BICE Distribution Partners- Which DOL "Financial Institution" Will You Choose?

For well over 15 years, I’ve been an industry wholesaler for some of the most recognized insurance companies in the industry. I’ve engaged every distribution type or channel and I’ve seen numerous regulatory changes and industry distribution adaptations throughout my career. Like many of you, I too have closely been following the annuity market and certainly the ‘back and forth’ predictions on how the Department of Labor Fiduciary Rule was predicted to play out. We now know!

 It has been well reported that FIA sales last year exceeded $60 billion and with estimates well over $25 trillion currently sitting in retirement account, 401k, 403b, Defined Contribution Plan, IRA’s, etc., there is no wonder insurance/investment companies are scrambling to position their company and products in hopes to garner their piece of the investment retirement pie and if all possible the entire pie. 

Candidly, in today’s markets product development and innovation is challenging. One of the few “innovative” features left is the restructuring of expenses and fees. Other than going direct to the consumer and bypassing advisors entirely, the easiest ways for insurance/investment companies to reduce fees and expenses is to obviously restructure sales charges and compensations within the products. In other words, “the sandwich is being taken from the mouths of those now fiduciarily responsible for selling products manufactured by insurance companies. Interesting- “is the car dealership responsible for poorly manufactured airbags that fail upon impact?” Talk about irony. As they say… it is what it is… and nothing more we can do about it. 

 Let’s not kid ourselves. For years, insurance/investment companies have looking for ways to level or reduce compensation: not just in annuities but with most insurance and financial services products. Therefore, regardless of whether the DOL Fiduciary Rules was going to move forward or be shelved by the Trump Administration, the “Jeannie” was out of the bottle. These companies felt the time was now right to revamp the annuity portfolios and products in ways more in-line with their compensation and distribution philosophies. This is evident, by the fact several leading carriers had been in product development and recently released products specifically designed around the fiduciary model without a 100% certainty the DOL Rules was indeed moving forward.

 Many distributors, producers and industry pundits have expressed diverging opinions or perspectives mostly on how the rule will have an impact to the advisors and independent insurance agents. What I haven’t noticed in industry publications, blogs, white papers, etc., is the impact the DOL rule will have on Brokerage Generals Agencies (BGAs) Life Insurance Independent Marketing Organizations (IMOs), Field Marketing Organizations (FMOs) and intermediaries. It is these organization that directly support advisors and independent insurance brokers throughout the country. The biggest challenge the DOL Rule will have for many of these distributors will be gross compensation, in the form of, overrides or allowances. Contrary to popular belief, to receive overrides and or allowances is not a Pyramid Scheme or a way to make fat cats fatter. It is those overrides or allowances that provides the financing to provide administrative, back-office, internal and external sales support to their distribution. If the margins are not enough to justify support, those firms will lose not just annuity sales but sales of other product. Some firms may be willing to consider annuity sales as a loss leader in hopes to acquire distribution and sales of other financial services products. That will be a difficult business decision. For all the perceived negative impact the DOL Fiduciary Rule will have on advisors and the distribution, there is also positive impacts as well. 

 I believe for a select group of forward thinking distributors, I’ll call BICE Distribution Partners (BDP) there is a once in a lifetime opportunity to provide a real value proposition that goes well beyond the aggregation of production. That value proposition for these BDPs will be to position themselves as guardians of the industry providing fiduciary guidance and Self-Regulating oversight much like FINRA provides within the securities industry. It will be better for the industry to get ahead of this issue now for although the DOL Fiduciary Rule came about through ERISA and currently only addresses qualified retirement investible assets and/or accounts; it will most certainly have an impact on all annuity sales producers and eventually even life insurance sale and producers throughout the country. With all the Self-Regulatory weight these BICE Distribution Partners may take on, they will also reap significant rewards in their ability to have more control to an otherwise independent distribution group.

 Here is how. We know via Insurance Intermediaries application memorandum 29 CFR Part 2550 [Application No. D-11926] ZRIN 1210-ZA26 there are a limited number of Independent Marketing Organizations (IMO) that have been recognized for “Financial Institution” designation by the U.S Department of Labor (DOL) under the Best Interest Contract (BIC) Exemption. 

 The distinction between the new “BICE” IMO defined as Financial Institution for DOL and more traditional Life Insurance IMO’s, such as BRAMCO, LIFEMARK, Insurance Designers of America, etc., is traditional IMOs came to exist through supply and demand and demutualization, carrier downsizing and eventual dismantling of long standing career distribution groups. The truth is, those distribution groups were costly and highly ineffective in how they created and distributed product in the evolving “boomer” markets of the 1990’s and continues through to this day.  The mass exodus of those career agents along with the attrition of producers facilitated the expansion of the Life IMOs and BGA distribution model. Traditional IMOs and BGAs filled the void brought on by “supply and demand”. Agents needing supply of carrier access and products and the IMOs fulfilled the demand of carriers to distribute product through “herding”, recruiting, training and marginally supervising producers.   

 Ideally this model for distribution was to allow both parties to mutually benefit from the relationship. Insurance companies would benefit by mitigating distribution and marketing expenses and the IMOs would benefit by aggregating producer production for significantly higher gross compensation and bonus payout. Unfortunately, the relationship started to fall apart when producers learned to play the “leverage” game and ‘shop’ commissions between various IMOs and BGAs. Over time, insurance company production requirements for top level agreements increased, products became commoditized, producers were no longer taught or forgot how to sell insurance and overrides/margins to these IMOs and BGAs shrank. The down and dirty was, often, in the world of independent distribution, production was driven by price, underwriting and compensation. Of the three, compensation led the pack. In a world of “what’s in it for me, these organization garnered little to no loyalty from producers regardless of support levels.

 Now that the Fiduciary Rules will go into effect January 2018, the way in which products will be distributed in the independent brokerage market place will forever change. Unlike how traditional IMOs and BGAs entered the game in the 1990s and whereby producer utilization was voluntary and mostly based on compensation, the BICE IMOs evolution and producer adaptation will be mandated and required for any producer supporting, servicing or selling of products within the qualified retirement market place. This significantly changes the playing field. I submit that since a BICE Distribution Partners (BDP) must be selected, I find it highly unlikely he/she will move from one BDP to another since compensation will no longer play a role and these firms will have access to the same group of carriers.

 Since most of the BICE Distribution Partners also support other financial services product lines, I am concerned for those traditional IMOs and BGAs. Yes, many are in the twilight of their careers and looking to merge, consolidate, sell or retire. For those remaining and looking to align their distribution with one of these BICE “Financial Institutions” I fear their producers will circumvent their efforts and go direct to one of these BICE Distribution Partners. By circumventing the traditional IMO or BGA, there will be no hierarchical protection and give card blanch to the BICE IMO to recruit the IMO and BGA producers for other insurance and financial products which the firm supports. Therefore, as their annuity business goes, so goes other business such as life insurance sales. 

 Plus, from a producer’s perspective, why would he/she not want this to occur? After all, how could they possibly defend a conflict of interest litigation suit brought against them resulting from a life insurance sale if they are doing business with an IMO or BGA that doesn’t provide fiduciary oversight? The industry will start seeing E&O underwriters adjust liability limitations to address the new DOL fiduciary definition and oversight requirement to all financial services products being sold by independent agents and brokers.  The advantage in recruiting and producer retention, once this adaptation occurs, will go to the BICE IMOs and traditional IMOs and BGAs, unless they adapt, will most likely die on the vine.

 From now until January 2018 and possibly into the following three-four months (Tax time) of 2018, there is a window of significant opportunity that exists for a handful of the newly formed BICE IMOs to acquire, capture and retain distribution. However, there is a Catch 22. Since the latest DOL announcement to move forward with the Fiduciary Rules, many annuity wholesalers and firms have been conducting webcasts pertaining to the DOL Fiduciary Rule. Some are partnering with carriers while others are looking to one of the BICE IMOs to co-present the events. On the surface, this seem like the best thing to do. However, over the last several years, webcasts have become mundane and subject to multi-tasking producers with attention spans of a gnat. Most neither engage or participate and treat the presentation as if they were attending a mid-day Rocky Horror Picture Show. To be fair, most company wholesalers and Marketing organization also do a terrible job following up with attendees and many attendees have little to no interest in being contacted. 

 Over the next several months, there will be an ever-closing window of opportunity for these BICE Distribution Partners to bring on existing producers. The day of broadcast, blanket shotgun marketing and the use of over utilized webcast presentation is over. And, to simply have access to products and provide periodically updates and the never-ending emailing of newsletters and carrier propaganda will no longer be enough to attract and retain distribution. Here is what we’ll see happen. Marketers will push out all types of traditional campaigns, DOL 'updates' and attempt to target key producers already appointed with their firms. Without a doubt, there will be many situations whereby one BICE marketers will contact a producer who happens to represent a company such as Athene while another BICE marketer may contact the same producer that might represent Allianz.  Knowing these organizations will have access to the same group of companies, providing the same level of compensation, and also knowing producers wait until the very last minute to make decisions, it will be interesting to see which BICE Distribution Groups come out on top.

 I have some ideas of which will win and which will win “less”. The big winners will be those BICE organizations with strong critically thinking internal/external field support, state of the art web-based cloud technology, Virtual marketing, diligent and thorough contact management platforms, exception document retention policies that can withstand fiduciary oversight and a strategic marketing plan that can successfully Identify, Target, Negotiate and most importantly, RETAIN quality producers, will be those firms that survive in the long term.  

 Which BICE Distribution Partner Will You Choose?

Pulling Back the Curtain on Brokerage