Valuation of Marketing Organizations
March 1, 2013 by Sheryl J. Moore
The past four or five years have been a major struggle for distributors in the life insurance business. The collapse of our nation’s economy, while catastrophic, was only the first domino in a vast Rube Goldberg Machine of economic destruction. Capital became scarce as the smoke cleared, causing insurance companies to pull back on their product offerings. The resulting mismatch between the supply and demand of fixed and indexed annuities was frustrating; never before was there such a demand for the products, but there were so few companies that wanted the business. Shortly thereafter, interest rates began a rapid downward plunge. The ten-year treasury, a major benchmark for pricing fixed and indexed annuities, fell from just over 4.25% in mid-2008, to a low of just under 1.50% a mere four years later. As a result, fixed annuity rates dropped from an average rate of 5.43% to 1.51% over the same period.
This chain of events has resulted in many Field Marketing Organizations (FMOs) questioning why they are still in this business. Surprisingly, it’s not the aforementioned obstacles that have many marketing organization principals the most concerned. There are other, more frightening, issues that have countless FMOs searching for an exit strategy. First, shrinking spreads are compounding the struggles we’ve discussed. Secondly, proprietary product has changed the fixed and indexed annuity industry — dramatically.
So what gives with the shrinking spreads? Marketing organizations perform many functions that the home office performs in a traditional career agency system, in order to provide economies of scale from a product manufacturing and distribution standpoint. Instead of the home office hiring folks to handle recruiting, contracting, continuing education, marketing, sales ideas, and more – they simply outsource it to a third-party expert – the FMO. In exchange for performing these services, the FMO earns an override commission on the sales of the agents that submit business through the firm.
But, how is it that an FMO can attract one of the estimated 1.2 million licensed life and health-licensed insurance agents doing business in this country, when there are about 300 different FMOs for this agent to choose from? What can any one FMO offer the agent, to entice him/her to appoint with their firm, rather than with their competitors?
How about a higher commission? This seems the quickest and easiest way; just share some of the FMO override commission with the street level insurance agent. This will increase the commission the agent is getting paid, and in theory, the FMO will still come out of it okay. Although the override commission that the FMO takes will be less, their production will be heightened because their street level commission is higher than the next guys; so, they’ll recruit more agents, attain higher overall production, and hit bonus compensation levels. This all compensates for the lower override. Right?
Well, it sounds good…but if sales don’t increase, and the FMO doesn’t reach their bonus levels, then what? What if the FMO next door decides to do the same exact thing? Then, you are right back where you started. And let’s get real…
aren’t we all about back where we started?
This has become a prevalent practice; to the point where nearly every FMO is passing-down overrides to the street level agent. Now the sales aren’t so hot, because products are less competitive and the profit/spread that the FMO is making is on the decline. This is a scary thing. You’d be surprised how many marketing group principals are dealing with potential staff layoffs today. Some haven’t had a raise in several years. Others are just holding-on to hope, praying that the rates will improve dramatically overnight. (However, don’t hold your breath.)
Meanwhile, proprietary indexed annuity products have also posed a problem for many FMOs. These products, which are available to only an exclusive handful of marketing organizations, have dramatically changed the recruiting and sales landscape of the annuity business. If the FMO can’t pass-down override commissions to attract new agents, offering a seemingly-more competitive product (that few others can offer) may result in a recruiting lottery. Typically, these exclusive product arrangements have a ton of money thrown into the marketing of the product. Shiny bright objects get the street level agent’s attention…until the FMO in the proprietary product arrangement is able to recruit the agent because their product is [simpler, better, more profitable, prettier, you get the idea].
Before, these products were few and far between. However, the challenges above have resulted in most FMO’s searching out insurance companies to partner with on exclusive product agreements. In mid-2008, only 5% of all indexed annuity products were proprietary in nature; today 13% of all indexed annuities are. But let’s talk about the numbers that really count, okay? Back then, just over 5% of all indexed annuity sales went to these exclusive products; today this share has increased to nearly 19% of sales. Translation: agents are flocking to the very few FMOs that can offer such products, leaving the vast majority of FMOs out in the cold.
As a result of these challenges, many FMOs have started looking for ways to sell-out. Goodness knows there are plenty of buyers: there are insurance companies with owned distribution, private equity firms have come into the mix over the past couple of years, and some more-profitable organizations have enough money in their pockets to snatch-up their competitors. The problem is these principals struggle to agree with their prospective purchaser on the valuation of the business; the multiples that these FMOs want in the sale are typically far too high. (Logical, as it’s an emotional decision, and how do you put a price on “your baby?”) For those that have taken the current economic environment into consideration, and put their emotions in-check, compromises have been made. Many FMOs have been acquired over the past few years. In fact, a long-time colleague just came to an agreement to sell his shop last month. I never thought he would sell-out. Then again, he was spooked about being left “in the dust,” having no proprietary product to offer…I should have seen it coming.
So, what can you do if you are one of those FMOs that are nervous or getting very close to being nervous, if you don’t want to sell? How can you stick it out, and still be head-above-water, once the storm clears? Develop some proprietary software system? Offer a lead generation program to your agents? Or maybe even develop a “unique” mentoring program?
NO!
This isn’t the answer! Your competitors can do the same thing tomorrow, and then you are right back to where you started again. Your organization needs a TRUE value proposition. You need something where your agents won’t leave because your competitor offers them 0.05% higher commission on the product they’re selling with you. You need a silver bullet!
My advice on this matter is twofold:
First, diversify your organization in terms of product lines offered. Don’t be an “annuity shop.” Offer other products: life insurance, long term care, disability income insurance, Medicare supplement plans, etc. Sure, these other products don’t pay as quick, and you have to put more work into your recruiting efforts because the products are more complicated to train-on. However, the low interest rate environment isn’t hitting other insurance types nearly as hard as it’s hitting fixed and indexed annuities. Plus, the less transactional your agents are, the less likely they’ll be to leave when they get offered a sweeter payout by your peer.
Second and most importantly, be cognizant of what your marketing organizations’ ONE TRUE VALUE PROPOSITION IS: relationships. I don’t care what your “lure” to the agent is: product, software, systems, cash…that can all be duplicated. But how do you replace the lasting, meaningful, personal relationship that comes with nurturing an agent and being vested in his/her business. If you focus on the relationships, you may be emulated, but you’ll never be duplicated.
This being said, I’d be interested to know – what is the value of YOUR marketing organization? Your multiple may be a little too high. A potential buyer may come-in too low.
Ask your agents. Their response is the only one that really counts.
Sheryl Moore is President and CEO of Moore Market Intelligence, an indexed product resources in Des Moines, Iowa. She has over a decade of experience working with indexed products and provides competitive intelligence, market research, product development, consulting services and insight to select financial services companies. She may be reached at sjm@indexdrockstar.com
