Filed Under:Life Insurance, Life Practice Management

Making the leap from commissions to fees

Producer's Corner

Agents and brokers may believe it preferable to retain an insurance-focused practice, even if means lost business.
Agents and brokers may believe it preferable to retain an insurance-focused practice, even if means lost business.

In the January issue of NU, I reported that commissions paid to agents and brokers were increasing, reflecting an improving outlook for the industry. Carriers collectively doled out a combined $34.5 billion to agents and brokers in 2012, a significant 5.9 percent jump from the $32.5 billion paid in 2011.

Are life insurance and financial professionals who also make money from fees charged for investment advice and other financial planning enjoying a comparable increase in income? The question is timely, in part because many insurance professionals who are thinking about shifting to a fee-based practice are having second thoughts.

The key reason: fear of more burdensome regulatory requirements imposed on investment advisors by the Securities and Exchange Commission, FINRA and the Department of Labor.  To the extent that additional compliance costs (in both money and time) outweigh the marginal benefit to be gained from charging advisory fees, then agents and brokers may believe it preferable to retain an insurance-focused practice — even if means lost business for non-product-related services they could be rendering.

Indeed, new research from Cerulli Associates cites increasing regulatory requirements as a factor underpinning a recent rise in fees needed to offset practice costs. The report, “High-Net-Worth and Ultra-High-Net-Worth Markets 2013: Understanding the Contradictory Demands of Multigenerational Wealth Management,” flags greater compliance costs, in addition to expenditures required to upgrade enterprise infrastructures, as “the main motives” for increasing fees. Of the one-quarter of surveyed advisors who did so, about half boosted fees by 10 percent or less.

The other three-quarters of advisors who kept their existing fee schedules presumably took a hit to their bottom line to remain competitive. And in the high net worth space, where advisors are competing for business in a small pool of affluent investors, a few basis points in fees can make all the difference between winning and losing a client.

According to Cerulli, three quarters of asset managers catering to the high net worth market peg their minimum fee on assets under management (AUM) at one percent, while fewer than one-fifth of advisors charge between 50 and 99 basis points of AUM. The report observes, however, a disconnect between stated and actual fees.

“In reality, on average, high-net-worth providers actually impose a fee of just 51 basis points on all investors possessing greater than $5 million in investable assets. In other words, discounting among HNW wealth managers remains rampant.”

The report identifies an AUM fee range of 0.36 percent to 0.95 percent for client assets totaling between $1 million and $50 million-plus in assets, the fee varying in inverse proportion to the assets under management. Only when investable assets fall below $1 million do fees hit the 1 percent benchmark.

The makes sense: As investable assets grow, advisors enjoy economies of scale, enabling them to reduce the fee percentage charged to the client. And to the extent the aggregate AUM pie expands — resulting in more business, both in absolute terms and on per-client basis — then wealth managers can better offset increased practice management costs, compliance-related or otherwise.

So is the pie growing? In respect to mutual funds and ETFs— collectively a significant share of investable assets — the trend-line clearly is positive. As Cerulli disclosed in a November survey of U.S. product trends, ETF assets grew to $1.6 trillion from $1.5 trillion in October, representing a 4.8 percent increase, while attracting an additional $24.8 billion in net flows for the month. Mutual fund assets in October also grew, rising to $10.7 trillion from $10.4 trillion, a 2 percent gain.

All well and good. Yet the question remains: How can independent insurance and financial service professionals — competing for business not only among themselves but also against alternative distribution channels —capture enough in investable assets to make a fee-based practice worthwhile?

Alas, each advisor will have to make that judgment call alone.

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