Advisors satisfied with MGAs, survey suggests

(June 9, 2005) Advisors selling insurance enjoy a good relationship with their managing general agencies (MGA), despite communications gaps on issues such as compensation and compliance, according to new research conducted by NewLink and the ADVISOR Group.

Fifty-six per cent of advisors surveyed use only one MGA. While some used more than one, there was a strong preference for their “top” MGA, with 90% of all business going through the primary MGA.

Despite this loyalty, Byren Innes, vice-president and director of NewLink Group, says advisors do not seem to feel beholden to their MGA and there’s little indication they felt trapped in the relationship.

“They say there’s room for improvement, but there is no hostility felt,” says Tricia Benn, director of research for the ADVISOR Group. The research results were presented at Changing Channels: Managing General Agencies at the Crossroads, an AdvisorLive symposium, held on Thursday in Niagara-On-The-Lake, Ontario.

“These are personal relationships. Advisors want to talk with MGAs, they want to meet and they want to know what’s going on,” says Benn.

According to the survey, nine in 10 advisors feel they have a good relationship and eight in 10 are satisfied with the status quo. Most advisors said they most value the support they receive from their MGA and that they would like to see it expanded.

They crave education on the nuts and bolts of how different insurance products work and they trust their MGA to offer them unbiased opinions. The last thing they want is another product sales pitch.

In fact, advisors trust their MGA so much that they said they wanted their help in transitioning their business when they eventually retire. MGAs are well suited to this task, since they deal with several advisors and could help bring interested buyers and sellers together.

While advisors said they appreciate the value their MGA brings to their practice, most felt the MGA was overcompensated. Even while demanding improved service and support, advisors said they did not feel their MGA should receive increased compensation.

On average, respondents estimated their MGA was getting about 40% of the total compensation for the sales they facilitated. When asked what would be a fair share, advisors, on average, said 30%.

As it turns out, that would suit most MGAs just fine.

That’s because advisors are dramatically overestimating the MGAs’ share, Innes says, basing their guess on the split of the override alone. With an override of 200%, the average advisor is getting about 160% and therefore assumes their MGA is taking 40%, which is true.

But the MGA does not get a share of the first year commission, which lowers their share of overall compensation to between 13% and 20%, Innes says. For the MGA to receive the 30% share that advisors say is fair, they would need to cut the advisor’s share of the override from 160%, to about 140%.

Innes points out that there is room for greater transparency on this issue, and that MGAs need to take the lead on debunking the notion of 40% compensation.

“There’s a little bit of the unknown on the compensation side, hence the debate over who gets paid what, for how much and for doing what,” says Bob Ferguson, managing director of marketing and corporate development at Partners in Planning Financial in Richmond Hill, Ontario. “But the research really does confirm that these MGA relationships are pretty darn good relationships. I think there are long-term, long-standing business opportunities going forward — it’s not exactly broken.”

“Basically, both parties are pretty happy with each other,” he adds. “The piece on compensation is probably the normal response in the tug of war that goes on over the dollar.”

David Juvet, managing partner of Ontario East Insurance Agency in North York, Ontario, says the inflated estimates for MGA compensation underscores the importance of communicating exactly what the MGA does for the advisor.

“They value what we do, so we have to show them the cost structure,” he says. “I’m carrying that cost structure, they’re not. They’re contributing a small piece, as one of many people that does business through me.”

“It points out that we have a gap in communication that we did not realize and the question for the MGA is, ‘How sensitive are you to getting into expense and revenue with your people?'” he asks. “Do you see them as partners, in terms of seeing your numbers? I’m certainly not prepared to show them my financial statements. But on the other hand, I’m perfectly prepared to say ‘Here are the expenses I’m carrying, they’ve gone up, but you’re still being paid a comp, based on commission split.'”

While advisors want a bigger piece of the compensation pie, MGAs are facing rising costs, as insurance carriers are downloading responsibilities to them, including broker training and marketing.

“The gap on the other side, is does the advisor appreciate what’s behind that service delivery and what are the consequences of offloading more and more onto us,” says Juvet. “My staff costs have gone up, so I can deliver to them. I buffer them from the failure to deliver service over here.

“Because the advisor is the beneficiary of it, they don’t see that more and more of it is coming down to me,” says Juvet. “They value what I provide, but they don’t understand that expenses are rising because the companies are cutting back on their function — the broker still expects that service to be there regardless.”

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com

(06/09/05)

Steven Lamb