Competition on overrides is coming to an end

By Alain Thériault | March 06 2017 08:30AM

Yan Charbonneau

The Managing General Agency market can no longer compete on the basis of the highest bidder. Competition on bonuses offered to advisors is becoming increasingly rare. Instead, firms look to build long term partnerships.

Kevin Cott, CEO of MGA Qualified Financial Services (QFS), says the lack of profits in the MGA channel is caused by many factors. “MGA’s that operate with low volumes, low margins and high costs are those for which profits are down. It doesn’t mean that if you offer higher overrides, you’ll be less profitable, it depends on the other factors of costs and volumes as well. Lack of profitability is not necessarily related to high payouts,” he said in an interview with The Insurance and Investment Journal.

He says an MGA can very well pay for high commissions while remaining profitable. “If you try to compete only on overrides, you’ll lose. If you try to be attractive to advisors in other ways, other than solely on compensation, and bring them value in terms of services and support, you can pay competitively and still be profitable,” said Cott.

Playing a losing game

Michael Williams, CEO of BridgeForce Financial Group and president of CAILBA, the MGA association, does not believe the role of MGAs is reduced to paying high bonuses on commissions. “We are a value adding organization. It’s all about the relationship we have with our advisors. We believe that having a strong relationship with our advisors by helping the advisors with their business is very important to us. That’s how we compete. Anybody who’s competing on overrides is playing a losing game,” he said.

Michel Kirouac, vice-president and general manager of Groupe Cloutier, and member of the CAILBA board, says, “If you gain an advisor on pay alone, you will lose them based on pay. This can come at a heavy price.”

Transfer costs

There is a price to gaining a new advisor, and a price to losing one, he explains. Gaining a new advisor requires significant initial expenses. Among these expenses are fees related to transferring from one MGA to another. “When it comes to life insurance, the MGA gaining a new advisor’s business has to invest to buy the volume and renewals from the other MGA. As for mutual funds, block transfers are no longer possible. Transfers are done on a client-by-client basis. If your back office system is not the same as that of the previous MGA, you have to transfer the data from one system to another. You will have to teach the advisor’s staff how to use the new system,” he says.

Changed the rules of the game

Insurers have changed the rules of the game since the 90s. In Quebec, MGA networks used to be more “everyone out for himself”, recalls Yan Charbonneau, CEO of Groupe AFL and treasurer of CAILBA. “In the 90s, there was a bonus war. Insurers had enough of this. They implemented a price on transfers. When an advisor changes MGAs, the new MGA has to pay the other five times the overrides,” says Charbonneau.

Groupe AFL works hard to recruit advisors who will stay with the company. “The war of 5 per cent more in overrides than the other MGA is over. I will not play this game that kills profit margins,” affirms Charbonneau. The small MGA with one or two direct contracts and gives a 95 per cent bonus instead of 90 per cent does not send out a good message to the market. Now, Quebec MGAs communicate more among themselves. When I joined CAILBA, I realized MGAs from out West had been communicating with each other for a while.”

Preserving market share

However, certain small firms continue to risk their margins to pay more. “This has always been a problem. The more players there are, the more they try to have their piece of the pie…There is still competition on overrides and that can be seen particularly among smaller MGAs looking to keep their share of the market,” says James McMahon, president of Financial Horizons Group in Quebec.

“Of course there will always be a bit of negotiation among advisors and MGAs, but the Quebec market is quite mature. Advisors understand we have become organisations that offer more services, and that we need to keep a profit margin to offer these services,” explains McMahon. MGAs that compete on overrides are not sustainable in the long term.

Compensation grid

Offering more must meet profitability criteria. When Kevin Cott said it is possible to offer more while remaining profitable, he was referring to what MGAs call a compensation grid.

Many MGAs work with such grids. James McMahon explains that an advisor will find himself at one end or the other of this grid according to the amount of business they bring to the MGA, or the level of service they require. “For example, an associate MGA that sends another MGA all their business from an insurer with whom they have no direct distribution contracts will get a higher bonus,” says Mr. McMahon. Same goes for an advisor surrounded by a team who takes care of all the business himself. “If all we have to do is send applications to insurers, we work less,” he explains.

Michel Kirouac is aware advisors may push for higher compensation. But to him, offering more to one than another is out of the question. "We avoid making exclusive or specific deals with one advisor, without thinking of the others that are in the same category according to our grid. How could I justify giving more to a someone new who produces $200,000 than someone who has been with us a long time who produces as much as him,” says Kirouac.

Certain MGAs, and not just small ones, will sometimes offer bonuses that may appear unreasonable, says Kirouac. But these can be explained by other factors. “I’ve seen large national MGAs offering very high bonuses to advisors that they want. Some advisors do not require much support because they are well equipped. They can enable MGAs to get a high volume of additional premiums without a problem, and without affecting their profit margins,” he says.

Groupe Cloutier tries to maintain a balance between support, tools for advisors and compensation. “It is rare that we lose an advisor based on pay, maybe up to one per year out of 1500,” says Kirouac. He adds that his organisation prefers to obtain volume growth by helping advisors raise their profits significantly.