Stability or stagnation?

The other major segments of the retail financial services business are weathering turmoil as firms join the chase for high net-worth clients — causing a slew of strategic and tactical changes both among and within firms. The insurance advisors, on the other hand, appear to be models of consistency. The big question is: does this consistency represent stability or stagnation?

One sign of possible stagnation is the fact that the insurance sales force is clearly getting older. The average age of the 327 advisors Investment Executive surveyed this year is 48, up from less than 46 last year.
And the average tenure is almost 17 years, up from slightly less than 16 years in 2004.
Both these statistics suggest there isn’t a lot of new blood coming into the industry.

The increase in average tenure indicates there aren’t enough rookies entering the business to hold that average steady or move it lower. Similarly, the jump in average age of more than two years suggests that older agents aren’t leaving the industry in any large numbers. To the contrary, if anything, it appears to be the ranks of young agents that are in decline.

There’s much to be said for wisdom and experience — particularly in an advisory business — but any time an industry appears to be aging rapidly, it’s fair to wonder whether it is because firms aren’t actively recruiting or that young people don’t see a future for themselves there.

Either way, the industry appears to be holding to its history. While other segments of the retail financial services industry are moving away from straight commissions and toward more fee- and asset-based compensation arrangements, the insurance industry remains very much transaction-oriented.

Respondents to our survey report that about 84% of their revenue still comes from transactions, less than 7% is from fee-based or fee-for-service arrangements and less than 5% is derived from salary. On the independent side (including both independent agents and Equinox Financial Group Inc. advisors), this dependence on commissions is even heavier — as 90% of reported revenue is transaction driven. (Note that these numbers never quite total 100% because of rounding, and the fact that they are derived from respondents’ estimates, which sometimes don’t total 100%, either).

That’s not to say that there’s anything inherently wrong with transaction-driven business. But with the industry coming under fire for its commission practices, both from lawmakers in the U.S. and regulators in Canada, the overwhelming importance of commissions could be a deterrent to prospective entrants.

Notwithstanding its adherence to tradition, the insurance business is not immune to some of the pressures driving change in the retail financial services industry. As insurance agents gravitate toward the securities business, they face some of the same competitive pressures.

At the very least, agents are relying more heavily on mutual funds. They report that while insurance is still far and away the biggest component of their businesses (67%), approximately 24% is in mutual funds. This latter percentage is slightly higher for independent agents (25%) than for captive agents (slightly more than 23%).

But agents from captive sales forces also report that 4% of their book is in in-house managed products, vs almost zero (0.2%) for independents. And captive agents report a higher reliance on segregated funds.
Within the insurance portion of their books, seg funds account for about 20% of captive agents’ business, vs slightly more than 18% for independents.

What’s clear is that these types of investments represent a significant portion of agents’ business. This may well mean they will import some of the same pressures facing the rest of the retail financial business.

One of those pressures — the shift to fewer clients — does appear to be taking hold.
Compared with last year, the average number of clients that agents serve is 933, down from 1,062 in 2004. On the independent side, the number of clients has dropped to 469 from 517. And for captive agents, it’s down to 1,176 from 1,257.

@page_break@Despite the vast disparity in the size of average client bases between independents and captive agents, the independents have significantly more money under management in the non-insurance side of their businesses. They report average assets under management of $12.8 million,
vs $8.6 million for captive agents.

And, of course, the independents’ greater AUM, and greater AUM/client, is reflected in the fact that they also boast bigger accounts than the captive agents. The same correlation is evident in the other parts of the retail business, which are doggedly pursuing bigger clients. Accounts of less than $250,000 are the single biggest category for both independents and captive agents, making up an estimated 64% of the average captive agent’s book, vs 47% for the average independent agent.

The independents hold the edge in every other account size, and the magnitude of their advantage grows as you consider larger and larger accounts. For example, independents edge out the captive agents in the $250,000-$499,999 account size category, by 22% to 19%. And they have more than three times as many accounts that are worth $1 million or more than (9% for independents, vs 3% for captive agents).

But despite the advantages that the independents have in terms of average AUM and larger accounts, the captive agents hold the edge in estimated average annual revenue — generating about $328,000, vs $257,000 for the independents. The disparity is largely because more big producers are found among the captive agents. On a relative basis, captive agents are about twice as likely as independents to report that they are generating more than $1 million in revenue a year. And they are about 1.5 times as likely to say they are garnering more than $500,000 in annual revenue.

There’s no particular firm that accounts for the advantage that captive agents hold over independents in revenue generation; these big producers appear to be spread among the firms in IE‘s survey. Instead, this revenue advantage for the captives points to the fact that, while the securities side of the business may be significant, it’s still the core insurance business that pays the way for many agents.

Looking at the insurance product mix for the industry overall, the average advisor’s business is fairly evenly divided among seg funds, term life, permanent life and other forms of insurance. Each of these categories accounts for roughly 20% of the average agent’s product mix (with term life most popular at 24%). Living benefits make up about 9%, and fixed annuities are roughly 2%, which is more or less the share that these products claimed in last year’s Report Card.

The biggest difference between this year’s and last year’s survey, in terms of product mix, is the huge increase in the popularity of permanent life insurance. Last year, it made up about 8.5% of the average agent’s product mix; this year, it’s almost 21%.

Both independents and captive agents report a big jump in their use of permanent life insurance, but the trend is particularly strong on the independent side. While captive agents more than doubled their use of permanent insurance, the product’s use by independents went to almost 23% this year from just 3% last year .

There are also some other notable differences between the captive agents and independents. Although the captive agents’ estimated use of seg funds slipped year over year, it rose handily among the independents (to more than 18% in 2005 from less than 15% in 2004 ). At the same time, fixed annuity sales slipped among the independents, to less than 3% from slightly less than 5% last year. And the prevalence of term life insurance for independents rose to about 32% from 26% last year.

On the captive side, the product mix tends to be more stable. The one area in which captive agents hold a big edge over the independents is in their use of “other” types of insurance. This represents just 9% of the independents’ business (down from 26% last year) but accounts for more than 24% for the captive agents.

The notion that the independent side of the industry is more volatile and prone to change may reflect its greater exposure to the trends that are affecting the other major areas of the retail financial services business. The captive agent’s life may be relatively stable by comparison. It’s the independent agent that must grapple with growing competition from and opportunities in other parts of the industry. IE