Dundee Wealth Management’s recent announcement that its advisors can no longer do insurance through outside managing general agencies (MGAs) has provoked a range of reaction from industry players interviewed by The Insurance Journal. Some viewed Dundee’s move as a harbinger of the future of advisor-MGA business models, while others see it as threat, both for advisors and for other MGAs.
Terri DiFlorio, president of the Canadian Association of Independent Life Brokerage Agencies (CAILBA) and president of Hub Financial and Hub Capital says she couldn’t really comment much on what CAILBA’s member would likely say to the new Dundee policy, except perhaps, "Oh Damn!!"
She elaborated by saying there are probably many MGAs who get business from Dundee advisors and now "are losing this business because of something completely out of their control."
But that doesn’t mean they plan to let it go without a fight. Some MGAs told The Insurance Journal that they see this new policy as an opportunity to recruit any Dundee advisors who are disaffected by the decision. Ms. DiFlorio says HUB is one of them.
"That’s exactly what we’re saying. It’s an opportunity for us. We have both sides of the business, an MGA and a dealer. And, independence is very important to us." She added that HUB does not have "a big master plan" to recruit Dundee advisors, but regional managers will be letting the Dundee advisors with whom they have existing relationships know that they can join Hub. The firm will even approach the advisors they don’t have and offer them an alternative. "Doing as they’ve been told is not their only option."
But, asked whether she thinks many Dundee advisors will choose to leave over the new policy, she said no. "If they have a large investment book, I expect that advisors will give Dundee Insurance Agency Ltd. (DIAL) a chance." The reason is that it is no easy thing to change mutual fund dealerships since each client in the book must be contacted and agree to move to the new dealer. "Moving mutual fund business is not a decision to be taken lightly," says Ms. DiFlorio.
A step backwards
Rene Pereux, Principal of Daystar Financial Group, says he has known informally that Dundee was moving in this direction for about a year. A couple of Dundee advisors, who have significant levels of business with Daystar, had informed him that they were getting pressure to do their business through DIAL, he explains. "My reaction to this is that the independent advisor is losing the right to be independent. Dundee is trying to create captive distribution."
He adds that he started his career in the captive system, which was the dominant system well into the early 1980’s. "Those distribution systems started to break down and fail for many reasons…as an independent advisor, I see the requirement to do all of your business with one entity as a step backwards."
He asks, "How does taking away choices, flexibility and independence add value to an advisor’s business? More importantly how does it add value to the client/end consumer?"
No one entity, he says, can offer all of the best products or services. Even if a firm has contracts with a wide range of insurers, many MGA’s offer proprietary products as Daystar does for small businesses in the employee benefits market. "As a captive advisor, this opportunity and many more are lost."
Is he worried that other large dealerships will copy Dundee’s lead? "It certainly is a worry if many other organizations took on the same philosophy. Having said that, there are a lot of advisors who cherish their independence. There would be some rebellion," says Mr. Pereux.
Mr. Pereux’s partner, Keith Brown, principal, Daystar, said he doesn’t believe compliance concerns are a good enough reason for Dundee to require all the insurance business from their advisors.
MGAs such as Daystar also protect consumers through compliance oversight. As an MGA he has a fiduciary responsibility to ensure that transactions are done in the client’s best interest, he explains.
The competition posed by mutual fund dealers’ increasing involvement in the insurance industry, may encourage more MGAs to open dealerships, Mr. Brown says. Daystar hasn’t yet gone this route. "We may have to…if we felt our business was in jeopardy." But it is a very heavy investment to open a dealership, so Daystar presently prefers to align itself with dealers that support independence, he adds.
The risk is real
As someone who also runs a dealership, Ms. DiFlorio says she understands why Dundee has taken this step. She knows that some people will view Dundee’s new policy as a play to increase their insurance business. While she says increased business for DIAL is no doubt a "pleasant side effect", she doesn’t believe it is the main driver behind the decision. "For a dealership, the risks are very real when advisors do business outside."
In terms of supervisory responsibility, a dealership, has something like an employer-employee relationship. Anyone who is registered with the dealer has been approved by the dealer. So, when there are complaints, the dealer’s compliance department ends up involved even if the business originates elsewhere, she explains. "And, with the misbehaving markets these days, there is a higher chance of complaints."
She says this kind of situation has "absolutely" happened at Hub and sometimes it isn’t even off book business. "It can even concern business done prior to joining the firm."
Even if the complaint is unfounded, these off-book situations are still a hassle for the dealer, Ms. DiFlorio continues. "It’s a resource-draining exercise. It is very time-consuming for the dealer even if there is no validity to the complaint."
Despite these risks, Hub, has no plans to create similar restrictions, she added. However, Ms. DiFlorio says she believes that regulators will eventually mandate insurance advisors to put their business through one financial services intermediary.
She expects "dramatic changes" in advisor practice management and says this trend is already beginning, with the recent anti-money laundering legislation and the Do Not Call list as examples. "Maybe Dundee is ahead of the curve."
Meanwhile, Mr. Pereux of Daystar agrees that there has been a trend toward increased regulation, but believes the independent channel would join forces to oppose any regulatory move to require a one-relationship type model. "It would have to happen with a very big fight."
Dundee’s new policy has not yet been rolled out in Quebec, but will be at the end of the year.
Michel Kirouac vice-president, general manager of MGA and mutual fund dealer, Le Groupe Cloutier, headquartered in Trois-Rivières, Quebec, is sure that it will be tough going to impose this policy in his province, where insurance brokerage has a 40-year history. And, the history of Dundee in Quebec is firmly rooted in the insurance brokerage business (Dundee acquired Cartier Partners in December 2003), he adds.
Mr. Kirouac says he understands Dundee’s fear on the risk management side, but he doesn’t think you can jump ahead of the market and impose such a policy on advisors in Quebec unless it became a regulatory requirement to have one relationship for insurance business. "I am not sure that my way or no way" is going to work, he says. "It’s a gamble."
At the same time, he thinks regulators will move in this direction and Le Groupe Cloutier is preparing for that possibility. "This is mainly why we started our dealership last year…If this happens by law, we’ll be ready."
Byren Innes, senior vice-president and director with NewLink Group, a Toronto-based strategic research firm for the financial services industry, also believes that regulators will eventually impose one relationship with a supervising intermediary on insurance advisors. Mr. Innes believes that this is an important step to protect consumers. Having an advisor’s business all in one place is the only way to ensure proper supervision, he adds. And, whether this kind of policy comes from a firm or through regulation, it should be applauded. Dundee, he says, has made a step in the right direction. "It just makes sense."
The only objection that an advisor could make to this policy is that it takes away some independence. But, according to NewLink’s research, advisors are already placing 90% of their business through one MGA. "There is the aura of independence and the reality of independence," Mr. Innes says.
He adds that it is "just foolhardy" for firms such as Dundee to take on the risk of allowing their advisors to do off book business. The current financial markets crisis demonstrates the need for careful risk control. "Look at the financial markets. People had no idea how much risk they had."
The financial markets crisis will no doubt lead to increased regulation, he adds. "More rules will be put in place. These rules will trickle down to the advisor."
He adds that a number of Investment Dealer Association (IDA) firms and bank-owned firms already have these restrictions in place. And, they are all increasingly interested in the insurance business.
What will be the impact on MGAs? Mr. Innes says to survive the increasing competition from MFDA and IDA firms in the insurance business, "MGAs really have to focus on what value they bring to the advisors they support." They also should be aware of what other products their advisors are selling. "If it turns out that my advisors are significant mutual fund producers, then my business is at risk."
Mr. Innes adds that the pressure from the IDA and MFDA firms could help drive consolidation in the MGA market, especially if they feel the need to open their own MFDA dealerships to compete. Size matters in this scenario. "Dealers aren’t cheap to run." Also, MFDA dealerships looking to acquire or expand their insurance operations will also help intensify the consolidation trend.
Dundee is one example of this.
Ron Dick, president of DIAL, says Dundee will be looking to bring over blocks of insurance business from Dundee advisors who previously were working with outside MGAs, or even possibly acquiring MGAs that were placing a lot of investment business through Dundee.
He is also interested in acquiring MGAs who may not presently be working with Dundee or its advisors. "I think there are some great opportunities for us to build our network in Atlantic Canada in particular. There is a high level of interest for us now. And there may be opportunities in Quebec and Western Canada as well."
DIAL already has some major acquisitions on the book including Central Ontario Financial Group, which was purchased at the end of 2005 and B Comm Financial acquired in 2007.