MGAs can profit by offering lower payouts

Ask an MGA exec what’s troubling their industry and the perennial answer always comes up first: vicious competition is pricing the industry into oblivion. Agencies have been forced into a competitive spiral of higher payouts to advisors—and thinner margins for the MGA.

But the somewhat cynical view that advisors will always place their business with the agency offering the highest payout is being challenged by MGAs that believe they can profit by offering more service to the advisor, at a lower payout.

The need to demonstrate added value is mirrored within the advisor channel. Individuals can buy term insurance over the phone or trade investments online. Yet it’s the value of advice provided on these products that brings clients to an advisor. The same mentality should also be applied to the distributor: If the advisor’s advice is worth more than simple execution, the advisor should, in turn, value the service of the distributor.

Keith Brown, CEO of Daystar Financial Group, says MGAs needs to focus on adding value to the advisor relationship, rather than simply paying them the most. To become the value-added MGA, the company must focus on its unique abilities, he says.

“I know what my unique ability is: I deliver client solutions, particularly in really tough situations. I know I’m really good at that. I know that’s what I should be doing; I shouldn’t be doing a ton of other stuff, like offering technology.”

In this case, outsourcing the technological aspects of the MGA might make sense, as it eliminates the in-house costs associated with development.

Without a value-added offering, the MGA can only compete on price, essentially commoditizing service.

To demonstrate the commodity trap, Brown used the analogy of the coffee shop. A consumer can buy coffee beans at a grocery store, take them home and brew a cup of coffee for a total input cost of about five cents. And yet millions of cups of coffee are sold in boutiques for more than $5. The industry is based on the commodity of coffee, but is priced on a service model.

The irony, Brown said, is that the financial services industry is, as the name suggests, a value- added service provider, which is then priced as a commodity.

The average MGA requires a margin of 20% to remain profitable, he added, and the mathematics behind incremental payout increases is not in its favour.

If an advisor earns an override of 190%, instead of 180%, the net revenue increase is only about 3%. That’s not much of a gain for the advisor, “but it totally kills the MGA,” Brown said. Shifting from an override of 150% to 160% would result in a 20% loss of revenue for the MGA, while increasing it from 180% to 190% cuts MGA revenues by 50%.

“What services are you getting from the MGA that pays 170%, instead of 180%?” he asked. “If you want another 25% of my margin, how do I cut my costs by 25%? Which of my staff don’t you like this week?”

Rather than focusing on the payout alone, advisors need to consider the risks of doing business with an unprofitable MGA. Brown suggested advisors consider the impact a collapse of the MGA would have on the business of the advisor.

Brown adds the MGA’s compliance regime is perhaps the most underappreciated value-added service it provides. The job of the MGA is not to simply process applications, he says, but to question the suitability of the products being sold to the client.

As part of his own value add, Brown provides close support on large individual sales.

“We have a lot of wisdom. We know how to sell this life insurance product,” he said. “I’m in the final three feet with consumers with very large cheques. I know what it’s like to help people buy at that level. Having that wisdom, we can provide leadership to the advisors.”

One strength of existing MGAs is that the industry is still relatively young and still finding its feet. This has allowed agencies to develop brand-new business models based on what works in their individual markets.

“We’re in the Wild West of the industry, with new MGAs being built at the same time that major players are consolidating,” Brown said. “We can pretty much create our businesses any way we want, and I like that.”

Avoid getting caught in the commodity trap:

• Think about what your capabilities are and are not. What are the opportunities you want to capture?
• Consider what’s unique about what you do?
• Create a process. This should include the things that your advisors experience every time you or your team meet with them or they do business with your agency.