Recruiter Confidential: Exploring the Underbelly of Insurance Broker-Dealers
by Jonathan Henschen, CFS and featured in advisorbiz.com
November, 2010:
My wife recently bought me a book that I’ve ve wanted to read for several years, Anthony Bourdain’s Kitchen Confidential. If you’re not familiar with Anthony Bourdain, he hosts the Travel Channel show No Reservations and is the former head chef of Les Halles in New York City.
Bourdain’s book looks at the underbelly of the culinary world as he reflects on his colorful, often drug-fueled life working his way up from dishwasher to head chef of a high-end French restaurant.
I’d feel remiss if I didn’t share some key information that Kitchen Confidential delivers in regard to the unknown dangers of eating out. Bourdain would never eat at a Sunday brunch because it is often the last stop before the dumpster for old food. If you’1re a fan of Sunday brunches you might want to reconsider. For example, the fish received on Thursday often times is used up at the end of a week in a seafood salad served at Sunday brunches. Another Sunday brunch favorite is Eggs Benedict. What many people don’t realize is that the hollandaise sauce is often times bacterial soup. Other throw-the-dice foods for your opportunity to bow to the porcelain throne include mussels, shrimp toast, and sushi (especially if on sale). Even vegetarians are at risk, with their tendency of contracting amoebas through uncooked vegetables and leafy produce. Bourdain’s final tips to keep you safe include; don’t eat at a restaurant if the bathroom or restaurant is dirty, or if there are few customers at the restaurant on a regular basis. And, be aware that restaurants recycle unused bread.
Bourdain’s book inspired me to do a similar exploration as a recruiter, to examine the unseen, sometimes secretive world of independent broker dealers owned by insurance companies. My first three years of recruiting were with insurance broker dealers so I have first-hand experience. I also drew from other recruiters who worked for insurance broker dealers to broaden my perspective. Here’s an inside view of the underbelly of some insurance broker dealers:
We Want You To Sell Our Products
Before FINRA adopted the mantra of “Sell what’s best and cheapest for the client,” it was commonplace for the insurance broker dealers to require a certain percentage of insurance product sold to be their proprietary products. Or, there would be a commission advantage in selling their proprietary product. No longer can they be so obvious in their intent, so they’ve become more subtle in their approach:
*Website – Proprietary products will be splashed all over the website but the competitive product options will not.
*Wholesaler Contacts – You’ll get visits from the insurance broke dealer’s wholesalers touting proprietary products at a frequency that may make your head spin. At the same time, they will likely restrict wholesalers of competing product from initiating contact with you.
*Conferences – Booths for proprietary products get center stage and speaking spots are dominated by them as well. You’ll probably never see booths for product companies that represent the primary competition.
*Recruiting – If you sell a lot of stocks, well, you’re just not a fit for joining the firm because, “we make our money on our proprietary products and that will never be a focus of someone doing mostly stocks. Besides, stock business is too risky.” One recruiter we talked to, who at one time recruited for a large insurance owned broker-dealer, said discussions with management about prospects in their pipeline always boiled down to, “How much insurance business did they do?” If their product mix was dominated by mutual funds, general securities or advisory, the firm’s interest would wane. Some of the insurance broker-dealers have branched out, having not only proprietary insurance products but also mutual funds and advisory programs. Still, the bias towards proprietary dominates.
We Are Experts at Finding Profit Centers
As a rule, all broker dealers have similar profit centers. In addition to mark-ups on ticket charges, there are administrative fees on advisory accounts, Errors and Omission Insurance, monthly fees, technology fees, postage and handling fees to name a few. The insurance broker dealers are different. They are industry leaders at inventing profit centers.
It was insurance broker-dealers that were the first to charge a $25 ACAT fee on Pershing to Pershing ACAT transfers, a sort of “we’re going to stick it to you for leaving us” fee. On Variable Universal Life Insurance (VUL), you may have a particular VUL product paying 90% commission on premium. However, at many insurance broker dealers, only 60-70% would be offered to the advisor, with the difference kept by the broker-dealer. This type of difference is peanuts compared to where they really differentiate “soft dollars.”
Large insurance broker dealers have a history of bleeding more soft dollars from product vendors than anyone else. For years we’ve heard complaints from product wholesalers about how much insurance broker dealers gouge product vendors for being on a focus list, to participate at their annual conferences, or for being part of high producer reward trips. Another recruiter who had a long history with a large insurance broker dealer, concurs. It’s obscene how much they take from the vendors for conferences, but then they divert a hefty portion of what is supposed to be used for those conferences into their general slush fund . If you were a product vendor, ethically, wouldn’t you expect the money to be used only for its’ intended purpose?
By Nature We Are Risk Averse
The nature of insurance companies is to be risk adverse. Owning something like an independent broker-dealer that can’t be measured by actuaries, with the potential of huge liability, drives them a bit crazy. You always see insurance broker-dealers supervise reps under an OSJ (Office of Supervisory Jurisdiction) structure as opposed to supervising the reps from the home office of the broker-dealer. The reason is simple: it puts more work and liability on the rep and less on the broker-dealer.
We’ve also seen a common pattern at insurance broker-dealers where they go from under- to over-compliant. The trigger for the swing in the pendulum is usually when they have to pay out large amounts in arbitration fines and/or regulators are breathing down their necks for lack of supervision. The result is a compliance environment that is 60% company policy and 40% regulatory requirements. This environment equates to excessive paperwork, compliance that is hostile to marketing efforts, and is restrictive in terms of doing products such as variable annuities (especially 1035 exchanges). Compliance approval timelines can be painfully slow and the environment generally caters to the lowest common denominator (everyone suffers for the sins of a few).
It’s Not Our Fault,They Did It
During the many years we’ve been recruiting, complaints about the clearing firm that the broker-dealer uses has always come from reps at the insurance broker dealer, without question. Why would that be you may wonder?
High service quality at a broker dealer is a primary result of low turnover, where you have a well established, consistent relationship between the clearing firm and key broker dealer operations personnel. That relationship between the clearing firm and key operations personnel is crucial to a functional back office where reps get their day-to-day business processed properly. If you have high turnover in operations, all bets are off and service problems ensue. Insurance broker dealers aren’t the only firms that have staffing issues with operations. However, they are unique in that when they do have service problems, they’ll tell the advisor the problem isn’t them, but the clearing firm. The clearing firm is used as a scapegoat for the broker-dealer’s dysfunctional back office.
You Don’t Have to Avoid All Restaurants, or All Insurance Broker Dealers
Bourdain would never suggest that all restaurant dining is ill advised. To bring a bit of balance into the picture, insurance-owned broker dealers have had and will always have their selling points. Having a household name and a deep-pocket parent company to fall back on brings comfort and security to advisors. For large producer groups, getting a 95-97% payout along with a fat sign-on bonus certainly has its allure. Transparency of the good, the bad and the ugly of restaurants as well as broker dealers helps us to avoid unexpected potential problems, be it shrimp toast or nine-page new client account forms.