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Insurer-owned indie B-Ds going the way of VHS?

Insurer-owned indie B-Ds going the way of VHS?

18:04 02 January in In the News

December 30, 2011
by Bruce Kelly, Investment News

Once the dominant player in the industry, carriers seeing reps exit; consolidation puts squeeze on

Independent broker-dealers owned by insurance companies, once the dominant players of the industry, will continue to dwindle in size and importance over the coming decade, unable to keep pace with more nimble competitors that invest in, and increase, investment advisory services for reps.

That’s the assessment of some industry executives.

To underscore that point, one leading group of advisers formerly affiliated withTower Square Securities Inc., which is owned by insurance giant MetLife Inc., left several months ago to work with a leading broker-dealer for fee-based registered reps, Cambridge Investment Research Inc.

In total, 87 registered reps — including some support-staff members with securities licenses — who produce more than $10 million in gross revenue, left Tower Square from July to November to become affiliated with Cambridge, said David Duncan, chief executive of Atlantic Financial Group LLC.

Atlantic Financial, a full-service general agency based in Richmond, Va., with offices in the Mid-Atlantic and Southeast, is the branch that left Tower Square.

“While we have a strong, long-standing relationship with MetLife and Tower Square, our business model is evolving into an RIA, and we wanted to work with a leader in that space,” Mr. Duncan said. “And Cambridge is one of those.”

A spokeswoman for MetLife, Jessica Ong, confirmed that the advisers left Tower Square but added that more than half of the reps decided to stay.

The MetLife broker-dealer group has “experienced significant growth in our fee-based advisory platforms,” she said. “Between both the platforms, we have almost $8 billion in assets under management. These platforms give advisers a wide variety of options in providing fee-based solutions for their clients. Additionally, we also have a number of offices that have well-established independent RIAs.”

Eric Schwartz, CEO of Cambridge Investment Research, declined to comment on the recruiting coup of adding 87 advisers from one team.

In general, however, Cambridge had another strong recruiting year, achieving a net increase of 400 reps and advisers, the firm’s biggest single-year gain ever, he said.

The newcomers generated close to $66 million in annual fees and commissions, known as gross dealer concession, at their previous firms, said Mr. Schwartz, who added that the figure was close to an all-time high for the firm.

Cambridge now has more than 2,000 registered reps and advisers.

“One segment we did well from was insurance broker-dealers, and we typically do well from those,” he said. “The insurance companies don’t seem to be interested in committing the resources to compete.”

In the 1990s, insurance carriers such as ING Group and American International Group Inc. rushed into the independent-broker-dealer channel, snapping up such firms or companies that already owned them. The goal was to broaden the platform to sell insurance products.

While consolidation in the securities industry has occurred over the past few years with numerous small firms, Mr. Schwartz believes such consolidation will occur among the largest broker-dealers, too.

And insurance-company-owned broker-dealers will feel the squeeze, he said.

“In 10 or 12 years, there will be only seven or eight broker-dealers doing 80% of the business, and insurance companies will own only one or two,” Mr. Schwartz said. “That type of consolidation happens in every industry.”

More erosion seen

One industry recruiter agrees.

The ownership of firms by insurance companies “will continue to erode in the broker channel,” said Jonathan Henschen. “Insurance companies make more money on products than on the broker-dealer,” he said. The shift away from insurance-company-owned firms is now so great that private-equity funds now dominate the market, Mr. Henschen noted.

In 2010, private equity manager Lightyear Capital LLC bought three independent broker-dealers that ING acquired more than a decade earlier.

To be sure, insurance-company-owned broker-dealers are not all cut from the same cloth. Some are vigorously competing in the registered investment adviser market. Others, however, remain tied to a model that emphasizes selling insurance products, industry observers said.

“In the past, independent insurance broker-dealers could offer 100% payout on proprietary insurance products, or have a percentage requirement of proprietary product sales,” Mr. Henschen said. “But those days are gone.”