MGAs boost commissions as competition for top advisors intensifies

By Carine Sroujian | June 20 2004 01:54PM

The competition between managing general agents (MGAs) to entice top insurance and financial advisors is heating up. The main reason: increased volume requirements from insurance companies. Many MGAs are upping their compensation scales to lure new blood. As a result, the service oriented MGAs are feeling the pinch.

There are a number of insurance companies right now that are offering more compensation to the MGA for higher volumes, reveals Sam Albanese, president of Albanese Financial Group.

“If you write a higher volume of business you get what I call a super MGA bonus. Because of that, some of the MGAs are now saying in order to get to that level, I’m going to have to pay out more money to my broker to get that business.”

He states that this is a very dangerous precedent and that agents are already being paid substantial amounts for their business. “The MGA is paying out larger sums of money just to make sure that he maintains those contracts, hoping it will reach the higher levels and therefore get a super MGA bonus, and of course he gets higher service fees because he’s got that much more volume. This is the trend right now which I find very disturbing. I don’t think it’s a very healthy way to grow the business. We’re buying business rather than earning the business.”

Mr. Albanese says he firmly believes that the insurance companies should take some responsibility for the payouts. “Many brokers are getting far too much money for the amount of business that they do. But, I have no choice. If the other MGA is saying come with me and I’ll give you a 170%, I don’t want to lose you because I need to satisfy my contracts so I say I’m going to have to cut somewhere else and pay the agent a certain amount of money.”

He says he knows of a situation where the advisors are getting the entire 200%. “And the MGA is hoping that through the volume, he’ll be able to get a super MGA bonus at the end of the year. But if it doesn’t happen, then you’re out.”

Joseph Pettinicchio, president of iForum Financial Services, explains that it is mostly the newer or smaller MGAs that are paying higher amounts to advisors in order to at least guarantee a certain amount of volume that will protect the quotas they need to meet.

“Is it healthy? I don’t know. From a bottom line perspective, it squeezes their margins dramatically,” he exclaims. “The whole industry is changing; there are fewer insurance companies, they’re increasing their minimums, and when they increase their minimums, they increase their quotas. They put their pressure on their MGAs to increase their volume. How are they going to increase their volumes? They have to go attract other representatives. How? By paying them more,” he concludes.

Raising book value

Since the buying value, or multiple, of the MGAs can be based on the number of in-force business, MGAs are offering higher compensation – sometimes to the point that is harmful to their bottom line – to attract advisors, explains affirms Mr. Pettinicchio.

“The more in-force business you have on the book at the time you want to sell,” says Mr. Pettinicchio, “the higher price you can command.”

Mr. Albanese, however, says that although this is going on, the buyer will do the necessary due diligence and look at the payouts. “They’re going to do their own homework and they’re going to say based on these payouts, ‘we can never make any real money, we’re never going to get a good return on our investments.’ I caution that because sometimes that could actually defeat the MGA trying to sell.”

Moving for money

Advisors seeking higher payouts are now negotiating ridiculous numbers for the very small amount of business that they provide, adds Mr. Albanese. “Most of the movement that happens is because of compensation; let’s be realistic.” He questions that if both MGAs have the same carriers, why else would the advisor be motivated to move?

Mr. Albanese remembers one situation when one of his advisors was offered 190% commission. “I get 200% [in that case] so how can I possibly pay 190% and at the same time expect to deliver the services that you want me to deliver. His statement was typical: ‘What do I care? That’s your problem Sam, that’s not mine.’ He left and got the 190%.”

Mr. Pettinicchio affirms that since the law allows an advisor to have contracts with different MGAs, they definitely shop around for a better payout. He says the way they usually proceed is by leveraging the price competition by negotiating with both MGAs. The advisor goes to an MGA and asks it for the highest compensation it can offer without any intention of joining, then returns to his MGA to inform it of the better deal. So it’s an “either match it or I leave” kind of situation. Most of the time, the MGA concedes.

He says it is difficult for an advisor to simply move to another MGA based only on compensation since most MGAs will not allow him to move his book of business. “It could be a five point difference from one MGA to another on the bonus, however I don’t think it’s the deciding factor for an individual agent to determine which agent they will deal with. It’s one item in the decision,” explains Mr. Pettinicchio.

Mr. Albanese adds that some advisors who want to consolidate their business with one MGA are also asking for higher payouts. “We’re saying, ‘if I’ve got all the companies you need, why do you want to sprinkle your business throughout three or four MGAs? Why don’t you do it all under one roof?’ But, the agents are saying, ‘if I’m going to give you all of my business, then I expect a higher payout.’ That’s one phenomenon that’s been happening.”

He says that in the long run, this practice is not feasible. “It’s a problem because the MGAs are getting squeezed. The younger ones are the ones that are suffering the most because you can’t forever sustain your business on tight margins.”

The more established MGAs, continues Mr. Albanese, which already have a large amount of in-force business can afford to pay more for new business because “that’s just on top of what they’re already making.”

Mr. Albanese stresses the difference between producing MGAs and marketing MGAs, and “the insurance industry has yet to recognize the fact that these are two very different organizations and that there exists an unfair advantage.… The agent that I lost, I lost to a personal producing MGA.” Mr. Albanese has lost eight agents in the last six months to personal producing MGAs that were offering higher compensation.

Jim Britton, senior vice-president of insurance operations at the MGA Partners in Planning Financial Services (PIP), says PIP recognizes the differences between the two types of MGAs. The MGA has an à la carte grid which allows an advisor to choose the services they need and pay for it accordingly.

“We don’t have one-size fits all because a large producer group might come to us with a full back-office, support staff…they don’t need extra service therefore we put more money back on the table to them. If you require marketing, it costs you one or two per cent of gross revenue. If you require processing, it might be two and a half to three per cent of growth. We actually show them the menu and if they do not have the facility to set up what we want them to do so they just keep walking down until our grid matches where they’re at in the their business cycle.”

Mr. Britton says PIP is not in a bidding war with producing MGAs. “They’re offering top dollar to try and recruit friends, acquaintances, people in the industry to help satisfy the contract volume, but MGAs that are more like career agencies are offering marketing, IT, personal touch and support from a group of staff.”

Mr. Albanese says he would like to believe that his company’s other services are what drive an agent to stay with that MGA, but unfortunately that is not reality. “If an agent made $50,000 worth of commission last year and if he goes across the street and the MGA there is going to give him 20% more, that means $10,000 more than what Sam is paying him. Even though Sam is giving him the online system, all the marketing support, is it worth $10,000? He says $10,000 is better in my pocket so off he goes. We have a real problem in trying to compete. We chose to be a much larger marketing type of organization, but there are many small MGAs who have one or two contracts, whereas we have nine.”