Insurance agents outperform (includes chart)

It appears that AUM is much less important to the business of most insurance advisors than it is for some other segments of the industry, and the growth is from a relatively low starting point. But the fact that the average insurance advisor has managed to increase AUM by more than 20% over the past year is remarkable, and it suggests that some clients are certainly seeing insurance as a safe haven at a time when major securities firms and markets have suffered tremendous upheaval.

With asset values so beaten up over the past year, there are only two ways that most advisors could be expected to grow their AUM — either by adding clients or by capturing a greater share of their existing clients’ wealth. It appears insurance advi-sors may be doing a bit of both.

Overall, the number of households served by the average insurance advisor jumped to almost 740 this year from slightly less than 660 last year. This large jump suggests that advisors have been able to boost their AUM mostly by adding new clients. But the story is not as simple as it appears on the surface.

When the data are broken down into two basic streams — those advisors who are with dedicated and independent direct-sales agencies vs those that operate through managing general agencies or specialized MGAs — some major differences emerge.

In terms of client numbers, for example, the dedicated/direct-sales advisors had much larger books to start with (about 770 households, on average, in 2008), and these advisors also were responsible for all the growth in overall client totals over the past year (with the average client list growing to more than 900 households).

In contrast, advisors operating through MGAs reported much smaller client lists to start with (an average of slightly less than 440 households last year), and that total has diminished even further this year (down to slightly less than 350 households this year).

On the AUM side, the outcomes have been much different as well. Last year, advisors with MGA firms held a slight edge in AUM — $14.2 million, vs $13.4 million for dedicated/direct-sales advisors. This year, however, AUM for advisors with MGAs is more or less unchanged at $14.3 million, whereas dedicated/direct-sales advisors saw their AUM jump to $17.5 million.

Clearly, the dedicated sales forces have made a concerted effort in building their books, adding clients and AUM at an impressive clip. Whereas the fact that AUM totals have remained unchanged while client numbers have dropped for MGA advisors suggests that these advisors have been able to capture a greater share of assets from a smaller group of clients.

Despite the divergent approaches, the data reveal that all insurance advisors are facing some common trends in other aspects of their practices. All advisors, for example, reported a greater role for first-year commissions and less emphasis on renewals within their overall revenue mix. For advisors at dedicated/direct-sales agencies, the shift was smaller; but for advi-sors with MGAs, first-year commissions now account for 65% of their revenue, up from 59.9% last year. Renewals have fallen to 20.3% of revenue for MGA advisors, down from 24.6%.

The composition of that first-year commission revenue has changed a lot as well. For the dedicated/direct-sales advisors, there was a notable shift away from life insurance products in favour of segregated funds and money products. According to survey respondents at these agencies, life products now represent only about 21.1% of first-year commissions, down from 52.1% last year. At the same time, the share for seg funds has jumped to 40.8% from 23.9% a year ago; and money products have seen a notable rise as well, with living benefits and property and casualty making smaller gains.

@page_break@On the MGA side, there was some decline in the significance of life products as a source of first-year commissions, although they remain the main source of revenue, at 61.2%, down from 65.6%. There was a much bigger swing for these advi-sors from money products and into seg funds. Last year, these advisors reported that 24.1% of first-year commissions were derived from money products, but that slipped to 7.5% this year. Conversely, seg funds have jumped in importance to 22.6% this year from 4.8% last year.

The increased importance of seg funds to all insurance advisors is also evident in the data on overall product distribution. For the dedicated/direct-sales advisors, the share of their business derived from seg funds rose to 20.7% this year from 17.8% last year. Similarly, advisors at MGAs saw seg funds gain market share as well, increasing to 17.2% from 14.8%.

The increase in seg fund popularity is not surprising — market turmoil has pushed clients to seek safer investments, and the guarantee features offered by seg funds would seem to make them a logical option. (See story on page 17.) What is perhaps more surprising is that insurance advisors also report that mutual funds have also seen a jump in popularity on the investment side of their businesses.

In last year’s survey, mutual funds made up 48.1% of the average advi-sor’s investment book. This year, their share is up to 75.5% — with the rise driven by the dedicated/direct-sales advi-sors, who say the share of their investment business derived from mutual funds rose to 75.9% from 43.2%.

These huge gains in market share for mutual funds may seem counterintuitive, but they come at the expense of proprietary and third-party managed products, which can be significantly more expensive than mutual funds and are no less vulnerable to a global market meltdown. Additionally, there has been a significant shift into money market funds over the past couple of years as clients have parked their assets on the sidelines.

Although investment funds have been making market-share gains with insurance advisors, traditional insurance products have seen their share whittled away somewhat (even though they remain the two biggest components of the average insurance advisor’s business). The share of business derived from term life products slipped to 22.5% this year from 26.1% last year, and permanent life saw its share decline to 28.7% from 30.9%.

For advisors at the dedicated/direct-sales agencies, the share for term and permanent life insurance products dipped year-over-year. But for the advisors at MGAs, term life saw a small gain in share (to 26.7% from 24.1%), even as the share for permanent life ticked downward to 38.6% from 41.8%.

Another indication that the insurance industry is weathering the financial crisis relatively easily is the fact that advisor compensation has held up remarkably well.

About half of all advisors report that they earn between $100,000 and $500,000, up from 46.9% last year. Another 24.3% say they are paid in the $50,000 to $100,000 range, which is up from 21.5% in 2008. There has also been a small decline in those earning less than $50,000 a year overall, although, among MGA advisors, the proportion in the lowest categories actually rose a little (most notably, the share of those earning less than $30,000 rose to 10.3% from 6.1%).

The insurance industry hasn’t escaped the financial crisis completely unscathed, and one sign of that is the fact the top end of the advisor pay scale has seen its ranks thinned a bit. Last year, 12.2% of advisors said that they earned between $500,000 and $1 million. This year, that club is down to 7.5% of all advisors. The big drop came among MGA advisors, for which the share of those earning that amount dropped to 9.3% from 16.5%. IE