Insurance agents sitting pretty

The data collected in the 2008 Report Card reinforce the basic demographic distinction between these two breeds of insurance advisors. In general, the independent agents who work with MGAs are a bit older, a bit more experienced, and — most important — run notably higher-end, insurance-focused businesses than do their dedicated counterparts.

According to this year’s survey, the average independent agent is now pushing 50 years of age, whereas the average dedicated sales agent is about 46 years old. Moreover, the typical independent has been in the business much longer — although he or she has probably switched firms more recently than the average dedicated sales agent. Independents report that they have been in the industry an average of 18.5 years but have been at their current firms for less than 10 years. In contrast, dedicated sales agents have been in the industry for slightly less than 14 years but have been with their present firms for more than 11 of those years.

Not surprising, these divergent career paths result in very different books of business for the two types of sales forces. But, unlike other portions of the retail investment business, the difference is not reflected in the dollar value of advisors’ books.

On that count, there’s not much to choose from between the two sales forces: the average dedicated sales agent has $13.4 million in assets under management, compared with $14.2 million for the average independent.

However, these very similar AUM totals are spread across much different client bases. The average dedicated sales agent handles a book of about 771 households. In contrast, the average independent is serving about 437 households.

The fact that the older, more experienced independents have smaller client bases reflects the fact that they are also running more productive books; however, this is not necessarily revealed in their AUM because their businesses are more tightly focused on the core life insurance business than are the businesses of the dedicated sales agents.

The average dedicated agent may have AUM that are comparable with the average independent, but he or she is also more reliant on asset-related products and services for his or her income than the independents. For example, a notably greater proportion of dedicated agents have mutual fund licences: more than 60% of dedicated agents maintain a mutual fund licence vs less than 50% of independents. (Only about 3% of agents in both segments of the business also boast securities licences.)

Looking at the compensation mix, it’s clear that dedicated agents’ revenue streams are more diversified as well. Notably, they get more than 10% of their compensation from fee-based sources and another 5% from fee-for-service sources. In contrast, independents get less than 8% of their compensation from fee-based sources and only 0.6% from fee-for-service arrangements.

These differences in compensation mix are also reflected in the investment product mixes reported by the two sides of the industry. In particular, dedicated agents devote a bigger portion of their investment book to managed products. Although fewer independents bother to get mutual fund licences compared with dedicated agents, those that do place more of their investment business in mutual funds. Almost 62% of independents’ investment portfolios are dedicated to mutual funds, vs 43% for dedicated agents.

Among dedicated agents, managed products make up more than half of their investment book — and proprietary managed products are almost as important to them as stand-alone mutual funds. For these agents, almost 40% of their books are invested in in-house managed products, with slightly less than 19% is devoted to third-party managed products.

@page_break@For independents, their MGAs’ proprietary managed products are barely on the radar, with just a 6% share. They are much more likely to make use of third-party managed products, which account for more than 33% of the investment portion of their books.

But, ultimately, the investment component is less significant to the average independent than it is for the average dedicated agent. The vast majority of independents’ compensation — about 60% — is derived from their first-year commissions. Another 25% is driven by renewals.

The average dedicated agent gets about 30% of his or her revenue from renewals, but less than 50% originates from first-year commissions. This suggests that the business of selling new insurance products is still much more important to independents than it is to dedicated agents.

Although first-year commissions are still the biggest single source of compensation for both sales forces, the dedicated agents are more dependent on their renewals as well as other revenue streams, such as fees, to provide their compensation. This suggests that dedicated agents are probably more exposed to direct market effects than independents.

The turmoil in financial markets during the past year has made it tough for all parts of the retail financial services industry to grow their client AUM; not only do the volatile markets make investors reluctant to commit new money to their portfolios, but the volatility also threatens the value of existing investments. In these conditions, a decline in average AUM is not unexpected.

As a result, the average independent has seen his or her AUM decline over the past year to slightly more than $14 million from about $17 million in 2007. However, the dedicated agents have actually managed to increase their totals over the past year. Compared with last year’s data, the average dedicated agent’s AUM is up to more than $13 million from $11.6 million last year.

The fact that dedicated agents have been able to boost their AUM in this environment is certainly impressive, suggesting that even though these agents may be more exposed to market effects, their businesses have actually held up very well so far.

Nevertheless, insurance remains the core business for both sales forces. And, on that count, the independents are far outproducing their dedicated counterparts.

Looking at the breakdown of first-year commissions, the average independent reports generating almost $500,000 in annualized commissions from life products, compared with less than $200,000 for the average dedicated agent. The average independent generates almost as much in commissions on money products — slightly less than $170,000 — as the average dedicated agent generates on life products, which is by far his or her biggest earner.

The independents also outproduce dedicated agents in commissions on living-benefits products, although both the absolute and relative difference is much smaller than it is in the life and money product segments. The average dedicated agent garners less than $22,000 in first-year commissions from living-benefits products, vs more than $36,000 for the average independent.

Areas in which dedicated agents outperform the independents is in segregated fund commissions and in property and casualty commissions. The average dedicated agent generates almost $86,000 in annualized seg fund commissions, for example, compared with slightly more than $33,000 for the average independent.

The relative differential is even bigger in the P&C area. Here, dedicated agents collect an average of almost $38,000 in annualized first-year commissions; independents report garnering only about $1,500 in revenue from this segment.

These differences in commission mix are also echoed in the product mix that agents report. For example, dedicated agents say that almost 9% of their business is devoted to P&C products, whereas this product line makes up a mere 0.1% of the average independent’s business.

Similarly, dedicated agents hold the edge in seg fund allocations, with almost 18% of their book in these products, compared with just less than 15% for independents.

For both segments of the industry, though, life insurance products remain the core competency. For dedicated agents, the mix is almost evenly split between term and permanent life products, with 27% in term life and 25% in permanent life products. Independents, meanwhile, show a stronger reliance on permanent life products, with these accounting for almost 42% of their product mix; term life represents another 24% of the average independent book. And independents also have the edge in fixed annuities, with a 2.3% allocation to these products vs 0.6% for dedicated agents.

Not only are the differences in the mix of first-year commissions between dedicated agents and independents reflected in their respective product mixes, but the disparity in magnitude of those commissions also translates to their bottom lines. Although most agents from both sales forces report that their total annual compensation falls into the $100,000-$500,000 range, there are notably more independents among the higher income ranges.

For both segments of the industry, about 47% report that they earn between $100,000 and $500,000. The difference is that 16.5% of independents say they earn between $500,000 and $1 million; and almost 8% say they earn more than $1 million per year.

On the dedicated sales side of the industry, just 10% report earning between $500,000 and $1 million; and less than 2% boast more than $1 million in annual compensation.

Although the independents may boast greater representation among the highest-earning agents, there are also more of them among the lowest earners as well — with slightly more than 6% of them reporting an annual compensation of less than $30,000 vs 4.5% of dedicated agents who say they fall into this category.

The dedicated agents, however, report a higher proportion earning in the $30,000-$50,000 range (almost 13% of dedicated agents vs about 6% of independents), and in the $50,000-$100,000 range (24% of dedicated agents vs 16.5% of independents).

In many parts of the retail financial services industry, there’s a distinction between independent and institutional players, but nowhere are the differences as stark as in the insurance business — in which the average independent agent runs a far different business from the typical dedicated agent. IE