An insurance power play

“We pride ourselves on our independence,” says Mark Kent, president of Calgary-based Portfolio Strategies Corp. “We don’t want to be seen dictating how our advisors run that portion of their business.”

“They can go anywhere with their insurance business,” echoes Andy Mitchell, president and chief operating officer of Markham, Ont.-based Worldsource Financial Management Inc. “And that’s what differentiates us as a firm.”

The issue of allowing advisors to choose an MGA underscores several industry issues. Certainly, it speaks to advisor compensation and dealer profitability. It also points to the potential liabilities that firms can incur as they see more segregated fund business. And, finally, it also underlines how regulators aim to protect consumers in an industry being changed by technology.

The issue came to the forefront this past autumn, when Toronto-based DundeeWealth Inc. told its advisors that it would require them to file all their life, health and seg fund business through its proprietary MGA, Dundee Insurance Agency Ltd.

“It’s really about risk management and protecting the integrity of the business,” says Gordon Martin, senior vice president of DundeeWealth’s retail division. “We can’t effectively manage risk if we’re not seeing where the business is being placed.”

The rule came into effect on Jan. 1. In-force business was grandfathered by DundeeWealth, but the firm now restricts advisors from selling all products, including guaranteed investment certificates, from third parties.

Advisors at so-called “captive agent” shops such as Winnipeg-based Investors Group Inc., Toronto-based Desjardins Financial Security Investments Inc. and Mississauga, Ont.-based PFSL Investments Canada Ltd. had never sought out independence, per se, so DundeeWealth’s move was somewhat of an industry first.

Toronto-based Assante Corp. has since followed DundeeWealth, although it has been less firm about the restriction. Other firms, such as Montreal-based Peak Financial Group, would prefer the business stays within the firm but it won’t outlaw the use of third-party MGAs. Meanwhile, independent advisors, in part led by the Independent Financial Brokers of Canada, have cried foul about DundeeWealth’s move.

Freedom and independence in the financial services industry can mean a lot of things, but in this case, the words’ meanings are tied tightly to better pay. Advisors tend to shop their business around, making deals with MGAs that give them the best overrides based on their sales volume.

That’s the theory, anyway. Al-though many MGAs are moving slowly toward digital transactions, the majority of the administrative details in the insurance world are still filed by hand.

And 90% of advisors working with a dealer are happiest processing the transactions in-house, where seg funds can be filed through software developed by FundSERV Inc. of Toronto or Winfund Software Corp. of Ottawa — technology originally meant for the mutual fund world but adapted for seg funds.

Still, the “deepest pockets” theory applies. Most MGAs are relatively small organizations with little excess capital, so even though the business may not even have run through the dealership, there’s a risk that the parent company that owns the MGA can be sued — hence DundeeWealth’s move. An ensuing lawsuit can be expensive and the public relations can be damaging.

“We guard our reputation very, very closely,” says Martin. “It’s very important to us, so that’s the reason behind the change.”

The majority of the risk lies with the so-called “money” side of the insurance business, or seg funds, including the fast-growing guaranteed minimum withdrawal benefit category, says Mitchell. The largest errors and omissions claims in the financial services industry don’t tend to involve traditional life and health insurance products. Instead, it’s the seg fund business that worries dealers.

“It’s a human psyche issue,” he says. “[Clients] get their statements and it’s not what they expected. People get worried and they complain or, worse, they sue. That’s where the compliance risk is for the firm.”

@page_break@Still, several executives see the compliance concern partly as a decoy because the underlying issue is profitability for all dealers.

“Our challenge as an industry,” Mitchell says, “is to support advi-sors who give you a small overall percentage of their revenue.”

He adds that it’s possible for an advisor to reach $300,000 in insurance sales but file only $40,000 of it through the dealer’s MGA: “Some firms are saying, ‘If you want to be here, you have to give us that whole $300,000 so we can support you.’ Compliance is a component; but, in my opinion, it can’t be the only reason.”

Similarly, Ken Rousselle, president and CEO of Markham, Ont.-based Professional Investment Services (Canada) Inc. , a firm that won’t dictate advisors’ business flow, says that at some point, it’s fair for the dealer to have a discussion with advisors who don’t give them their insurance business.

“You’re not profitable to us because you’re not giving us enough business,” Rouselle says of advi-sors who sell seg funds through a third-party MGA. “That’s not meant to be a threat; it’s meant to be a fact of life. The fact is we’re running a business, we need to make money — and if we’re not making any, well, you either find a way to help us or go find another dealer.”

If advisors added up the services they receive from their dealers — from business cards to marketing services — the extra overrides they’re receiving from the MGAs might not tip the scales anyway. For example, executives from Mississauga, Ont.-based Independent Planning Counsel say IPC can’t provide marketing support for business that may end up elsewhere.

From a regulatory perspective, the issue is somewhat of a red herring because both provincial and federal regulators seem to tag the insurance manufacturers with responsibility for the oversight of the insurance sales.

Seg funds are the insurance industry’s answer to mutual funds, but they exist under a completely different regulatory regime. Although mutual fund regulation requires advisors to sell through one dealer that oversees compliance, such as suitability and “know your client” rules, in the insurance world, advisors can theoretically take their business to whichever MGA suits them best.

And although some MGAs may seem to function with all the services that mutual fund dealers offer, others simply offer back-office services and still others function like order consolidators for insurance manufacturers looking for fewer distribution points.

The Financial Services Com-mission of Ontario, which oversees insurance sales in the province, says that it’s the insurance manufacturers, not the MGAs, that have the responsibility to supervise the advisors who sell their products.

No single self-regulatory organization encompasses MGAs, and none is imminent, says Grant Swanson, executive director of the licensing and market conduct division of FSCO in Toronto. That doesn’t mean things couldn’t change in the future if consumers start getting burned too often.

Swanson points to the Canadian Council of Insurance Regulators‘ strategic plan to 2011, which aims to keep abreast of the evolving insurance industry. One of the plan’s priorities is to review, together with the Canadian Insurance Self-Regulatory Organization, the regulation of MGAs, among other distribution points, in property and casualty, life and health insurance. The aim, according to the plan, is to “identify and address risks to consumers, regulatory gaps, and legislative and regulatory barriers.”

“Essentially, because this channel is growing,” Swanson says, “we’re wanting to gather information about the channel so that we’re well informed.”

In the meantime, he notes, there are a lot of different business models out there in the financial services industry.

“One recognizes that it’s a competitive marketplace and people do business in different ways,” says Swanson, adding that FSCO isn’t there to impede the market.

In this sort of regulatory environment, Mitchell says, dealers simply have to understand the business their advisors are running: “At some point, we have to start trusting in the professionalism and the ethics of the business.” IE