From 1990 up until a few years ago, insurance companies dominated broker-dealer acquisitions in order to gain greater control over insurance product distribution. In case you haven’t noticed, there’s been a steady flow of insurance companies getting out of the broker-dealer business and focusing on their core business: insurance products.
To be certain, private equity firms are now the dominant players in broker-dealer acquisitions, in part because broker-dealer prices have been driven up to rates that insurance companies aren’t willing to pay. Paying 30% to 40% of revenue was the old pricing model. Today, 50% is increasingly common. When Multi-Financial was originally sold to ING, they fetched a price of 40% of revenue, which at the time was considered a very good offer.
Proprietary Product Dominance Evaporating?
Pricing is only one reason we are seeing less acquisition activity from insurance companies. Another is the fact that these companies’ ability to directly manipulate their reps into selling proprietary insurance products has largely evaporated. This is due to FINRA’s attempt to level the playing field with its edict that broker-dealers not have product mandates or pricing advantages that favor particular products. In the past, independent insurance broker-dealers could offer 100% payout on proprietary insurance products, or have a percentage requirement of proprietary product, but those days are gone.
With these manipulative measures gone, tactics used to sway reps to sell proprietary products are more subtle, but still effective:
- Heavy wholesaler contact on proprietary products and restrictions on competing wholesalers’ ability to initiate contact
- Saturation of proprietary products on broker-dealer website
- Domination of proprietary products at annual conference, reward trips and regional meetings
The conference domination of proprietary products was made evident to me when I attended a Multi-Financial conference (when they were owned by ING). My observation to management that two-thirds of the product vendors were blue and orange (the ING company colors) was quickly rationalized: You will rarely, if ever, see a competing variable annuity vendor in attendance at an insurer-owned broker-dealer conference. If the insurance company also owns money managers, you can bet that competing third-party managers will be few to none. Insurance companies claim their broker-dealers have a level playing field on product, however, this is only true in part. In spite of higher sales of proprietary products from their own reps, the allure of insurance companies to own broker-dealers continues to erode.
Litigation Eroding the Bottom Line
Insurance-company-owned independent broker-dealers have seen a substantial increase in litigation and arbitrations in recent years, which have eaten away at their bottom lines. Client market loss, inappropriate investment sales, lack of supervision fines and problematic alternative investments are a few of the liabilities that have given insurance companies regret, causing them to either consider selling their broker-dealer or be sold, as we’ve recently seen with Securities America.
Financial Upheaval and Politics
The financial upheaval caused by variable annuities that promised too much in living benefits temporarily crippled many former Rock-of-Gibraltar insurance companies. The economic turmoil of 2008 was enough to cause ING to shed all but one of its broker-dealers to help shore up losses in Europe. In good times, insurance companies like to branch out, but when times get tough, they sell outside businesses to focus on their core profit centers.
Besides business cycles, politics with competing non-insurance broker-dealers have given insurance companies additional concerns. In 2008, Jackson National broker-dealers aggressively recruited Pacific Life BD representatives who had been recently bought by LPL. At the time, they were offering unusually high forgivable notes to entice reps to come their way. According to industry insiders, LPL threatened to pull their Jackson National product sales agreements in retaliation. The profitability losses from such a move would dwarf any potential profits from their broker-dealers. The threats resulted in immediate changes in management and recruiting personnel at their lead broker-dealer. According to former recruiters, to this day, Jackson National broker-dealers do not recruit representatives from either LPL or Raymond James Financial.
Company politics aside, new regulations threaten to add to insurance company potential conflict with broker-dealer ownership. A uniform fiduciary standard imposed on brokers by the SEC could become a headache for insurer-owned BDs. Under a fiduciary standard, advisors must put the interests of their clients before their own. A fiduciary standard is most likely to affect captive insurance broker-dealers, but independent insurance-owned broker-dealers could still see substantial downward pressure to their product sales.
Representatives will be caught in a mental tug of war: “Do I offer my clients the best product or do I offer them my firm’s product?” We might see some reps motivated to avoid sales of any broker-dealer proprietary products, wanting to steer clear of any potential perception of inappropriate bias. If the uniform fiduciary standard pushes through, we may be looking at an increase in sales of insurance-company-owned broker dealers going forward.