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