The future of distribution

George Aguiar: We’ve seen some significant consolidation, but we’ve reached the [peak] on the distribution side. There are few really meaningful acquisitions in that space today, but that could change. I think a lot of the organizations that have gone through the process of acquiring distribution have now dug in their heels and are looking forward in an effort to make their distribution viable.

Having said that, [the consolidation we’ve seen] also [creates] an opportunity for boutique shops to emerge. Organizations that have gone through an acquisition may not necessarily be a cultural fit for all their advisors.

Jim Burton: We’ve seen the transition from companies on the life insurance side distributing to their own branches to the evolution of the MGAs. And the commoditization that’s happened over the last number of years is going to change that model because we’re reaching a point where insurance companies aren’t earning money because of product pricing. The MGAs are being squeezed because they’ve chosen to pay such high amounts to the agent, and there’s little left for them in terms of the margins. So we’re going to see a consolidation of distribution. I also think the pressure for governance and more [sales and marketing] support will also enhance the [push towards] consolidation from smaller MGAs to large, national MGAs.

Ronald Madzia: If you look at our industry 10 or 15 years ago, it was predominantly an agent-driven system, with independent brokers dealing with the insurance companies on a direct channel. Over the last 10 to 15 years, it’s migrated over to independent advisors dealing with the insurance companies through an MGA. You never know what can happen down the road, but at this point the trend is leaning towards dealing with the insurance company through an intermediary.

George Aguiar: The biggest threat we see today is [reduced] access to advice, and that’s really an unintended consequence of government policy. For instance, look at pension reform. The government is always assessing things with a rear-view-mirror approach. We went through a massive market correction, and clearly Canadians were affected, so the concern then becomes, ‘Are Canadians exposed, and do they have enough retirement assets?’

So all of a sudden we start seeing the government beating the drum of pension reform, and looking to mandate and implement new pensions for the segment of the market that may not have access to company pension plans. If the government mandates that you take a certain amount of assets away, it reduces the amount of assets available for private, discretionary investing. Can advisors afford to manage a smaller amount of assets and still provide the same level of service when their cost of operations continues to rise?

This disenfranchises the newcomers to the space, and especially those who are at the point where that discretionary dollar is now available for funding their retirement. Their access to advice becomes diminished.

Jim Burton: The biggest threat has been commoditization at all three levels. In the last few years, agents have been turning to whichever MGA gives them the highest override. They’ve been selling only the lowest-priced products, and that’s driven MGAs to a position where in some cases they only attract the business without much value. That has squeezed the margins, [but] it worked for a while — they relied on their service fee for profit. [But] now the insurance companies are saying, “No, the service fees are there to give service.” So that margin squeeze is very real, and it’s going to be exacerbated by the need for more compliance, and probably for more sales and marketing support.

Ronald Madzia: We’re seeing more and more companies get into distribution. Banks are starting to buy insurance companies, and wealth management companies are starting to buy MGAs. There are different players getting into that type of distribution, so competition is probably our biggest challenge.

George Aguiar: It’s unlikely we’ll see the MFDA fold. [But] I think it’s inevitable that we’ll see a merger of SROs. So in the same way that there’s a move towards a national regulator, at some point we need to rationalize whether two SROs are necessary.

It’s a question of ‘when’ and not necessarily ‘if.’ For most investment dealers, the challenge is whether the unique business structures of an MFDA dealer will be recognized in a merged SRO. That’s part of the unknown. I suspect that if merger discussions become more active, then at some point dealers are going to have a checklist of what they think is required for this to be a successful merger.

Jim Burton: On [the mutual fund] side the challenge has been that the model is flawed because of the margin squeeze. And if there is a merger, that consolidation will perhaps [result in] more appropriate pricing at every level, which probably means there will be more left [over] for supervision and compliance, and for sales and marketing support.

Ronald Madzia: One of the things we need in our industry is simplicity from a regulatory standpoint. It’s not necessary to have three or four different regulatory bodies trying to manage our industry. If you look at the IIROC side, they sell securities and mutual funds, as well as insurance products. The MFDA side can sell various types of financial instruments — basically everything but securities. If you look at the insurance side, we sell a combination of similar types of investments as the MFDA side, along with insurance.

The consumer is trying to find the easiest way to understand products and services, and how they’re regulated. By adding more layers it just makes it more complex for them — and for us. It also adds, in some respects, an unnecessary expense. So on the issue of whether the MFDA survives or not, I think the fallout of these controversies, and why they happen [in the first place], is a result of there being too many players and too much complexity. Simplicity is the answer.

George Aguiar: I think all mutual fund dealers are struggling to figure out how to ensure their distribution is viable. The challenge we face as mutual fund dealers is that to a large degree our compensation is somewhat fixed, in that it’s embedded in the prospectus. [Unlike IIROC dealers], we don’t have the flexibility to build our revenue stream against the cost of operations, so there’s a continued squeeze on margin. If equities are only growing at 6% a year, our revenue stream would be linked to that. Yet our cost of operations continues to rise, and so you see these two issues colliding. At some point this should be addressed.

Jim Burton: The cost. If you’re large and have economies of scale, there are wide-open opportunities. But the small independent will face a significant barrier in trying to compete and give value as we move from a commoditized to a value-driven model. We’re going to come back to people needing sales and marketing [as well as] compliance support, and the larger entities are in a better position to deliver both. But I always believe there’s room for the little guy. I started off as a little guy and we’ve grown significantly. But the key would be to find a niche where you can create value that is different. I believe there is always going to be room for that unique, boutique approach.

Ronald Madzia: There are too many players in our channel. The insurance companies set quotas and contractual obligations that MGAs have to meet to warrant having a contract. If every company honoured their requirements, there would be fewer MGAs in the field. Some companies—not all—don’t hold their MGAs to task on their contract requirements. But that’s changing. The [insurance companies] are getting more stringent, which is good. Compliance is also becoming front and centre in our organizations. A lot of MGAs, including us, have invested heavily in having compliance departments and compliance heads.

Some of the smaller players are not doing this, and it’s going to become apparent to the carriers that they’re going to need to focus on the MGAs that are running their business like a business — making sure they’re in a compliant environment, and that they have the right people and tools to support an advisor base. Just because you can qualify for a contract based on production doesn’t warrant being an MGA.

George Aguiar: Harmonization of regulation. [Currently] investors have different experiences going through different distribution channels, and what we need to figure out is a way to make the investor’s experience consistent no matter what channel they approach. So there needs to be consideration of [a merger of] IIROC and MFDA. [We also need to look at] the insurance side.

I’m not suggesting [IIROC is better than the MFDA, or vice versa]. I’m just suggesting there are different experiences in each of these channels. And at the core there are commonalities. We need to make sure there isn’t an arbitrage between one distribution channel over another at the expense of the investor.

Jim Burton: I think there’s gong to be more of a need — whether it falls to an SRO or to the insurance-carriers and banks — for compliance, and for selection of the independent agent who’s going to be distributing product. I’m completely in favour of that. We invest a lot of money in the selection process and in the technical support we give people to help them become competent and knowledgeable when they’re out working with customers. And I do believe that would be helpful to all concerned, whether you’re a boutique firm or a significant national firm.

Ronald Madzia: I would like to see an SRO for MGAs and insurance companies. We have an association called CAILBA, Canadian Association of Independent Life Brokerage Agencies. Basically, it’s an association of MGAs. It’s not mandatory to be a member of CAILBA, but in the interest of running a compliant and professional organization you’re advised to be a member.

Most of the major MGAs in Canada are members of CAILBA. We’re working closely with our insurance companies to develop a set of standards we can do business by. Developing and maintaining a standard of professionalism, compliance and ethics is the most important thing we have going forward, which the end consumer is going to benefit from.