There is no shortage of issues that financial advisers will have to face over the next five years. What should their compensation be like? To what kind of regulations will they be subject? How will technology affect their practices? Leaders from insurance companies and managing general agents (MGAs) say that the coming years will see changes in the way financial advisors and MGAs do business.On Nov. 11 in Montreal, The Insurance and Investment Convention hosted a unique event. It brought representatives from both insurers and MGAs together on the same stage, where they debated the future of life insurance distribution.
According to James McMahon, Quebec president of Financial Horizons Group, the MGA distribution network will evolve significantly over the next five years. “Currently, we see large networks being created…We also see insurance companies that are investing in networks to get market share,” he commented at the outset of the debate.
McMahon said he also sees major challenges ahead for the life insurance industry. He suggests that the first among these is technology, including the introduction of “big data” analysis.
“Managing general agents must invest in IT systems in order to connect directly to insurers and obtain information instantly. To give you a sense of the magnitude, that represents an investment of $250,000 to $300,000 per year. We must then maintain these systems, train our staff, and then educate our clients. That means a lot of money,” he notes.
The other challenge for those who sell financial products and services is compliance. “Five years ago, only two people were involved in compliance at our company. Today, we employ ten people and a full-time lawyer,” says McMahon.
For Michel Kirouac, vice president and general manager of MGA Groupe Cloutier, size will be critically important for managing general agents. “There is a minimum size they must reach in order to handle compliance,” he comments.
Furthermore, Kirouac believes that the very role MGAs play in the distribution of financial services will have to be redefined. “Today, insurers delegate important roles to us, especially in terms of advisor supervision. However, the zone between the role of the client, the managing general agent, and the insurer is not clearly defined. We, as managing general agents, are asking for clarification on what must be done. Should we supervise? Should we control what is sold?”
Yves Pelletier, chairman of the National Bank Insurance Firm, says one of the challenges for managing general agents will be to find ways to take a “comprehensive, integrated approach to support the advisor in the whole of his practice,” he says. In exchange, Pelletier suggests that the advisor should place 100% of his business with one managing general agent.
André Vincent, CEO of Assumption Life, also raised the issue of the size MGAs must reach if they are going to survive.
“The issues of technology or compliance are real for everyone, but they may mean that smaller managing general agents will no longer be able to survive,” he notes. “We see a consolidation trend that has been developing over the last few years – the bigger ones eat the smaller ones. There is probably a movement in that direction.” Vincent believes the main question is whether smaller MGAs will be able to bear the weight of compliance, since it involves requirements in training, human resources, and other areas.
Humania’s CEO, Richard Gagnon, affirms that MGAs occupy a “fundamental” place in the industry, but at the same time he points out that their role will have to evolve.
“Now it is the customer who goes to the financial advisor, by way of new distribution channels, through the Internet and social networks. The financial advisor who is not visible on these networks risks flying below the radar of a client who is looking for a service or an advisor,” he warns. “For us, the insurers, seeing managing general agents enhance their ability to manage compliance is good news. We can only be pleased since regulators are making insurers responsible — whether we like it or not, to be honest — for products once they have been delivered into the hands of the consumer.”
High and low commissions
Another challenge for the future distribution of financial products and services is the thorny issue of advisor compensation. Indeed, both regulators and consumer groups are becoming more and more insistent about transparency when it comes to commissions. And one question appears crucial for the coming years: can the industry’s high and low commission model be sustained?
For his part, Michel Kirouac thinks it can be. But, in particular, he believes that commissions will be more levelled out than they are currently. In his opinion, there is certainly room for a significant change despite certain obstacles.
“Going from 150% and then to 2%, to 15% for life, that is not the goal either. But I think it is possible to bring remuneration to a point where there is not such a high and low,” comments Kirouac. He also notes that the value of blocks of business that are compensated on a more level method is three, four, or even five times higher than others.
For Gagnon, the issue is limited because at Humania levelled commissions are the norm. He thinks that level commissions should be encouraged, especially for long-standing clients.
Gagnon believes the influence that levelled commissions have on the value of an advisor’s book of business will tip the scales in favour of this form of remuneration.
“For young people...it is a way of saying, ‘Build yourself a block that will appreciate in value. Do not think short term.’ Levelled commissions have quite an effect on the value and duration of a book of business. You just have to find a way to help the young advisor in his first four or five years in practice,” says Gagnon.
André Vincent of Assumption Life says that the problem with the high and low system is that it does not encourage the advisor to follow his client over the long term, since his remuneration is affected from the start.
“The idea of a level system was precisely to ensure that service would be available permanently,” he notes. “Level commissions would help to limit policy replacements, while at the same time it would encourage advisors to seek new customers on a regular basis to increase their income.”
Unlike the level system, the high and low model is more difficult to justify to clients, comments Peter McCarthy, CEO of BMO Insurance.
With the growing demand for transparency from clients and consumer protection agencies, distributors may also be compelled to disclose the amount and type of compensation they receive. Suffice it to say that this issue is not generating a great deal of enthusiasm in the industry.
James McMahon, for example, says, “When I go to buy a car, the salesperson is not going to tell me the commission she is making. But me, I’m going to be obliged to do so,” he says. “More seriously, it should be understood people are tackling something that could call the structures that are currently in place into question. For me, the best consumer protection lies in the independence of financial advisers.”
For Michel Kirouac, transparency will lead to other problems. “When you sell an insurance policy to someone, are you going to say, ‘I make 150% commission’ or ‘I make 15% per year’?” he asks. “I hope that if one day we are required to disclose our contracts, we will disclose based on a period of time instead of what we have been paid up front.”
Quality of service
André Vincent does not believe commission transparency is the key issue. For him, quality of service is the most important thing that needs to be evaluated. “Regulators want to ensure that the consumer’s interest is well served by the product that is offered. Commission should not come into the equation,” he says.
From Richard Gagnon’s perspective, the transparency fight is already lost, so he is inviting distribution professionals to prepare for the change.
“We must be careful and choose our battles…Transparency is fashionable in all spheres of business. We must prepare properly,” he says. “Today, the citizen wants to see a provincial politician’s snack bar bill posted on a web site...There is no doubt that the same customer wants to know what he is giving to his advisor. You can’t fight against it. This is precisely the time to highlight the value of the service.”
Peter McCarthy underlined that the transparency trend is impacting all sectors of financial services. “The market is changing,” he says. “Last week, Visa and Mastercard reduced fees for all small businesses. This is just a small example that demonstrates transparency is everywhere now. It is a challenge.”
Finally, Andre Vincent warns his colleagues about the importance, now more than ever, of creating added value. “The more the advisor simply sells products as commodities, the less he creates value and the more he is exposed compared to other distribution methods which have lower costs for the consumer. If we do not create value, we will be destined to disappear.”
A few ways to increase sales
Sales of life insurance products seem to have been in decline for the last few years. However, according to some industry professionals, there is no cause for alarm since advisors have the recipes for renewal at hand.
James McMahon of Financial Horizons says that the solution is simple: advisors need to “see more people” and rediscover their selling abilities. “The average age of financial advisors today is 50 or 55 years,” he notes. “They were 25 or 30 years old when they were selling the most...Advisors have forgotten their prospecting reflexes, and they have also been too inclined to rely on investment products.”
As for Richard Gagnon of Humania, he invites his colleagues to offer even more innovative products. “There is a shared effort to be made between distributors and insurers to make sure we update our products, that we update our marketing, and that we adapt to consumers’ new realities. Needs change, so our products must change.”
Michel Kirouac of Groupe Cloutier says what is lacking today is awareness about client needs. “If the advisor visit clients, families, and does a complete needs analysis, we can increase these (sales) numbers,” he says.