For many independent life insurance and financial service sales professionals, affiliating with a large producer group has a strong appeal. They maintain their independence while securing the support and expertise of a larger organization. In 2010, upstart Lion Street entered this market, one long dominated by two industry giants: National Financial Partners and M Financial Group.
LifeHealthPro Senior Editor Warren S. Hersch recently interviewed Brian Murphy, Lion Street’s president and chief operating officer, to learn how the company differentiates itself and aims to gain market share. The following are excerpts.
Hersch: How did Lion Street get started?
Murphy: Bob Carter, the founder of Lion Street, co-founded PartnersFinancial in 1987, then integrated the practice into National Financial Partners, which he established 1999 as one of three founders. Bob then left the company in 2008 and, eying an opportunity for an insurance-focused, financial services distributor, started Lion Street in 2010 with financial backing from Austin Ventures, the largest private equity firm in Texas. Hartford Financial, where I worked at the time as executive vice of the life business, became Lion Street’s first partnership carrier.
Hersch: How significant is Austin Venture’s equity stake in Lion Street?
Murphy: The company has a $5 million stake, but a majority of our business is owned by our producers: all independent firms that provide life insurance, business insurance, and wealth management solutions to high-net-worth individuals, business owners and corporate clients.
They have five of the eight board seats. Bob Carter and I have two of the others; Austin Ventures has one. We enjoy a unique governing structure.
Hersch: How does a producer become part of the firm?
Murphy: To qualify, you need to generate $1 million-plus annually in revenue, of which life insurance sales provide a material percentage — north of 50 percent. We have nearly 100 firms representing 160 owners and 250 selling relationships or sub-producers within the firms.
Hersch: Do any of the firms hale from M Financial or NFP?
Murphy: Yes, some of them. Most of the advisor-owners have a son or daughter or nephew or niece in their operation.
Hersch: What do you offer advisors in terms of training and support?
Murphy (pictured at right): Our Lion Street University curriculum focuses product/case study design, underwriting/new business and training. We also have Young Guns Study Group, which bring together people who have from 1 to 10 years in the business. Some of the training is done via in-classroom instruction, but we also avail advisors of webcasts and WebExs.
On the support side, we offer a host of back-office services. The most recent addition is Multi-Life Design Center, which we launched last year to facilitate multi-life insurance sales for both executive benefit firms and traditional life insurance professionals.
Hersch: Are advisors at the member firms also learning from each other?
Murphy: A lot — this is a big part of our value proposition. Our seminal meeting of the year is Indaba, an African term signifying a meeting of elders to discuss important community interests. The annual gatherings feature TED-like talks presented by 20 to 25 advisor-owners, each talk lasting 15 to 20 minutes.
The meetings have led to more partnering: About 40 percent of our owners do business with each other, for example by lending each other people with particular advanced planning expertise.
Hersch: To what extent, then, are the advisor-owners outsourcing needed expertise to other firms versus recruiting specialists internally?
Murphy: We find there is a much greater appetite for outsourcing — and not just in an ad-hoc fashion. We also avail our advisors of opportunities to share resources on an ongoing basis.
Hersch: Does joining Lion Street entail a cost for interested advisors?
Murphy: There is no annual fee. To join, advisor firms purchase Regulation D stock — non-publicly traded shares —and they must be accredited investors.
Generally, they’re buying $50,000 of preferred stock that’s convertible to common stock. Some of our founding firms were able to invest a bit more, but no one firm owns a big stake in the company. That was important to us.
Hersch: So the advisor-owners mutually benefit from company earnings; and it’s therefore in everyone’s interest, I imagine, to collaborate as much as possible, yes?
Murphy: Correct. There’s an alignment of financial interests among the owners. They derive income from revenue at the firm level. And they benefit from growth in Lion Street’s profitability. Generally, Lion Street retains 10 to 15 percent of what an individual producer generates in sales. Reverse revenue-sharing with the member firms varies, based in part on the size of the firm.
Hersch: Do you have near- or long-term revenue goals for the company?
Murphy: We expect in three years to be twice as big as we are now. We’re fast-approaching a tipping point — a doubling of our national footprint and revenue — that will command attention and respect for our firm in the marketplace.
Hersch: How does Lion’s Street’s business model differ from that of M Financial Group, National Financial Partners or other producer groups?
Murphy: Our business model is closer to M Financial’s than NFP’s. NFP started as a life insurance-centric organization, but has since pivoted to focusing on executive benefits and wealth management. M Financial Group has remained true to its life insurance roots. But unlike M, we’re not restricted to a handful of carriers: M has five or so product providers; we’ve got some 35 to 40.
Hersch: To the extent that Lion Street maintains a strong focus on life products, I imagine their advisors will continue to derive a significant amount of compensation from commissions. Given the growing number of advisors who are opting for fee-based practices, do you anticipate a shift in payouts from up-front or heaped compensation to fee-like commissions?
Murphy: Yes, and for several reasons. First, given growing calls for greater compensation transparency, it will be very difficult to avoid commission disclosure. Second, as advisors build their products, they can’t remain single product-only providers to clients. They need to integrate other practice components, such as serving wealth accumulation and retirement income needs.
Also, it’s very difficult to hold yourself out as a fiduciary acting in the client’s best interest while being restricted to one or two product providers. By affiliating with a company like Lion Street, advisors can remain product-neutral: They can source product from multiple insurers; and they receive no financial incentives to sell product from one carrier versus another.
Aside from how a carrier prices its products, it makes no difference compensation-wise whether advisors sell product from one of five partnerships carriers with whom we deal directly — Prudential Financial, Pacific Life, Lincoln Financial, John Hancock and Symetra — or the 35th company in terms of sales volume.
Regarding the partnership carriers, we believe that our owner-advisors should be able to talk directly to the underwriters, and not work through clearinghouses like brokerage-general agencies. BGAs, in my view, are on the wane because companies don’t compete as much today on price as they do on product features.
Hersch: So if BGAs are to remain competitive, I take it they’ll have to provide additional value. I raise this point because I spoke with the president of one recently whose expertise was in helping carriers to design cash value-rich universal life products to appeal to retirement savers. Does Lion Street also have such product development expertise? Or do you depend entirely on the insurers to manufacture products in tune with your requirements?
Murphy: It’s a hybrid of the two. We don’t yet have a product design person on staff. What we do provide carriers — and this extends beyond our partnership companies — is input on products we believe will sell. One example: products that pay advisors levelized commissions over a period of years in lieu of heaped commission.
Many carriers have been circumspect about adopting this structure, in part because they’re concerned about cannibalizing their current sales. They don’t want to do what’s in their long-term interest because they’re concerned about short-term sales results.
Hersch: Why would they be cannibalizing existing sales?
Murphy: If a carrier becomes an early adopter of levelized compensation, then producers — particularly commission-only agents and brokers — may favor a competitor that pays them commissions up front.
But whereas life insurers lag in migrating to levelized payouts, the trend is already well underway at mutual fund and annuity providers that incorporate a commission into an advisory wrapper that generates recurring fees. If and when insurers join the bandwagon, Lion Street will be well position for the change, as our partner-owners undertake long-term client engagements to which fee-based or fee-like compensation lends itself well.
Hersch: Many advisors now specialize in retirement income planning, a burgeoning market given the growing number of baby boomers entering retirement. Is this specialization also taking place at Lion Street?
Murphy: Very much so. And this touches on our core focus: protection products. Retirement income planning can’t just be about investments, rate of return or volatility testing.
An unexpected disability, critical illness or long-term care event can spoil the best-laid plans. And because of medical advances, accidents or illnesses that once killed people now leave them infirm.
I like to think of long-term care insurance and life insurance as discreet income buckets that can help to bracket regular retirement income — supplementary tax-free money that can defray additional expenses in retirement.
In short, investment and protection planning are coming together. An investment advisor who only deals in that part of the business is, in my view, leaving a whole flank of the client’s nest egg exposed.