By Chris Flint
With the wave of industry consolidation over the past year, I’m frequently asked: “Is the insurance company-owned broker-dealer model dead?” This is because many simply assume that such firms operate as product distribution divisions for their parent companies—a characterization that hasn’t been true for some time—and therefore cannot offer the flexibility and client focus that are the true hallmarks of the independent channel.
So my reaction to this question is always, “who cares about ownership structure?” As long as firms deliver a world-class service experience to their clients, they will remain competitive, regardless of the regulatory environment or whether ongoing consolidation trends continue.
Independence: What It Means, and What It Doesn’t
The abiding image of an independent firm in our industry is one that focuses solely on enabling the delivery of financial advice, with no incentives to distribute proprietary products or services. But this image doesn’t match reality. Indeed, nearly every so-called independent firm today delivers proprietary offerings or services of some kind, including model portfolios built by in-house asset management strategists and investment banking services that give clients access to their own private placement deals.
The bottom line: Neither a firm’s ownership structure nor the presence of “proprietary solutions” impact a firm’s ability to enable independent, conflict-free financial advice. Successful insurance-owned broker/dealers know this and have been building their businesses on this principle for years.
That said, there’s no question that the landscape is changing, with the demands of the fiduciary era forcing such firms to take stock. Here’s what to keep in mind when thinking about the future:
- Optional Versus Default Proprietary Offerings
Does the firm provide diversified products and services that go well beyond its own proprietary offerings or those of its parent company? While there will always be cases when the best solutions for a client’s needs are proprietary products, in a post-DOL rule environment, it will become increasingly time-consuming and costly to provide documentation that demonstrates such recommendations are in the client’s best interests.
Insurance-owned firms overly dependent on a parent company’s proprietary solutions—in excess of 10 percent of total revenue—will face head winds over the long term, since those may end up costing more than they produce. On the other hand, insurance-owned IBDs that don’t rely on proprietary offerings as a default approach could be well-positioned to thrive.
- Leveraging Risk Management Insights to Drive Holistic Planning
This is an especially important competitive differentiator for insurance-owned IBDs, because firms that started as part of a broader insurance organization frequently offer an in-depth understanding of risk management and long-term portfolio construction that other firms struggle to match. By systematically translating these insights into actionable client recommendations and strategies for their advisors, such firms can expand their client service models beyond product sales and into holistic financial planning that seamlessly integrates downside contingency planning. Enabling the creation of financial plans with robust risk management components, therefore, represents a distinctive value-added relative to much of the rest of the industry.
- Emphasizing Advisory
Of course, there’s no getting away from the fact that success in the fiduciary era will depend on the ability of independent firms and their advisors to continue to transition away from transactional business and toward the advisory model. Any insurance-owned IBD that has successfully transitioned to having at least 40 percent to 50 percent of total annual revenues driven by fee-based advisory work is in a solid position for continued success. This is especially the case if the firm is actively encouraging advisors to commence each engagement with a customized financial plan. By the same token, any firm—insurance-owned or otherwise—whose total revenues are skewed toward more than 60 percent commission-based business is going to find it challenging to survive.
The insurance-owned IBD model is no more inherently doomed to extinction or destined for success than any other sub-segment of the IBD industry. Broadly, success in the independent financial advice industry going forward will be driven by independent advisors who lead with fee-based solutions under a customized financial plan.
Based on this, one conclusion that could be drawn is that firms backed by well-resourced owners—whether these are successful product manufacturers or deep-pocketed private equity firms—may have a distinct competitive advantage relative to “stand-alone” b/ds going forward. In other words, fixating on whether a firm is owned by an insurance company or any other specific product enterprise, misses the point of independent advice entirely.
Chris W. Flint is President and CEO of ProEquities, Inc., the independent broker-dealer and RIA headquartered in Birmingham, Alabama.