While more and more managing general agencies are starting to offer their own branded products, some agencies are refusing to follow the trend and argue that the real motive behind proprietary products is to trap the broker with the agency.
A broker selling a managing general agency’s (MGA) proprietary house-branded insurance product, may not be able to move that business to any other agency. This potential mobility problem is why some agencies have not bothered to develop their own products.
Today the trend is moving full steam ahead with MGAs such as the Investment Planning Counsel of Canada (IPCC), Cartier Partners, and PPI Financial Group all having their own private-branded products. Furthermore, Cartier is planning to launch other products such as Cartier-named universal life (UL) and critical illness (CI) products this year and IPCC and PPI also plan to launch more products.
Vincent Valenti, President of the managing general agency (MGA), Independent Planning Group (IPG) fears that brokers are not asking enough questions before starting to sell house-branded – also called in-house and private-label – products.
He explains that the main danger is that brokers may risk losing clients should they decide to do business with another MGA. For this reason, the Ottawa-based MGA does not sell, nor plan to sell, any in-house products says Mr. Valenti.
“There are two objectives for the company that introduces proprietary products,” explains Mr. Valenti. “It is supposed to help achieve a higher profit margin, and it should keep the products and the clients with the firm and not with the advisor. If the advisor leaves, there is a very good chance they won’t be able to take that client and the product with them.”
He says that brokers rarely ask the question: “what happens if I leave the MGA?” Mr. Valenti says that sometimes the MGA and the broker have a verbal agreement but there is never anything in writing. “A lot of the times the advisor can transfer their regular clients but when you throw in a proprietary product it is like a double hit. Because if the broker leaves one MGA for another he cannot service the client unless he persuades the client to sell it and change company…but they should not be flipping clients in and out of MGAs.”
Mr. Valenti foresees that the life insurance industry will bear witness to what happened to the stock brokerage firms in the mid-90s when they came out with proprietary investment products. “What they did to entice stock brokers was say, ‘If you sell this, we will give you a trailer fee, we’re going to have it professionally managed and there are going to be all these benefits.’”
However, Mr. Valenti adds that what they later realized was that once the firms started getting the majority of the broker’s assets, the situation changed. “The niceness of the brokerage firm turned to bitterness. They then turned and said, ‘we’re doing all the money management, we’re doing all the back-office work, we’re doing all the operational work and all you have done is refer the client to us.’” At this point, the broker had no power to threaten to leave since they would risk losing their existing clients, he adds.
David Stewart, Director of Insurance and Financial Services and a Partner at Wise Riddell Financial Group, an MGA headquartered in Oakville, Ontario, agrees that in-house products can pose problems not only for the brokers but for the consumers. “The MGA creates incentives for you to write that product and that product may not be in-line with the clients’ needs,” he explains. “We as a broker work for the client, if you have a proprietary product you don’t have to worry about competition, once you establish the product line you don’t have to worry about anything else.”
The MGA does not currently have any proprietary products and Mr. Stewart says that it has no plans to launch its own in-house products. However, he does not hide the fact that the MGA had offers to develop its own products. He says that it would be interested in having an input on the development of a design but it would not be branded under the Wise Riddell name.
Mr. Stewart is especially not a fan of MGAs selling proprietary products such as UL, CI or other types of life insurance.
“The fact is that there is a quiet pressure put on the advisor to market those funds…it is very dangerous. This is my own personal philosophy but manufacturers manufacture, and distributors distribute; it is a separation of church and state.”
Mr. Stewart highlights that the MGAs which are entering the private-labelled market are the agencies which also serve the mutual fund side. “The ones doing it are the mutual fund dealers. They are the non-traditional life channel and they are building a mutual fund model for life insurance and that is a dangerous road to go down.”
So why are mutual fund dealers more likely to do it? “Mutual fund dealers shot themselves in the foot because they had unrealistic payouts and they had no profit margin from a distribution standpoint, so they went into manufacturing and they have a margin now,” Mr. Stewart answers.
He adds that the MGAs realized that if they could make money in manufacturing on the fund side, the same could be applied to life insurance. “From a life insurance perspective, that is greedy…. The mutual fund companies are unaccustomed to brokers being able to write their business in more than one place so they want to create an environment where advisors only have one choice: their dealership. They want to recreate that career shop that most of us as independent brokers fought so hard to get out of.”
However, Chris Reynolds, President of IPCC, an MGA offering both life insurance and mutual funds, does not feel that it is trapping brokers. The agency currently offers one product under its name, which it launched about one year ago. The product, underwritten by AIG Life of Canada, is part of IPCC’s money management division.
IPCC plans to launch a range of products. In an interview with The Insurance Journal, Mr. Reynolds said that IPCC would like to have everything from mortgage insurance to CI, long-term care, and disability insurance under a private label, adding that it is also negotiating a quick-issue term-life product.
He explains that the MGA’s money management product is available to anyone and says that most MGAs’ proprietary products are available anywhere. He compares it to banks and says that one bank’s mutual fund can also be purchased at another bank and anyone can sell them. “I do not know of a single case where there is actual entrapment,” he points out.
Mr. Reynolds also states that it does not offer added incentives to sell the private-labelled product. “The compensation structure is the same as any other competing product…we think the product should stand on its own.“
As to why more mutual fund dealers are doing it, Mr. Reynolds explains that it fits with their business models.
“It is not that we are pushing it, but that is our business model. Our business model is like the President’s Choice label. We find out what the consumer wants and then we, on behalf of the large network, become a buying group. Most MGAs, to be honest, are just not organized enough to do that, whereas the large companies like Assante, Cartier Partners and IPCC have large dedicated distribution networks who have loyal customer bases. We can use that as leverage with the manufacturers to get our consumers better deals.”
Mr. Reynolds sees it as important for MGAs to develop their own private-labelled products. “It is a competitive advantage. You want to bring something to the table that is different than everybody else. If you are doing something that everyone else is doing, you will get the same results. We want something that makes us unique in the eyes of the consumer.”
Another MGA offering its own products is PPI, which offers a proprietary UL, and a health care product, triAccess. Scott Beckett, Vice-President of Living Benefits for PPI feels that a broker would not be forced to stay with the MGA.
“The way our contract works with independent brokers is that we specify that you are independent from us and our relationship is not one of employer-employee. They are clearly an independent broker,” he says.
He adds, “our contract says that you have absolute and immediate lifetime vesting of all commissions, therefore, if your relationship with PPI were to change, we would have no right to the commissions that you would get paid. In addition, our associates have ownership of all records of accounts, the client is not a client of PPI, it is a client of our associates. Should they leave PPI, we have no right to approach that client, it would be a clear breach of contractual arrangements.”
As well, Mr. Beckett stresses that the MGA does not force the broker to sell PPI’s proprietary products over another. “The broker always has the choice…. We offer UL products from a bunch of companies. If we propose to sell the proprietary product it is because it is the right thing to do.” Mr. Beckett adds that there is no added incentive to sell the PPI products.
However, Mr. Beckett’s advice to brokers is to be careful of smaller MGAs where the broker may have less independence or freedom. “I would definitely say, ‘be careful with who you contract with and under what circumstances.’ One of the areas we feel is most overlooked is the financial stability of the MGA because a lot of the times that contract does not give you rights to the commission of that business. If that MGA goes under, the broker might lose future renewals or monies that are owed to you.”
Mr. Beckett suggests that brokers view the Million Dollar Round Table (MDRT) checklist for what constitutes a good agency agreement. “You are a broker and you are entering into a very serious contractual relationship with the business partner. You would be shocked at how many brokers take that responsibility lightly and it can have a profound impact on your practice both financially and emotionally.”
Overall, Mr. Beckett is an advocate of private-labelled products. “We feel that we owe it to our associates to develop innovative and creative products through PPI. It allows us to customize a product specifically for the market that we want to be in.” He adds that PPI would like to develop other in-house products however, he did not want to disclose which types of products nor when they would emerge.