The Independent Planning Group is opening a new door in compensation. The Ottawa-based mutual fund dealer and managing general agency has just started offering to brokers the full commission on mutual funds and the full override on life insurance it receives from the manufacturers.
In exchange, brokers have to pay a flat-fee to take advantage of the higher compensation. A move that some experts say is risky business for a managing general agency (MGA).
Life insurance companies offer different compensation packages to MGAs and brokers based on a percentage of the product’s first-year premiums. The percentage varies by product and company.
Typically, when a broker makes a sale, he or she receives a sales commission (first-year commission, or FYC) directly from the insurer. From the same sale, the MGA receives an “override” from the insurer which it shares with the broker. The portion the broker receives from the MGA is called a “bonus.”
The override can go up to 200% (and in some cases even more) of the broker’s commission. The bonus is based on the broker’s volume and is never the full override amount since that is the money used by the MGA to service its clients.
Richard Kluska, President of the MGA division of IPG, explains that on the life insurance side the broker will continue to collect the FYC from the insurance companies. What changes with the IPG system is that the broker will receive the full override IPG receives. Therefore, a broker can receive 200%, and in some cases even higher.
This is a drastic change compared to most MGAs who usually offer a maximum bonus of 160% to their top producers.
The added compensation, however, comes at a price. To receive the full 100% commission on the mutual fund side, there is a flat-fee of $15,000. To receive the full override on life insurance, brokers must first pay IPG the mutual fund fee of $15,000, and then pay an additional fee for the increased bonus.
IPG developed a three-tier bonus system on the life side. If they choose to pay a $2,500 annual fee, brokers will receive as a bonus 160% of the override. The second option is $7,500 annually, where brokers will get 180% of the override. And for $12,000 annually, brokers will receive the full override which can be 200% or higher. In these cases, the override will be paid directly to the broker.
Therefore, if a broker wants the full override on all his or her life business, it will come at a price of $27,000 per year. A broker wishing to sell life insurance without paying a fee may do so under the traditional IPG model.
“The MGA decides based upon the individual broker how much of that bonus they will pay the writing broker and how much they will keep to pay for office expenses. We have seen it be as low as 100% and as high as 190%,” explains Mr. Kluska. In mutual funds, most dealers offer the rep between 80% and 85% of the commission they receive from the mutual fund company. “What we have done is simplify the process and we are paying the full amount of the override,” he adds.
He uses the example of $1,000 sold in term insurance. In general, the broker will receive the FYC from the insurance company. Mr. Kluska says that if a broker were to make 30% of FYC, equating to $300, then IPG would pay the broker a 200% bonus of the $300.
Mr. Kluska explains that the fee-based model came about because of requests from licensed mutual funds reps who also sell, or are planning to sell life insurance. They see this as an attractive model says Mr. Kluska and he adds it will help expand IPG’s client-base.
Vince Valenti, President of the Mutual Fund division for IPG, explains that the IPG model is a good move for individuals selling $75,000 or more on the mutual fund side and $45,000 or more on the life insurance side.
Currently, four brokers have signed on and Mr. Kluska says IPG’s goal is to have between 40 and 50 brokers by the end of summer. As well, Mr. Kluska hopes IPG will increase its volume to $2.5M in total FYC. If achieved, this will be a 50% increase from last year. Another goal, adds Mr. Kluska, is to attract more carriers. IPG presently deals with eight.
However, Klaus Zabel, President of Marketing Concepts Group and President of the Canadian Association of Independent Life Brokerage Agencies (CAILBA), explains that the IPG system is a novel idea that can be a smart-move for certain brokers but in-turn may be dangerous for the MGA.
Mr. Zabel does not see a problem on the mutual fund side where some dealers already offer the 100% commission, however, he sees an issue on the life insurance side where IPG is the first to offer this compensation system.
He says that if a lapse or a charge-back occurs, where the policy is cancelled and the commission needs to be paid back, this can become problematic for the MGA since the broker may not be able to payback the commission.
David Stewart, Director of Insurance and Financial Services and a Partner at Wise Riddell Financial Group, an MGA headquartered in Oakville, Ontario agrees that the charge-backs, should they arise, will be challenging to deal with. Wise Riddell Financial, adds Mr. Stewart, pays a maximum 160% bonus to its brokers.
“Large brokers write large cases and even though large brokers with large cases don’t suffer a lot of charge-backs, it only takes one to cripple an organization,” says Mr. Stewart.
He stresses that should a lapse occur, the insurance company will collect the money from the MGA within 60 days. However, it may take longer for the MGA to get the money back from the broker or it may never be collected.
However, Mr. Kluska highlights that because IPG is both an MGA and a mutual fund dealership, the risk of charge-backs is greatly reduced.
“If [brokers] have a charge-back we can go after their mutual fund commissions or their life insurance commissions,” says Mr. Kluska. He adds, “…if we were an MGA only, yes, that would be an issue but this model has attracted and will continue to attract the industries top producers so we have quite a bundle of money to go after if there is a charge-back.”
Another issue that Mr. Stewart raises is that since IPG will be giving away the entire override, there will be less money left over to cover expenses and to provide other services to the broker.
“I don’t see a lot of extra dollars there at the end of the day, that will allow you to do extra value things… we provide a lot of advanced case support and so there is a lot of services we provide as an organization, where under that model we would be unable to do it,” notes Mr. Stewart.
David Baird, President of Ten Star Financial Services, a mutual fund dealership and MGA, echoes Mr. Stewart’s feelings. Mr. Baird explains that on the life insurance side, Ten Star pays between a 100% to 160% bonus and says that it cannot match what IPG is doing. “We have compliance officers, we have a back-office administration and we are required by the MFDA (Mutual Fund Dealers Association) to audit every branch and it costs money. If they have lower costs, than best of luck to them,” he says.
However, Mr. Kluska maintains that the cost of running the business should be sufficiently covered by the broker fees. All the administrative service and support, as well as in-force transactions are included in the fee structures, he adds.