Moving to wealth management

The financial downturn that crushed investor assets has demonstrated the importance of dual-licensing for the advisor, and the combination of investment dealer and MGA services under one roof.

Such combinations have already become common, but there remain some holdouts on the distributor side, and many advisors have not yet embraced the one-stop-shop model.

Tough economic times are traditionally a boon for the insurance industry, as clients shy away from straight investment products and seek out risk mitigation. Robert Frances, president and CEO, PEAK Financial Group, points to the uncorrelated nature of the two businesses as the obvious reason to offer both.

“We’re seeing that quite a bit today,” he told the audience at the Advisor Group’s Distributors’ Summit in Niagara Falls, Ont. “Our insurance MGA is doing a lot better than our mutual fund dealer right now, in part because the drop in trailer fees is not as significant on the MGA side, we have service fees that do not change with stock markets.

“In times of uncertainty, in times where the investment world is not doing very well, risk type products are doing exceptionally well. People seem to understand a little bit better what risk is when they start to lose a big chunk of their portfolio.”

By providing both services to the advisor, the distributor allows more latitude in what the advisor sells. Sales of segregated funds are booming right now, relative to their mutual fund counterparts.

Frances points out that if the dealer is only offering investments, the advisors they deal with are likely placing insurance through another firm. Adding an MGA component to the dealership not only allows the advisor to place additional business through the dealer, but also cements the relationship.

“We’ve seen more products invented in the last five years than we saw in the previous 50 years,” he says. “By having both registrations on the mutual fund and the insurance side, all of these products then become available. As new products are invented, the dealer is not left on the sidelines.”

It’s becoming more difficult to ensure compliance when advisors are able to place business with other MGAs. The problem for the dealer is that the MFDA and IIROC are pushing dealers to be more responsible for all financial activities of their advisors, whether the business is placed though the dealer or not.

“They’re asking the dealer to conduct all types of reviews even on products that the advisor is not placing through that dealer,” said Frances. “What happened with Portus is an example of where the MFDA started to get very worried about some practices.

“If they are responsible for compliance, they might as well have the business being placed through them so they can more easily follow it, and also get compensated for it.”

Holistic Planning

Combining insurance and investment operations also allows the distributor to provide consolidated statements to the advisor, which includes investments, insurance and cash balances all on one piece of paper for delivery to the client. If all business is placed through one dealer, the advisor can provide holistic financial planning.

There are three ways for the dealer to add MGA services to their current operation: build it; buy it; or borrow it. Each strategy comes with its own strengths and weaknesses.

Building the MGA from scratch can be tremendously expensive, and the new agency would likely struggle to attain the critical mass needed to land contracts with the largest carriers. On the upside, the MGA can be built to the exact specifications of the dealer.

Buying an MGA gives the dealer a ready made team, an existing client base and book of business. But there can be cultural differences between the acquisition and the dealership. From a regulatory point of view, insurance advisors are responsible for their own acts, but investment dealers are responsible for acts of investment advisors.

“Borrowing” an MGA can take different forms: the dealer may strike a strategic alliance or partnership with an existing MGA, or transact a partial or full merger. The benefit of this strategy is the whole back-office operation is done elsewhere. There can be useful synergies on the technology side, as MGAs may opt to use the investment platform for their segregated funds.

Another danger is the addition can dilute the company’s focus. The firm may start focusing on pushing the product supplied by the parent company, when the dealer should be focused on timely processing and compliance.

Frances warns that pursuing economies of scale can cause more problems than it will solve, as the result can be more duplication of effort, rather than the finding of synergies.

(06/05/09)