It is getting increasingly difficult for managing general agents (MGAs) to turn a profit in today’s cutthroat business environment. It is under these conditions that two MGAs are developing new fee-based business models.
The two MGAs are Ottawa-based Independent Planning Group (IPG), and Markham, Ontario-based AFG Canada.
Although each has developed different models, they are both based on the premise of charging a fee for their services. In return, clients receive all the commissions, bonuses, and overrides (see inset text: “Competing for overrides”).
IPG launched its first fee-based model based on existing fee-based mutual fund dealerships last year. Brokers who wanted access to the full-commission program for life insurance had to also participate in its mutual fund program. The fee on the mutual fund side was $15,000 per year, and $12,000 per year on the life insurance side, for a grand total of $27,000.
Allan Bulloch, President of IPG explains that model has knocked down a lot of barriers. “There is an enormous amount of energy spent on MGAs and advisors having discussions, on, ‘what are you going to pay me?’ This model has taken that discussion out of the equation. We don’t have these conversations anymore.”
This past June, IPG changed the program to include brokers who are solely life licensed.
The reason brokers had to be dual-licensed was to protect the MGA in the case of a charge-back, IPG could go after the mutual fund commissions. A charge-back is when the policy is cancelled within a certain number of months after the sale and the commission needs to be paid back to the insurance company.
The MGA found a way to make life licensed only brokers take part in the deal, explains Vince Valenti, President of the Mutual Fund division for IPG. “We bumped up the fee from $12,000 to $15,000, and what we do is take a portion of the fee and allocate it to an internal contingency fund. The idea behind the contingency fund is that it is going to be used to help protect us in case of a charge back. We went through some actuarial figures, and we can be very well protected,” says Mr. Valenti.
He adds that the selection process allows IPG to deal with brokers who would rarely encounter a charge-back. “We are dealing with top producers and are looking for the best professionals with a high persistency.”
Mr. Valenti explains that the screening process has become much more rigorous as well. Potential candidates for the life-only model must complete a five page application for sponsorship and must undergo reference, credit and background checks.
A business transformation
AFG is experiencing a metamorphosis of sorts. After its amicable separating with IPC Financial last August, it re-branded itself from Albanese Financial Group to AFG Canada Inc., named a new president, and is implementing the fee-based model.
Sam Albanese, founder of the company is the CEO, and Dino Vecile is his second in command as President and COO.
“I am looking at being a different kind of MGA,” says Mr. Albanese. “The traditional model done up to this point worked well in the ‘90s, but in the 21st century, the market has changed…You have the possibility here of setting up a different kind of distribution network.”
The “Re/Max” of insurance
Like IPG, Mr. Albanese wants to attract top-notch brokers, small MGAs, associate general agents (AGAs), and other producer groups to build what he calls the Re/Max of the insurance industry.
He explains, “When all the consolidation was happening in real estate, Re/Max came in and said ‘we want entrepreneurial people to whom we can pay the whole percentage and they pay us a fee.’ It attracted some of the best of the best in the industry.”
The branding is AFG in this case, but the reps maintain their names, continues Mr. Albanese. “We don’t want to lose the person’s identity here. I’ve always believed that the insurance industry is driven by two “e”s: ego and economics.”
He recognizes that people work hard to make a name for themselves, so he wants the producers groups to keep their names yet have access to AFG’s services and name. “So that takes care of the ego part.”
For the economics part, “We’re able to process the business far more efficiently. We charge a flat fee and the client keeps the full compensation. If the industry is driven by ego and economics, then the model has to reflect that,” states Mr. Albanese. “[Clients] can associate themselves to us for certain services, or all services, and we will charge accordingly.”
Mr. Albanese says his model will include high-producing brokers, but it will be best for producer groups. The perfect candidate would be a small MGA that has difficulty doing enough business to maintain the minimum volume requirements of its insurance company contracts.
Mr. Albanese says if the small MGA does not want to lose contracts or its independence, AFG is the perfect solution. “We have all the contracts,” he exclaims. “If you’ve lost one of your contracts, or you need a contract, piggy-back on our contract and you get the full compensation just as if you were the MGA, and just pay us a fee.”
Since the small MGA has access to AFG’s contracts and services without all the premium and volume requirements, it can now look and feel like a big MGA, he continues. “They have to worry about getting the fee to us and that’s it.”
They will pay for whatever services they are buying from us (probably a monthly fee) be it processing their business, be it accessing our contracts.
AFG has identifies five services that it feels can be categorized and priced. Mr. Albanese won’t get into the details, but lists for example: back-office support, technology, access to contracts, sales tools, and business development techniques on a cost effective basis.
Mr. Albanese’s says the fee for all the services would be approximately $2,000 per month.
Model not for all
IPG and AFG agree that the fee-based system is not for everyone. “The vast majority of our brokers will never want to go on a fee-based model,” states Mr. Albanese. “We’re going to offer it to the better producers. The lower-end producers don’t have the resources to pay the fees. Studies show that 86% of producers in the country earn less than $100,000 in first year commissions. That tells me that this is not going to be a model for everybody.”
Currently at IPG, only 15 brokers are signed-up for the life only model. “Of course we would love to say we have 1,000 brokers, but we are happy with the quality of the people using the service, they are top-notch people!” says Mr. Valenti.
Mr. Albanese says that AFG has three fee-based agents already. But adds that not all brokers will need to pay the $2,000 per month, since the number changes depending on what services are used. “You have three different packages,” explains Mr. Albanese. “Some don’t need marketing, quotation services, commission accounting, or policy services. They just want processing for new business.”
Mr. Valenti says that a broker wishing to sell life insurance without paying a fee may do so under the traditional IPG model. He explains that that the IPG fee-based model is a good move for individuals selling $50,000 or more on the life insurance side.
Change with the times
It is a different environment today, remarks Mr. Albanese. Consumers are more cost conscious, and the market performance has had a dramatic effect on disposable income.
“This environment has shaken consumer trust in our core products and driven a different business mix (more term insurance sold), and the carriers are raising the bar in terms of volume requirements as well as driving down more responsibilities to the MGA,” continues Mr. Albanese.
In the 90s, AFG’s business mixture was 75% universal life (UL) and 25% term and other products. Now, it is 65% term sales and 35% UL and other products. The change is a hard one because term products sell for a lower premium rate, typically pay lower commissions, and ultimately lower the volume override bonus that MGAs depend on.
To make matters worse, compensation is based on a percentage of sales. The problem with the current set-up for an MGA is that its income can vary week by week and lapses can have a dramatic effect on expected revenue. It is very difficult to budget for and it is very difficult to forecast, says Mr. Albanese. “It is a crapshoot. You simply have to set up a different kind of distribution model.”
At IPG, Mr. Bulloch says the fee-based model is receiving some flack from other MGAs. He explains that MGAs using traditional models are pressuring insurers to prevent the use of fee-based models.
Mr. Valenti adds that other MGAs don’t like to release brokers to other agencies. “We have a written agreement with all brokers that we will release their business and we will not solicit their clients. It seems not a lot of MGAs offer that because when they transfer a broker they give up renewal fees.”
He states, “IPG is one of the few homes left for the independent advisor. We can continue to ensure they own their book of business, that we will not solicit their clients and we will provide them with a high level of service through a simple model.”
The pressure from competing MGAs is nothing new. A similar situation arose about a decade ago in Quebec, when the now-defunct MGA, Assurances B.P.R., attempted a fee-based model. The model failed due to negative pressure from other MGAs and the MGA was eventually purchased.
Despite B.P.R.’s fate, Mr. Valenti is confident and says IPG will continue to execute its fee-based business plan.
He points out, “If other MGAs decide to get into it we can counter criticism or competitive arguments we get from competing MGAs.” And adds, “We are glad to hear about Albanese; it will offer more credibility to the model.”
The model is something any other MGA can do and result in them being more profitable, explains Mr. Valenti. “Hell or high water, we are going to collect a fee regardless of what the advisor does. We are only dealing with the industry’s top producers and we know what are income is and it is more profitable for us,” he highlights. With the model, IPG hopes to increase its volume to $2.5 million in total first-year commissions.
So why are traditional MGAs not leaning towards the model? “It comes down to change,” Mr. Valenti simply answers.
“We are very proactive on the recruiting side. We realized we are going to take little bit of a hit with existing advisors that change to this system, but at the same time because we are out recruiting new people that would more than make up for our lost revenue… But a lot of MGAs want to keep business at the same level.”
In terms of the hit IPG took, Mr. Bulloch explains that, on the mutual fund side if a broker had $150,000 of gross revenue and they were on an 85% grid, it would translate to IPG receiving $22,500. If the broker switched to the fee-based model, IPG would be collect just $15,000.
Insurers not fazed
Response to the AFG model, on the other hand, has been positive, says Mr. Albanese.
“We’ve talked to some AGAs and MGAs and also some insurance companies… Response has been very good. I thought that I would get backlash from some of the carriers and none of the insurers that we’ve spoken to seemed to be concerned about it. They thought it was unique. We haven’t talked to all of our carriers, but will be doing this in the next little while.”
By this time next year, comments Mr. Albanese, “I would have at the very least a critical mass of 25 fee-based producer groups that I’m working with, and then we’ll go from there. Nobody knows for sure if this is the model. This is what I am experimenting with. We’re moving forward as quickly as we can, but at the same time, we’re not going to offer this to everyone and we’re going to be very careful who joins the team.”