Just as life insurance policies brought to the secondary market may attract any number of varying offers, the agents who bring those policies to life settlement brokers can see varying levels of compensation for their work.
There is, in fact, no specific formula for determining compensation in a life settlement transaction. Rather the potential maximum compensation is largely determined by the funder, or buyer, in the deal.
“Generally, buyers will have rules about the maximum fees allowable,” said Martin Ruby, chief executive officer of Stonewood Financial in Lexington, Ky.
Stuart Meyerson, president of Autumn Life Settlements in Matthews, N.C., echoed that sentiment, referring to the funders as “driving” the compensation process.
“It’s clear that the funders have compensation structures,” he said, “and that they really control this whole thing.”
Meyerson said different funders will have different formulas for determining what their maximum compensation number is, and that those formulas can vary significantly between funders. “It’s all over the place” he said, noting that funders themselves may have different formulas for different types of policies or cases and those formulas may change often.
Ruby noted that there is “wide variation” among maximum compensation formulas, and Meyerson said he had heard of formulas that offer the lesser of 30% to 40% of the offer, or 6% of the face value of the policy. Additionally, he said that some funders will base their maximum compensation figure as a percentage of the gain for the insured, meaning the sale price in the life settlement transaction minus the surrender value of the policy.
There does appear to be a degree of settling on the issue, however. Ruby said it has become a “rough rule of thumb” for providers of setting potential fees at about 30% of the total settlement, the amount paid for the policy. Norm Caldwell, director of the Insuranceappraisal.com said that there is an “industry accepted guideline” of 6% of the face value of the policy, or 30% of the gross offer.
Once the maximum compensation has been set by a funder, the issue becomes a question of how a referring agent and a broker will split that fee. Additionally, both Meyerson and Ruby noted that the figure is the maximum compensation amount, and that it is not uncommon for brokers and referring agents to agree to accept less than that depending on the needs of the seller or to help close a transaction
“There are a couple of different ways” of determining that split, Ruby said. In some instances, when an agent comes to a broker, “some brokers will quote the agent a fee schedule” outlining what fees they can expect from the transaction.
However, he said that the more common version, and one of which he was an early adopter, is for the broker to disclose to the referring agent the entire fee available and agree upon a set split. “I disclose the entire available fee,” he said, and work out a pre-agreed upon split with the referring agent based on any number of factors.
That process, Meyerson noted, can vary from broker to broker and is part of the competitive landscape within the secondary market.
As with funders, Ruby said that determining how a commission will be split varies from broker to broker.
“Everybody’s different,” he said, with several factors, such as the agent’s relationship with the broker or the amount of work to be done in preparing the case for the secondary market, coming into play. Ruby said he has heard of agents and brokers splitting the fees down the middle and cases where the referring agent took as much as 75% to 80% of the total commission. “It’s really no different than with a life broker,” he said.
Ruby would not offer an estimate as to what an agent making their first referral would receive, but said it would very likely fall somewhere between the 50% and 80% levels depending on the other factors involved in the transaction.
In addition, Caldwell suggested that an advisor’s close ratio could potentially be a factor in determining their portion of the commission. Not surprisingly, he said that an advisor who closes only one of 10 cases he or she brings to a broker would likely end up with a smaller percentage of the total commission than an advisor who completes sales on one of 3 cases. “The expense” of putting together a policy for auction on the secondary market, “doesn’t change if you close the sale or not,” he said.