Macro trends such as consolidation, convergence and the emergence of financial services supermarkets have reshaped the retail marketplace — and the insurance industry hasn’t been exempt. But amid all of these high-level changes, what emerges from Investment Executive’s 2007 Insurance Advisors’ Report Card is that the advisors on the front lines have changed very little.
Strategic trends may be leading the financial services business toward homogenization, yet the average insurance advisor is still overwhelmingly devoted to his or her bread-and-butter insurance business. Investments represent just a modest sideline.
For the 2007 Report Card, IE divided the insurance advisor population into two camps — those who are dedicated sales agents and those who operate through managing general agents — to reflect the different nature of their businesses. In past years, IE has observed that the independents tend to be slightly more experienced than their counterparts, generate more commissions and boast more assets under management but with much smaller client bases. The two sales forces also have different product mixes. This year, the research drilled even further into advisors’ practices, highlighting even more areas that distinguish the two sales forces.
For the most part, past demographic differences between the independent and dedicated sales forces were echoed in this year’s survey. The average independent advisor is more experienced — 49 years old and in the business for almost 18 years — vs 46 years of age and about 16 years on the job for the average dedicated agent. The independents are notably more mobile, too: they have been with their MGAs for less than 11 years on average, whereas the captive agents have been with their companies for an average of 14 years.
The practices these sales forces run are fundamentally different, too. In 2006, the average dedicated agent had a practice of about 1,450 clients, and just $12.3 million in AUM on the wealth-management side of his or her practice. By comparison, the average independent agent had $17.2 million in AUM last year, spread across slightly more than 520 clients.
This year, those numbers are generally unchanged, as is the fundamental split between dedicated agents and independent advisors. The average client roster for dedicated agents is down slightly to 1,435, and AUM has slipped to $11.6 million. Conversely, the independents saw some growth in their practices, with average AUM edging up to $17 million, as client rosters jumped to more than 620.
The starkly divergent demographics are reflected in what the two types of advisors sell, as well. The biggest difference is in the types of insurance. About two-thirds of the average independent advisor’s insurance sales are in some form of life insurance. Living benefits are a relatively small, but growing feature of his or her practice. Segregated funds, annuities and other types of insurance make up the balance of the business.
By contrast, the average captive agent has only about 35% of his or her business in life insurance (term and permanent combined). Property & casualty accounts for the single largest allocation, at almost 30%. This large allocation to P&C business among the dedicated sales force is not surprising, given that a couple of the firms in the category focus on this area.
This is the first year that IE’s Report Card has broken P&C business out from other forms of insurance, but it was always clear that P&C accounts for a much larger share of the captive agents’ custom than it does for the independents. So, while its impossible to directly compare P&C allocations year-over-year, the shift in other parts of advisors’ product mix is discernible.
Notably, the only product to see growth for both dedicated agents and independents is living benefits. For the captive agents, this segment rose to 8.3% of their business this year from 7.4% in 2006; similarly, the average independent’s use of these products grew to about 12% this year from 8.5% last year.
The mix of the independents’ life business also shifted toward permanent life and away from term products. Permanent life now accounts for almost half of the average independent advisor’s book (47%), up from 38.4% last year. Conversely, allocations to term life slipped to barely 21% this year from 25% in 2006. For the agents in the dedicated sales force, allocations to both major types of life insurance slipped year-over-year.
@page_break@The other notable product that saw its market share decline among both sales forces’ business is segregated funds. For dedicated agents, the move was a modest one, with average allocations sliding to 18% this year from 21% last year. The independents’ allocation to these products slipped even more precipitously — sliding to 13.5% from 22.5% last year.
This falling proportion of seg fund business seems to reflect the relative strength of overall insurance sales, as seg fund sales have reportedly been quite robust this year, mimicking the strength that’s been evident in mutual fund sales. Either that, or insurance agents are accounting for a declining share of seg fund sales relative to other parts of the retail investment industry.
Some of the other new data in this year’s survey — first-year commissions, reported by product — suggest that the former scenario is probably true. For the dedicated agents, seg funds account for about 19% of the average agent’s first-year commissions. For independent advisors, seg funds account for only about 6% of first-year revenue.
Indeed, apart from P&C business, seg funds are the smallest part of the average independent’s first-year commissions, edged out by money products, more than doubled by living benefits, and soundly trounced by the traditional life insurance commissions.
For the dedicated agents, P&C business generates the biggest portion of first-year commissions, with almost a third of revenue coming from P&C products. This is followed by life insurance, with seg funds ranking a distant third.
The significance of seg fund commissions shrinks even further if you extrapolate their share of first-year commissions to the total revenue mix. For independent advisors, first-year commissions are the single biggest source of revenue, at almost 60%, which means seg fund sales commissions account for only 3% of overall revenue. Renewals are much less important to the independents than they are to captive agents, representing on average only about 24.5% of revenue.
For the dedicated agents, renewals are the biggest source of revenue (43.8%), with first-year commissions coming a close second at 39.5%. (For more on compensation, see page 22.) The result is that first-year seg fund commissions shrink to only 7.5% of overall revenue.
Other transactions are the only additional significant source of revenue for both sales forces (accounting for 15% of independents’ revenue, and 12.5% of the dedicated agents’ business). Neither sales force does much fee-for-service or asset-based business.
To the extent that insurance advisors do sell investment products — such as mutual funds or wrap vehicles — mutual funds remain the dominant choice, accounting for 86% of dedicated agents’ use of other products and 61% of independents’. Neither sales force makes much use of proprietary managed products, but the independents do report a significant allocation to third-party managed products (more than 35% worth). Still, in the overall context of their businesses — whether these products count as transactions or asset-based revenue — they remain relatively immaterial to the average agent.
While there has been a blurring of the insurance and investment businesses in recent years, for most insurance advisors, the investment component remains a side dish; their traditional insurance offering is still the main course. IE