss of revenue sharing, move away from lucrative commission based products and increased compliance and legal exposure, it’s no longer business as usual. I suppose it’s understandable that the financial media does not distinguish between the various breeds of broker-dealers given all the varieties and their unique complexities. However, a largely overlooked segment of the community that will be impacted disproportionately are the insurance manufacturer B/D’s. Take a look at the most recent Investment News ranking of the top 10 independent broker-dealers based upon number of registered reps:
    Firm                                                                             # of Reps
  1. LPL Financial                                                         14,036
  2. Lincoln Financial Network*                                  8,457
  3. Ameriprise Financial Services*                            7,589
  4. Northwestern Mutual*                                           6,014
  5. Transamerica Financial Advisors*                         5,103
  6. MML Investor Services*                                             4,892
  7. AXA Advisors*                                                         4,854
  8. HD Vest                                                                         4,515
  9. Cambridge                                                                     3,374
  10. Cetera Advisor Networks                                           2,948
*Insurance based manufacturers
Source: Investment News B-D data center
You’ll notice I’ve placed an asterisk next to those “independent broker-dealers” that are owned by a manufacturer of proprietary insurance products. They represent 60% of the top 10 and 36,909 reps on this ranking from a highly respected industry publication. Yet, you’d be hard-pressed to find any industry articles about these firms, how they operate and the coming challenges ahead.  And I’m not surprised. The lines that once separated insurance based distribution models from investment based have blurred to the point where they now appear one in the same. Then there’s the intentional blurring by the publically traded insurance companies themselves…why?...because the multiples for asset managers are well above being characterized as a stodgy low growth insurer. But the confusion goes further. There are insurance companies that own independent broker-dealers as was the case with Transamerica above at #5 before they sold it off late last year and more recently with AIG selling to PE firm Lightyear. AIG specifically cited challenges with the DoL proposal as a reason for selling and I’m certain that any others who can sell will do so. That leaves one set of insurance affiliated B/D’s left “holding the bag”. They are those inextricably imbedded into the insurance manufacturer known as career life insurance distribution firms.
There is one distinguishing factor that makes career insurance shops (several listed in the top 10 above) the most challenged of the platforms with the DoL proposal; proprietary products. The symbiotic relationship with the field branches and home office of insurance carriers worked for generations. HQ manufactured competitive proprietary products and the field agents and managers received differential compensation, recognition, benefits and conference qualification credits for selling them (with differences between GA and Managerial systems, but I don’t want to further confuse). But what happens if they are no longer allowed to receive these extra benefits for distributing proprietary products? Answer: they no longer have that symbiotic relationship as the economic basis for tying field distribution and the manufacturer no longer exists. And unlike the independent B/D’s owned by insurance companies (as was AIG Advisor Group and Transamerica Financial Advisors), they cannot be easily sold off. The legacy costs in the form of infrastructure, real estate leases and retiree benefits alone are like a ball and chain that can’t simply be extracted. Add to that the lack of investment into current technology and relatively low GDC per advisor and it becomes questionable at best if there is any value at all.
The drift away from proprietary products at the career shops has been going on for almost 20 years. To combat it, insurance companies have been increasing 3rd party distribution and dramatically cutting costs in their career platforms. But the implementation of the DoL proposal and potentially following with an SEC fiduciary proposal will act as a shock to the system should proprietary products no longer enjoy favored status. An obvious question then…is this a death sentence for career life insurance models? I think it depends. In their current form, yes it is life threatening. But with some semi-radical restructuring, they could actually come out on top.
Radical change within the career life insurance space does not come natural. There is a formula and system that has worked for generations and toying with it is pretty much sacrilegious. Those who are wed to the old ways where leadership is not bold enough to change will die a slow death. I expect attrition to the IBD models in a big way (to those IBD’s who survive). But if an existing career firm is willing to make tough decisions and change compensation, recognition, product set and their entire value proposition, they are actually better positioned than the wires and indy B/D’s.  
Here’s why they’re better positioned; There is going to be a big shift from investment management and towards financial planning as a result of AUM fee compression and a need for the human advisor to add value above and beyond the robo-advisor. The career insurance models have culturally been more process driven than transaction driven which matches up perfectly with financial planning. They also have a recruiting model in place to bring in new talent where none of the IBD’s have ever had success. But can you teach an old dog new tricks? (ie move the career life salesman to become a fee for service financial planner). Yes, I’ve done it before and with the right incentives and HQ support, it can happen again.
"There are risks and costs to a program of action. But they are far less than the long-range risks and costs of comfortable inaction" -John F. Kennedy
“Back in the day” I headed an initiative to morph a life insurance sales force towards financial planning. The old guard of the firm was very much against it thinking it would deep six the insurance sales. We changed the licenses (from series 6 to Series 7 & 65), training, product set, compensation and recognition. Rather than recognizing producers for commissions earned, we recognized advisors for how many Asset Management Accounts were opened and assets gathered. The most interesting thing about it is that not only did we capture all the investment assets, we also saw a marked increase in insurance sales. Referrals increased, per capita GDC increased and the breadth of products distributed increased when a financial planning approach was used instead of a sales pitch.  Financial Planning Mag article about it here . So what happened to it? While the initiative was wildly successful, the market downturn hit in the early 2,000’s and it was dumped back in favor of a product driven strategy, namely variable annuities, to goose profitability of the mother company. However, it may have just been ahead of it’s time. I truly believe that if the career life space is to survive, financial planning is the path they must take. It will be interesting to see who is willing to make radical changes and who will die a slow and agonizing death.
“To be truly radical is to make hope possible rather than despair convincing”

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