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Moving From Commissions To Fees In Employee Benefits

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Do you want to move from a traditional brokerage structure into a “revolutionary and completely out of the box” business model?

Mark J. Hanna says he did just that. A CLU and ChFC, Hanna is a benefits specialist and president of Hanna Insurance Solutions, Walnut Creek, Calif.

In a focus session here at the annual meeting of the Million Dollar Round Table, he recounted how he transitioned his business into a fee-based model that differentiates his firm from the competition.

“Are you interested in looking at an employee benefits-based business model in which you can, over time, transition your business to a fee-for-service model and build a sustainable and saleable business that isn’t subject to capricious changes in carrier compensation schedules or socialized health-care initiatives?” he asked the audience.

“(Do you want to have a model) that allows you the ability to scale up or down to serve the client segments you desire and to move away from the commodity sale that is the insurance sale?”

The model his firm has developed over the years will do that, he explained.

How so? “The answer for us was in refocusing from the products that our clients were buying to the ‘experience’ the client had in working with us,” he said.

His staff rededicated themselves to “identifying the challenges our clients were facing and the likely challenges they were about to face–and to building solutions for them before they knew they had the problem,” he added.

The focus was on delivering relevant advice.

Before discussing how his new business model evolved, he presented the audience with a related paradox:

“If you are in the benefits business, working on a commission basis, and premium rates go up, you get a raise, right? What does your client (rightfully) expect you to do? That’s right; your client wants you to work to lower his cost. In other words, you are asked to work hard to lower your income!

“Here is a paradox: What if your income wasn’t pegged to carrier commission schedules? What if carrier commission schedules were used to offset your fees?”

He urged the audience to keep the paradox in mind as it follows how the evolution of a-fee based practice might work.

Following is what happened at his own business.

In 1991, Hanna’s firm was serving about 50 client companies with an average size of about 10 employees each. It used the traditional brokerage model of service. Later, to introduce customization, it worked with carriers and ancillary providers to package a benefit design and market it to client segments.

Then, from 1995-1997, Hanna recalled, “we started to realize that our clients’ changing needs dictated that we build some human resource infrastructure around our employee benefit solutions.”

Next, in 2002, the firm began to focus on compliance around HR functions and the regulatory liability that clients faced (Sarbanes-Oxley, COBRA administration compliance, Form I-9 verification, 401(k) plan audits, etc.).

Around the same time, it began to see some of the unique challenges that employers were encountering in deploying retirement strategies successfully. “So, we began to integrate our financial advisory experience into the HR function … and to integrate our revenue from this business service into our HR pricing model.”

More recently, it expanded its service offerings still further, with “on-boarding” (bringing new employees “on board” with a client company); immigration support (working with client companies’ travel teams, providing subject matter experts on immigration issues, and occasionally providing immigration-related legal resources); and global payroll (assisting with not only global payroll, but also global benefits procurement, global compensation, and sometimes recruiting).

Today, his firm’s mission statement has several elements: serving companies and employees as a “trusted advisor and partner;” collaborating with clients to meet human resource challenges by delivering “innovative and sensitive solutions using the most appropriate products, technology and processes;” and serving as a team that maintains the highest standards in ethics, expertise and personal commitment in serving clients “while building lasting friendships with them.”

Nowhere in his company’s mission statement does the firm represent that its mission is to sell anything, stressed Hanna. “Rather, we strive to solve client challenges by delivering an integrated solution.”

In meetings with clients, he said he always discusses “the traditional” 3-step approach to human resources.

“Step 1 is consulting,” he said, noting that employer clients pay for this advice. “The bigger the client, the more they are likely to pay.”

“Step 2 involves assembling the procurement team,” he said. Here, the client’s HR team generally hires vendors and brokers to source–or “white label”–outside services such as payroll, retirement plans, benefits, and recruiting.

“Step 3 requires the client to manage the various aspects of Steps 1 and 2,” Hanna said, noting that “this is the origin of the large HR departments that seem to grow at most client companies.”

By collapsing the 3 distinct roles of consulting, procurement and service into one end-to-end experience, Hanna said his firm has found value creation in the relationship. Usually, he said, this value is “more than enough to underwrite the cost of the broader range of services and still generate reasonable profits” for his firm.

The “secret sauce” is vendor management, not outsourcing, he stressed.

“Outsourcing isn’t new; everyone outsources,” he observed. Also, outsourcing isn’t just about salary arbitrage, he said. “While there has been a huge business around outsourcing from other countries where the (educated) talent pool is deep and salaries are a fraction of what they are in our own country, even this salary cost disparity is shrinking. In the future, as the global economy becomes real, salary differentials will not be as great as they have been.”

But, with vendor management, he continued, “the more relationships that you are able to control, the greater the opportunity for value creation and the fewer vendor margins that need to be served.”

Today, in all client engagements, he said his firm’s objectives are to provide a single-point solution for HR challenges; manage and support employee interface; manage vendor relationships; create operational and cost efficiency; and become part of client DNA.

Focusing on the last two points, he raised these questions for the audience to ponder:

“If you were in a position to control the employee interface between all of the employees at your client companies, how hard would it be to positively impact enrollment decisions and 401(k) participation, and to position your firm as a trusted personal advisor, beyond your role as the employer’s consultant?

“If you are so ingrained in the client’s DNA that your firm is touching all benefits (even if you have in turn outsourced them), and if your firm is interfacing with payroll, is managing eligibility and immigration, and is facilitating the on-boarding and off-boarding functions, how susceptible is your firm to competition?

“Finally, if your fee-for-service is determined and contracted outside of the insurance product sale (meaning that your negotiations are always based on net of commission calculations) and your client engagement contract runs off-cycle to benefit plan renewal, how likely is it that your client will replace you under a BOR (broker of record) letter when there is no compensation available to pick up and the client is obligated to continue to remunerate you under your contract?”


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