FMO Q&A

October 23, 2019 by Sheryl J. Moore

Over the past couple of decades, I have had the pleasure of working with hundreds of FMOs. These distributors drive innovation in product development, have the ability to command sales, and help the independent agent in their quest to best-serve their clients.

I am not just the lady that keeps their secrets; I am also the woman who helps outsiders to understand their role in the insurance business. I help introduce them to key stakeholders, listen to their concerns to help shape product development, and serve as their voice in regulatory matters.

Historically, as much as 97.40% of indexed annuity sales have originated through this distribution. Today, just shy of half of all sales are attributable to FMOs. However, that half is a heck of a lot larger piece of the pie than the $10 billion they were credited with in 2002. Most recently, FMOs’ market share was a whopping $18 billion of 2018’s indexed annuity sales.

A lot of new insurance companies have recently shown interest in the indexed annuity market. (Welcome to my hood!) Variable annuity sales are waning, and with fixed interest rates at historical lows, insurance companies aren’t able to shift the assets to the other side of the house with fixed annuities. Indexed annuity sales continue to grow to record levels, and that has a lot of folks’ attention.

Still many more insurance companies have shown interest in entering the FMO distribution for indexed annuity sales, specifically. So many of the existing indexed annuity underwriters selling through banks and B/Ds have seen that the key to increasing their sales is to leverage the FMO distribution, which is synonymous with indexed annuities. As a result of the many questions I have received about this distribution, I thought I’d drop some FMO knowledge this week.

Q: WHAT IS AN FMO?

A: A “FMO” is a Field Marketing Organization. The FMO serves as an intermediary between the insurance product manufacturer and the insurance salesperson.

In a traditional career/captive agency distribution model, insurance companies not only develop life/annuity products, but also recruit new agents, get them licensed, provide them with training, continuing education, sales ideas, and more. Over the past few decades, many insurance companies have found this distribution model to be expensive; career agents are often paid base salaries, provided benefits in addition to strong training/support, and the agent retention rate is less than 15% at the end of a three-year period.

As a result, insurance companies have been steering closer to the independent agent distribution model, where they have the ability to dramatically reduce their expenses by serving only as a product manufacturer. In this model, the responsibilities of recruiting, licensing, training, and supporting salespeople is subcontracted-out to a third-party intermediary. These functions are typically served by Brokerage General Agencies (BGAs) or Field Marketing Organizations.

Q: IS THERE A DIFFERENCE BETWEEN A BGA AND AN FMO?

A: Yes.

In short, both BGAs and FMOs are distributors in brokerage distribution.

However, the differences between the two types of brokerage operations include the general product line offerings, level of back office work, demographics, number of contracts, sales distribution, and business methodology.

Q: WHAT IS THE DIFFERENCE BETWEEN A FMO, IMO, NMO, AFMO, ETC.?

A: These are all different ways of referring to marketing organizations.

The generic terminology that I use is “FMO,” which stands for “Field Marketing Organization.”

The IMO acronym stems from FMO distribution in the late ‘90s/early ‘00s, and trying to differentiate if the distributor is owned distribution (four insurance companies owned FMOs at that time, one of these insurance companies was/is the top seller of indexed annuities). Distributors adopted the “IMO” acronym, in an effort to communicate to recruits/agents that they were independent, and that salespeople needn’t be concerned about the corporate ownership swaying the product suggestions of the distributor.

A “NMO” is a National Marketing Organization; again, just another name for an FMO.

An “AFMO” is the terminology used to communicate an FMO that is in the hierarchy of another FMO, per some companies’ contract levels. Or, just a lower-level FMO, in terms of the contract with the product manufacturer.

Q: WHAT DO YOU MEAN BY “HIERARCHY?”

A: A hierarchy, in general, is a ranking. In the simplest FMO relationship, the insurance company product manufacturer is appointed with an FMO, who has an appointment with the salesperson, who sells the indexed annuity.

However, that is a very unrealistic example, given that there may be five (or more!) different FMOs in the hierarchy between the insurance company and the salesperson.

Q: WHY WOULD THERE BE SO MANY DIFFERENT LAYERS OF FMOS IN A SINGLE ANNUITY TRANSACTION?

A: This is attributable to something called “stacking,” which I will not elaborate on here.

Q: IS FMO SYNONYMOUS WITH “INDEPENDENT AGENT DISTRIBUTION?”

A: No. Some companies sell through independent agents, without using a third-party intermediary such as an FMO or BGA.

This is referred to as an “agent direct” model; Jackson National is the most noteworthy example of a company that distributes indexed annuities through this method.

Q: HOW ARE FMOS’ RECRUITING EFFORTS DIFFERENT THAN CAREER AGENCY INSURANCE COMPANIES’?

A: The difference is night and day. I won’t elaborate here.

Q: WHY DOES THE AVERAGE SALESPERSON HAVE NUMEROUS FMOS?

A: FMO A has a [special software program]. FMO B has an annual trip to [Ireland]. FMO C has a [special contract with an insurance company that pays agents a bonus on aggregate annuity production at the end of the year]. You get it.

Q: WHY HAVE SO MANY FMOS RECENTLY BEGAN OFFERING PRODUCT DEVELOPMENT SERVICES TO INSURANCE COMPANIES?

A: One of the biggest challenges for FMOs is standing-out amongst their 300+ competitors. Having a unique product to recruit to has helped that endeavor for many distributors.

Historically, FMOs have lent insurance companies product development assistance through three different methods:

• KINDNESS OF THEIR HEART APPROACH: FMO has a great product idea, which they could sell a lot of, and gives the idea to a product manufacturer in exchange for nothing but goodwill (note that I cannot recall the last time this happened);
• NATIONAL OVERRIDE APPROACH: The FMO has a great product idea, and shares it with the product manufacturer in exchange for a small percentage of all sales of the product, regardless of which FMO the sale originates from; or
• PROPRIETARY PRODUCT APPROACH: The FMO has a great product idea, and shares it with the product manufacturer in exchange for a larger percentage of all sales of the product and the availability to limit the product availability to be exclusive to their own agents (at times, temporarily).

It should be noted here that the latter has become so popular that many FMOs have their own pricing actuaries in-house.

Many FMOs have significant market share, and can bring distribution if an insurer needs help meeting sales goals. At one time, the FMO with the largest market share in this industry commanded nearly 10% of all indexed annuity sales! This is very attractive to some insurance companies looking for immediate distribution and the idea of “guaranteed success” in sales (note that proprietary products do NOT actually guarantee success in sales).

That said, channel conflict is a very real problem when it comes to proprietary products. If an insurer underwrites a product that is seemingly-supreme, whey wouldn’t they make it available to the national/general distribution? I assure you that when the general distribution finds out about such a product, they will want a satisfactory response to this question. This issue continues to be a challenge for many product manufacturers, despite the fact that proprietary products have become commonplace in the indexed annuity market.

Q: IS THERE A LIST OF FMOS?

A: Yes, I have a list that has been carefully cultivated over the two decades I have been in this business.

Ultimately, the decision to do business with FMO distribution is one that comes with tremendous benefits, and some serious costs. For those insurance companies exploring a dip into the FMO channel, it pays to know what you are getting into.

Sheryl Moore is President and CEO of Moore Market Intelligence, an indexed product resource in Des Moines, Iowa, as well as the life and annuity market research firm of Wink, Inc. Her companies provide competitive intelligence, market research, product development, consulting services and insight to select financial services companies. She may be reached at [email protected].