Do your own due diligence before switching MGAs

By Kate McCaffery | February 26 2015 09:00AM

It almost certainly doesn't feel that way for advisors making the switch, but of the different distribution paradigms an independent advisor might be aligned with or using, those moving their business from one Managing General Agency (MGA) to the next, would appear to have the most reasonable course to follow, comparatively, when getting their block of business transferred.Still, despite the existence of carrier-MGA contracts which prescribe buyout formulas, hurt feelings can often cloud the process.

Comparatively speaking, for any advisor with a clean record and solid clientele, moving from one MGA to the next should be a relatively straightforward affair. This is compared to the effort required when switching from one Mutual Fund Dealers' Association (MFDA) dealer to the next, where advisors need to meet with each client before their trailing commissions are reinstated, or, at IIROC (Investment Industry Regulatory Organization of Canada) brokerages, where the firm owns its client files. Some of these are known to divide these accounts up, and call each affected client within days, if not hours of a broker's departure.

Buy-out arrangement

In contrast, when an MGA advisor makes it known they are leaving for another MGA, most times the two agencies are then obligated to sit down and negotiate a buy-out arrangement, with the acquiring MGA cutting a cheque to the advisor's former processing partner.

"Carriers, most carriers, have a formula that dictates what the receiving MGA must pay to the losing MGA when an advisor moves. Some companies have no such obligation, but with companies such as Manulife, Sun Life, and Empire Life, those companies for sure have a formula (and an agreement) that says if the advisor goes, the block of business goes," says Rick Forchuk, distribution consultant with Empire Life.

Currently, those contractually outlined formulas require MGAs to pay a range between four and five times renewal commissions for life insurance business, depending on the carrier and the MGA contract in place. Although the numbers are prescribed, Forchuk also says MGAs are generally free to cut their own deals when negotiating for the business too.

"The acquiring MGA may say they're prepared to give two times, or three times. They absolutely have that right. Depending on how desirable the block of business is, the acquiring MGA could say (they're willing to pay) six times," he adds. "As long as it's done in a timely fashion, the two MGAs can make their own deal."

This practice, and its addition to carrier-MGA contracts is a relatively recent development, put in place following a period of intense scrutiny from regulators.

The heightened attention began after it was alleged, several years ago, that lax oversight on the part of MGAs was putting clients at risk.

"The spin," Forchuk says, "was that there was a missing link in regulation – that MGA organizations are unregulated, and they failed to properly supervise their agents. It really got the regulators' attention."

The resulting Guideline G8, approved by the Canadian Life and Health Insurance Association (CLHIA)'s board of directors, and the Canadian Council of Insurance Regulators (CCIR)'s 2012 position paper, Strengthening the Life MGA Distribution Channel, were both rolled out to address who would ultimately be responsible for agent oversight, and other, related responsibilities being pressed back and forth between the two at the time.

"They came to the conclusion that the MGA channel was ok. What was not ok, was the role carriers were playing in all of this – that the carriers seemed to be, in many cases, abdicating their responsibility."

As a result, carriers have spent the past two years reviewing their MGA contracts. Addendums to these often cover compensation, for example. Others now also stipulate the actions which must be taken when an advisor departs.

"There is an agreement (now) that clients follow the advisor," agrees Nick Simone, president of Qualified Financial Services (QFS). "That's really dictated by the carriers. Advisors are free to move to any MGA they like, right? The MGA they're moving from may slow down the process, but we're generally not worried about it."

As for letting advisors go, Simone says it's a business necessity for his firm to let producers leave on good terms, if necessary. "It's such a small industry, right?" In addition to future mergers which could occur, he says those leaving for greener compensation pastures sometimes come back, as well.

For those at the ground level, however, the experience is not so cut and dried, and certainly not without its surprises.

"I don't like to burn bridges, and I don't want to go out burning bridges, but they're burning bridges," Stacey Aarssen, executive planning specialist with Sentry Group says of the MGA her firm left recently to join QFS. "Just nasty emails. Very abrupt," she adds. "It was a business decision; we all make decisions to enhance our business, right? But they're taking it personally."

Ask questions

In looking at the options available, she says she was surprised to find out about the service being provided at some MGAs that she says she wasn't receiving at her own. "I didn't realize you could get more support. Half the time my sales rep would tell me 'You're supposed to go through your MGA for this.' They would still help, but I didn't realize that, a lot of times, I just wasn't getting that support," she says.

Some questions she recommends advisors ask of their prospective new partners:

• What do you do for support?

• How many support staff do you have?

• What's the process when placing an application?

• What happens? Where does it go? Who handles it?

• How many people do I need to deal with, personally?

"Do your own due diligence," she says. "You don't know what you don't know. I had no idea what was available."

The rocky road to changing MFDA dealers

In moving his own MFDA practice from a bank-owned dealer to PEAK Financial Group, advisor Ray Black says his former dealer was decidedly slow to process account transfers. He found commissions were cut off for him, almost immediately.

The firm also sent a notice to his clients the next day, to say Ray Black was no longer with the company – a note which made it sound like he had left for Florida.

"The MFDA says clients need to be serviced, or they need to go over to another representative that I agree too. I had one I wanted. They didn't like it, so they recommended another agent," he adds. "They say we own our clients. If you decide to leave though, you don't."

He says the experience was difficult for clients as well. Departing agents have no access to client accounts to answer questions mid-transition, before the KYC re-papering process is complete. "The client can have a lot of anxiety because of the way we need to do things."

Although MGAs have been almost mandated by regulators, and by their carrier contracts to respect the advisor-client relationship during such transfers, mutual fund companies do not appear to have the same responsibility or inclination: The Investment Funds Institute of Canada (IFIC) says advisors switching firms is not an issue the organisation has been involved in. IIROC rules, meanwhile, say client consent is required for accounts to be transferred to another dealer member; its Dealer Member Rule 39 also says the books and records related to a client accounts are the dealer member's property, not the advisor's.

Black estimates it took roughly 600 hours, not including those put in by his assistant, or by those helping him at Peak, to get 95 per cent of his business transferred to the new dealer. Given the opportunity to do things again, he says he probably would've waited another year to get things in order.

"I would have found out more about how the transitions go. Still," he adds, "you're never really ready."

Ray Black wrote about his experience in a letter to the editor published in the November-December 2014 issue of The Insurance and Investment Journal. To read more go to: