It's the new year, and financial services pundits all across the land wax eloquent and otherwise with their attempts to predict the future. Casey Stengel pegged it best about this annual phenomenon when he said, "Prog-nostication is very difficult, especially when you are talking about the future." So after five years of doing this in January Broker World articles, I've decided to resist crystal ball gazing and concentrate instead on reporting present-day realities relating to one important message coming from the financial services business: insurers aren't the only ones looking for alternative distribution systems.
When pressure causes change,
the smallest unit changes first.
Brokers, careere addressing each and every one of them. The perspective would be that we are not moving fast enough to satisfy your needs and that our direction is not totally aligned to yours We considered your suggestion of establishing a "key producers unit" and although we do recognize the value in this approach, we do not see it as being feasible in light of our current organization, the present financial structure within the distribution system and our long-term need to continue to grow and develop our existing producers, as well as the critical need to expand our number of points of distribution and the size of our distribution system. We believe the approaches we have taken are more in line with our financial constraints and the market realities we face as an organization." It took over four months for this officer to write this letter after meeting with the established group of senior agents and hearing their issues and ideas about how the insurer could help them process business better. The experience left them incredulous and angry.
It's not so much hard times coming,
as easy times going.
The answers to where the capital should come from to grow, who should be changing and how, what the consumer will demand next, how to ethically sell financial products and services with enough disclosure to present the risks but not so complicated that the consumer cannot understand, etcetera, all perplex the financial services marketplace.
I've always been of the mind that if the agent is to be an entrepreneur, s/he must function as a broker in the marketplace and manage the business as a business. Which is why I work mostly with independent practitioners in financial planning and insurance. That's the way agents are being squeezed anyway--to get closer to a primary company or go independent. So I expect the broker ranks to grow as the agent ranks thin, with an overall result that the number of people selling primarily insurance will shrink while the total number of people licensed to sell insurance will grow much larger.
If it's to be,
it's up to me.
So what must today's insurance practitioners and financial planners do to survive and prosper? They must learn to capitalize their own growth. With their own money at risk, a dose of efficiency is prescribed: use it up, wear it out, make do, do without. For effectiveness: improvise, adapt, overcome. In effect, function as the one who owns, operates and assumes the risk for the business venture (definition of "entrepreneur").
Easier said than done. The needs for increased computer power, color graphics, new market-specific promotion packages that pass compliance requirements, and myriad other costly items grow. Learning new skills requires training. Growth requires capital. Most salespeople capitalize (painfully) out of cashflow, which is often the fatal flaw of financial failures. So where do they turn?
Producer Groups: one option
Surveys of why life insurance producers join producer groups show their dissatisfaction
with other arrangements; need for more compensation; desire for ownership/equity;
wanting access to more products from more carriers, specialized software tailored
to their styles of doing business, help with advanced underwriting, opportunities
to learn from contemporaries; and other motivating factors. Desire for training,
marketing and camaraderie do not show up as very important reasons for joining. But
conversations with my clients about what they want (and many of them belong to producer
groups and place at least some minimum required amount of business with them), indicate
that there are other needs not currently addressed by either home office or producer
groups.
Producer groups have some problems, to, especially for plateaued and middle class
producers. Starting and maintaining a producer group requires capital, good management
and loyalty of members to place business through it. In many cases, the egos and
whims of certain members grate on the other members. As with insurer home offices,
producer group resources are limited, so the choices made about which services to
develop or products to support cannot satisfy everyone.
When one member hides the fact that s/he places a substantial amount of production outside the group, thus violating the group's charter and limiting its income, the group suffers while the producer prospers, an insidious problem more common admitted. This is parallel to insurers not ever really knowing how much of their field forces' business is written outside the primary carrier, and whether the agent or general agent is telling the truth when s/he answers the question.
Are there alternatives to producer groups?
There are several alternatives.
Different practitioners have different needs, in the same way different firms have different needs based on their stage of growth; management's present level of skills, talents and interests; amount of revenue and profits being generated; ability to capitalize future growth; how long present management will be actively involved in the firm and the firm's growth. The problem for distribution systems is how to define, attract and profitably serve specific groups of similar practitioners interested in similar services and products.
Insurer Producer Groups: Following and/or fearing the lead of established and emerging producer groups attracting away their producers, insurers have begun trying to create their own specialized producer groups. Since the early eighties The New England, Prudential, Mutual Benefit Life and other insurers have created internal producer groups, mostly catering to the needs of very substantial producers, for writing large cases, or for both. Few insurer producer groups have succeeded, especially at keeping their top-end producers satisfied and loyal to the insurer.
Internal Brokerage Groups: Some insurers have created their own brokerage
operations so their career agents can get the products they want while the insurer
controls the business to some degree (compliance, commissions, licensing, carrier
and product selection quality control, etcetera). This works to the degree that agents
want what the insurer's internal brokerage offers, with whatever conditions are attached.
Brokerage Agencies: Traditional brokerage agencies seek business from agents and
brokers, and often offer value-added services such as special workshops with popular
speakers on special topics, usually inviting brokers whose business they cherish
and others they'd really like to do business with.
Career Brokerage Agencies: These offer better producers an array of services on the same level a career agency might, such as help developing customized presentations, access to computer power, access to and underwriting help with special products, subsidized housing, direct sales support without having to share the case, increased compensation. They have their own sense of family and culture, and develop meaningful relationships with many of their loyal producers.
Brokerage from Career Agencies: Many career agencies now openly solicit brokered business, and invite some of their brokers to career agent meetings and other agency functions, treating the brokers as part of the agency culture. They may also sponsor special meetings for brokers only, and often negotiate career contracts with brokers promising to write at least enough business to satisfy the career contract, and hopefully a lot more.
Independent Agencies: There are some independent agencies that broke away from career companies, took their agents with them and held them together pretty well. They have negotiated deals with two or three non-competing insurers, and specialize in certain markets or selling systems. They build the agency with producers who want what they offer. They often suffer from insufficient capital, as do their agents.
Study Groups: Study groups come in all shapes, sizes and purposes. Some last for decades and others have trouble staying together. Charters and qualifications for membership vary, as does the degree of formality they impose on themselves.
On the very high end of this study group spectrum I'd say the Twenty-five Million Dollar International Forum (basically a Top of the Table type organization for independents who kowtow to no company or industry organization, and who run their own meetings) and MDRT's Top of the Table are very large study groups with annual qualifications for membership. They provide an impressive array of member services and support, and to large degree solicit and listen to the wishes of members.
Toward the other end of the spectrum, where first year commission requirements are less imposing, there are personal study groups of practitioners who may be from the same or different companies, but who meet twice or more each year for a few days of intense study, camaraderie and a focused break away from the interruptions of the daily grind.
In any study group where the participating agents have the discipline to make a charter with clear objectives, and administer their standards with understanding and firmness nevertheless, these pocket groups of five to fifteen participants can afford to meet productively twice annually, invite good speakers in, and share skills, talents and interests between meetings. I have worked with several such groups: The Chicago Study Group of a dozen or so New York Life top producers meets twice annually at O'Hare Airport for a few days; the Hudson Bay Study Group of Manulife-Canada (I belong) meets semiannually in North America for two days of learning, sharing, brain storming and camaraderie. Both these groups are independent of their home offices, and the value to the participants is evidenced in the many years they have been together.
Study groups of practitioners from different companies, or comprised of independent brokers, also exist, and many of them actually help themselves place business with and through each other in a sort of clearinghouse arrangement based on trust and similar interests.
A few things are clear about study group participation. First, based on first year commissions, study group participants in general produce more than twice what other producers earn. Second, the more highly structured the study group (by charter, use of agendas, discipline to organize and to stick with it, use of outside presenters, focus on markets rather than on products, etcetera) the more productive the participants, by many fold.
The New Age Agency: There is another emerging alternative to the producer group, that can help solve the dillemas and frustrations of producers no longer satisfied to wait for home offices to provide effective leadership and suitable change. It's a new phenomenon without a label yet, so I choose to call it the new age agency. What my title does not reveal is that this innovative firm is a financial consultants network, capitalized correctly to provide an effective and well-managed array of network services for quasi-independent brokers and agents looking for a place to live without too many obligations.
Although there is a primary relationship with one insurer, there are also secondary relationships with one or two other major, quality carriers and a superior broker dealer, all providing services to the producers. One insurer is probably superior for variable life, another for traditional life, and the third for health and disability income products.
What this type financial consultants network offers goes beyond any traditional agency I've seen since the seventies, both in the breadth of services offered and the depth of each service commitment.
Here's an overview of services offered by one such financial consultants network, which can also serve as a checklist of criteria you might select from to decide if association with a similar operation is worth your looking around for one. Whether you are looking to come in from the cold or to out-source some services you want to provide but cannot manage profitably, it's a good list to consider.
These last categories of financial planning, financial management and wealth management--whatever you choose to call it overall--is the future. The shifting reality here is that most future compensation will come from assets under management: acquiring premium dollars via placing assets under management. If you think this is speculative thinking on my part, then get this. Prudential's new chairman--the first ever from outside the company--announced last November that the Prudential is shifting its focus and resources to acquiring assets to manage, and that the insurance aspect of the company will dramatically reduce the number of employees and sales and service offices. Other major insurers have been huddling over this strategy for a few years now, and are about to announce similar changes in direction and purpose. The legal issues related to this change in course are already being hashed out with state insurance departments and other regulatory bodies who are now more prone to help business develop in their states.
The best times are yet to come.
Insurance business leaders have begun to openly encourage insurers to innovate and experiment with alternative distribution systems, and also to correct the serious problems in their agency distribution systems. The search for alternative distribution systems, once a hush-hush search insurers denied making, is now openly acknowledged. LIMRA's CEO John C. Scully said, "We have too much to lose by walking away from the agent distribution system before other systems are in place to supplant them." He called for "radical change." Radical or not, change is coming, and the smart will ride the front of this wave.
As producers seek better distribution outlets and insurers seek the same, it seems to me that the time is ripe for developing some innovations to fix at least parts of the present agency distribution systems in those companies willing to negotiate and innovate. Here's how I think it might unfold productively:
certain agent/broker groups with a lot in common (certainly with more in common than a company's agent advisory group represent, such as agents and brokers with consistent levels of production, persistency and in similar markets) get together to think through their problems and decide what to ask for from the home office
the home office listens in good faith, and in good faith replies with an offer (all negotiations require good faith opening offers by both parties)
the home office and producers negotiate the development of a business plan, budget and
sources of capital for the agreed effortthe arrangement becomes a contractual business deal in which the home office and the producer group's members are equity participants
Now the insurer has another (alterna-tive) distribution system that the producers also own a vested interest in. Mutual accountability to profitability becomes the guiding factor, which is fundamental to business. When the producers pony up their capital and the home office listens as an equity partner, then things will change--for the better.
For those companies unwilling or unable to successfully negotiate the formation
of interdependent, qualified producer groups focusing on specific markets, and producers
unwilling to pony up capital or negotiate innovative solutions to their distribution
source problems, the other alternatives will still exist. After all, as I've demonstrated,
others are already at work to solve their problems, and many are making big progress
quickly.
John H. Melchinger coaches financial planning and estate planning professionals who market and sell to high income and high net worth buyers. His consultations on developing their professional practices through effective marketing are highly profitable for his clients. John's career experiences in financial services and products--since 1977--make him exceptionally qualified to have developed innovative, non-traditional marketing and skills development programs in estate planning, financial planning, business planning, ethics and consultative selling. His how-to books, articles, bulletins, workshops and presentations have become classics in the industry, and his clients are among the most profitable and productive in their fields.
John is available by telephone appointment at (813) 880-9899, by fax at (813)
249-7282, and by mail at the John H. Melchinger Company, PO Box 21286, Tampa, FL
33622-1286. Email John at jhmco@ix.netcom.com.
S.M.A.R.T. Marketing
Brokers, Agents and Alternative Distribution Systems:
insurers aren't the only ones looking
© 1996 by JHMCo.
All rights reserved. 1/96 Broker World article
by John H. Melchinger
Financial Services Journal
800-856-0193 http://fsc.fsonline.com/fsj