On Sept. 9, through an internal memo, Dundee Wealth Management officially informed its network of 1650 advisors that they will no longer be permitted to sell individual insurance products, segregated funds and certain other financial products through outside firms, such as managing general agencies (MGAs). Instead, they must put this business through Dundee Insurance Agency Ltd (DIAL). The new policy will take effect Jan. 1, 2009.
The memo, entitled Business Relationships Outside Dundee, a copy of which was obtained by The Insurance Journal, explains that "Business placed outside Dundee creates an unacceptable level of financial risk and unnecessarily jeopardizes the reputation of the firm. Therefore…all new individual life insurance, segregated fund policies, living benefit policies, GICs, GIAs and registered investment plans must be placed through Dundee."
Certain exceptions are permitted for existing contractual arrangements, the memo states, and "at this time group insurance is not mandated to be placed through DIAL." The memo also adds that "existing blocks of business can remain with the current external MGA." However, if the advisor chooses to consolidate their business, "DIAL will attempt to negotiate the purchase of blocks from the current MGA."
In addition to insurance products, the new directive also restricts business dealings with firms such as MRS Trust or B2B Trust for self directed registered plans, the memo explains. With some exceptions, "All new self directed registered plans must be opened internally with Dundee." The same applies for guaranteed investment certificates (GICs) and guaranteed investment annuities (GIAs) that must now be purchased through a list of approved MRS Trust or B2B Trust for self directed registered plans, the memo explains. With some exceptions, "All new self directed registered plans must be opened internally with Dundee." The same applies for guaranteed investment certificates (GICs) and guaranteed investment annuities (GIAs) that must now be purchased through a list of approved companies including Dundee Bank and life insurance companies.
Ron Dick, president of DIAL, says the new "full partnership" policy has not yet been rolled out in Quebec except for Dundee’s Quebec-based IDA registered advisors, including Quebec-based IDA dually licensed advisors. "Working with our Quebec-based resource centre principals, they felt that they needed until year-end 2008 to work with the larger group of advisors (AMF or MFDA, AMF or MFDA dually licensed, or Life Licensed only) to prepare for the rollout of this program and we decided to proceed in a two step process."
In the mutual fund world, regulations oblige advisors to place all mutual fund business through one dealer such as Dundee. Insurance regulations, meanwhile, do not require insurance advisors to place business through one managing general agency, so some Dundee financial advisors have been working with outside firms for the insurance side of their businesses. The new policy means that these advisors will now have to choose between continuing as Dundee advisors and terminating sales through outside MGAs, or leaving Dundee and finding a new home for their investment business.
In an exclusive interview with The Insurance Journal, Mr. Dick explained the reasons behind this new policy decision.
He said that in recent years, Dundee Wealth has been drawn into client complaints that involved transactions where Dundee advisors had sold financial products through outside firms. Even though Dundee was not involved in the disputed transactions, the advisor had presented the clients with their Dundee business cards.
Mr. Dick did not want to go into specific details about the nature of these complaints, but said there were "a small number of large situations." When asked to give an example, he said there were a few very common situations that would not be unique to Dundee.
"The most common complaint that you get from consumers is about suitability of recommendation of a product, whether it be a mutual fund, security or life insurance product. If the business is not conducted through DIAL where we have a full service MGA, assisting with the underwriting of these cases as they go through to the insurance company, we have no ability to assess the process and business quality, or to help the advisor with the business so that we can manage or minimize that exposure to risk.
"The dark side Riskier still is what Mr. Dick calls "the dark side."
There are some advisors who either through a change in situation, or some other inexplicable reason, "even venture into activities that you may consider to be unethical or in some cases even illegal. In that case, if they are usually conducted off book, we have no way to protect the client or the firm on behalf of the vast majority of hard working and professional Dundee advisors." He added that Dundee’s new policy will "help our advisors maintain the professionalism and quality of their business and make sure that we are doing our job to look after our joint clients, the investing and insuring public."While some insurance MGAs have expressed understanding about Dundee’s position, others are indignant and consider this move to be a threat to the independence of the insurance distribution channel (see article page 18).
Mr. Dick disagrees with this viewpoint and argues that DIAL offers its advisors independence through its contracts with multiple insurers. "We thrive off the independent model. We are not telling advisors what life insurance companies they have to do business with. Dundee Insurance Agency as an MGA has 18 life insurance supplier company agreements providing a competitive choice of life insurance, living benefit and money products for Dundee advisors to meet their clients’ needs."
In terms of the overall Dundee advisor channel, Mr. Dick admits that the advisors weren’t all positive about the change and the firm didn’t anticipate that they would be thanked for it. Telling an independent entrepreneur what to do is going to result in a certain amount of resistance by definition, he said.
Dundee is also aware that some of its advisors have longstanding business relationships with some MGAs that they are not happy to give up, he added. "There are some heritage or career relationships that are not as easy to transition. We understand that part of it is an emotional aspect of liking to work with certain people."
Even so, as business people, the advisors understand that this business model is necessary, he added.
"The decision was not made lightly. It was made after a lot of consultation with our advisory councils and our top advisors. And, our top advisors wanted to see the business done within the firm to reinforce our firm’s reputation and quality of business. They wanted to see us keep that standard high."
This new policy is an opportunity to tighten risk controls, the importance of which has been highlighted by the current global financial markets crisis. "It doesn’t take a rocket scientist to see that proactive risk controls are a good thing."
If the shoe were on the other foot, Mr. Dick believes that advisors would not want to expose their businesses to the risks that firms face with off-book business. What company, he asks, would want to put a blank cheque on the table and accept responsibility for off book business that that they don’t know anything about, while receiving no compensation for taking on that risk? "From a risk management perspective, why would Dundee put itself in this situation?" he asks.
Dundee is looking to grow its business together with advisors as a mutual partnership. This means that while Dundee will invest in their businesses, at the same time it is also looking for the advisors to invest back into Dundee, Mr. Dick said. He added that he expects the end result to be a higher quality relationship.
Mr. Dick added that with the services and range of products and compensation bonuses that Dundee offers its advisors, that DIAL deserves the advisors’ business. "We feel that we’ve earned the right to do this and many of our advisors asked us to do this."
Aside from risk management, the new policy is also aimed at growing DIAL’s business, he adds. Insurance is a core platform that Dundee Wealth is looking to expand.
How much business will be transferred from other MGAs? "It is hard to quantify a number" since the value of business blocks held outside DIAL would be confidential, he explains.
"But we are going and talking to individual advisors and looking at possible ramifications of a transfer and making sure when building this framework that we are doing the right things for client and advisors."Although this policy was officially announced in September, informal discussions related to this change in direction began in 2006. The firm stepped it up in 2007 by requiring new recruits to bring their insurance business to DIAL.
At the time of the interview in September, Mr. Dick said that it was too early to tell how many advisors might choose to leave Dundee instead of following the new policy. He says Dundee is respectful of the fact that some advisors will decide that the Dundee business model doesn’t work for them. He anticipates that a "slim number of advisors would be seeking other relationships. We expect that. But it is not something we can forecast."
What if a Dundee advisor chooses to stay with Dundee, but does off-book business on the sly? There is no way to absolutely ensure that this won’t happen, he says. "We’re asking our advisors as professionals, and they are very professional, and holding them at their word. We feel, working with our independent professionals, that this is all that is required."