LIFE & Health Advisor October, 2006
An old maxim, “may you live in interesting times”, accurately describes today’s business climate for principals of independent marketing organizations (IMOs). Then again, interesting may be an understatement.
Since the issuance of NASD’s NTM 05-50, IMOs and their down-line producers have been confronted with an never ending series of disruptions and challenges to their status quo. While these changes began gradually with broker-dealers taking a greater supervisory and product selection role in the sales and marketing of equity-indexed annuities by their Registered Reps, we don’t yet know the full extent to which the IMO business will ultimately be transformed.
While significant change for IMOs is occurring and more is inevitable, the ultimate effect on these organizations could be disastrous (arguably, the conventional wisdom), or enormously productive. We believe that the strategies which IMOs initiate in response to the present marketplace upheaval will determine, rather quickly, whether they will become larger and more financially successful enterprises, or, smaller if not marginalized operations.
When challenges emerge unexpectedly it’s easy to get caught up in a pessimistic mindset. Rather than allow this to happen, IMOs should take stock of their inherent strengths, producer value and expertise with the goal of aligning these advantages with emerging trends in the marketplace.
THE INHERENT STRENGTHS OF IMOs
There’s a long list of strengths which are not only significant but are also virtually exclusive to IMOs. Start with the most significant one – relationships. In a commoditized business like financial services, the relationship is everything.
Can you name another company-to-person relationship which is as close, as economically significant and as longstanding as the relationship which exist between IMO principal and his or her producer?
Certainly, the relationship between a typical Registered Rep and his or her broker-dealer is not as close. Nor as warm, in all likelihood. Similarly, the relationship between a product provider, such as an insurance carrier, and its licensed agent is not nearly as close as the one between the agent and the IMO.
An IMO’s desire to maintain its long-standing relationships with its producers combined with its willingness to restructure its business model in order to maintain those relationships will determine future success or failure. IMOs principals that stand pat while B-Ds assume an ever larger share of their fixed annuity and life insurance business need only to look in the mirror to find the individuals responsible for the subsequent business decline. It won’t suffice to blame the NASD or other regulators for transforming a previously lucrative business environment. Change is here. Every business transformation begets winners and losers. IMOs are in a wonderful position to emerge as winners. What they need is a plan to win.
CREATE A CAPTIVE FIELD FORCE
For decades the idea of a captive field force has been an impossible dream for IMOs. In fact, it was captive agents of insurance companies which drove growth of IMOs as more and more of these agent sought independence and greater product availability. Isn’t it ironic, therefore, that IMOs now have a first-ever ability to create their own captive field forces?
Recognize an unambiguous trend: broker-dealers are exerting more and more control over the products their reps sell. B-Ds have enjoyed total control over the securities products their reps sell, and now that are assuming control over fixed products as well.
Strategically, IMOs need to place themselves in a position to benefit from this inherent advantage. If they do, they will be able to sweep virtually all sales the rep makes under the IMO’s business umbrella, effectively creating a captive field force for the first time.
HOW DO I?
It goes back to the relationship. If an IMO wants to maintain its relationship with a Registered Rep then the IMO must reconfigure its operation to be able to handle all of the rep’s business. This means starting an OSJ- or a super- OSJ – and recruiting the rep to the OSJ. Yes, we understand that transferring from one B-D to another is a big hassle. Yes, it’s time consuming and stressful. However, the rep may well have earned more money working with the IMO over the past five years than he or she has earned through the broker-dealer. In many cases, reps have strong desires to maintain and even expand their relationships with their IMOs. But they need a means to do so. The OSJ provides the means. In fact, the IMO may become an OSJ under a broker-dealer with which it also maintains a strategic product distribution relationship. In this way the IMO is building both a retail and a wholesale profit center, a healthy business model to be sure.
THE COMPETITIVE ADVANTAGE OF EXPERTISE
Don’t forget that the sources of inherent expertise on fixed products are not to be found at the broker-dealers. That expertise lives almost exclusively at the IMO level. Year after year, it’s expert advice on product selection, case design and underwriting which has earned the loyalty of reps. Make no mistake. Product and case design guidance translates to real value which reps rely upon because it directly impacts their earnings. Forming an OSJ which incorporates a fixed product service center possessing IMO-level fixed products expertise creates a competitive advantage for the IMO/OSJ which most broker-dealers can’t match.
EXPAND YOUR WHOLESALING: GO VARIAABLE – YOU’RE ALMOST THERE ALREADY
Within many broker-dealers, EIA contracts are now treated like securities. Consequently, most Registered Reps must process their EIA business through their broker-dealer. Gone are the days when IMOs could call on any rep for fixed annuity business.
If you’re an IMO which has structured a strategic partnership with a broker-dealer, as many have, then you already understand that broker-dealers expect to share in the overrides to the extent of 50 percent or more. You also understand that EIAs are under compliance scrutiny and any marketing tools and seminars require B-D compliance approval. In fact, EIA product providers are beginning to submit their consumer marketing pieces to the NASD for review in recognition of this new paradigm.
IMOs working in strategic partnerships with B-Ds may not realize that they are 90 percent down the road in terms of their ability to wholesale variable annuities. Making the effort to close the loop on that remaining 10 percent creates a significant financial opportunity for the IMO.
COVER ALL PRODUCTS
Traditionally, IMOs like to address the multiple fixed product needs of their producers. Expanding into variable annuities accomplishes this to an extent never before possible. Moreover, the expansion into variable annuity products adds little incremental marketing cost. The key ingredient, the relationship with the Registered Rep, is already in place.
And it gets even better. First, with variable annuities, IMOs experience no hassles with contracting levels as they tend to in the fixed product world. There’s only one contracting level, and its set between the carrier and the Broker Dealers.
Second, forget about producers asking you for additional compensation. This is frowned upon by B-D compliance officers. Third, and it’s a big one, you won’t have to process any applications. The reps must send their applications to their OSJ (or broker-dealer) which sends them to the insurance carrier and tracks them for the rep. Of course, if you’re also the OSJ, you’ll happily trade off the processing of variable annuity applications in return for participating in all of the rep’s business.
It’s also worth pointing out that the variable annuity market is approximately five times the size of the EIA market. By definition, therefore, reps are already writing variable annuities in abundance. This implies huge override potential for IMOs willing to engage in variable annuity wholesaling.
A BLEAK OR ROSY FUTURE?
We view today’s marketplace as one which presents a unique growth opportunity for IMOs. That said, this growth potential won’t be realized unless IMOs retool their business models in recognition of new compliance and regulatory related realities. Those IMOs willing to transform themselves will set the stage for dynamic growth potential that will drive revenue beyond previous levels. Those that refuse to shift their business models will become bystanders as a much larger and lucrative marketing opportunity passes them by. If this sounds like a harsh analysis, it is. Yet, it represents the real-world decision point for IMOs. The right decisions made today will create tremendous success, tomorrow.
Reproduced with permission from LIFE & Health Advisor, P.O. Box 613, Walpole, MA 02081 The Journal for the Financial Services Industry