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Profitability Comes Hard to Insurer-Owned Brokerage Firms

By Crucial Clips     January 7, 2015
The following text is a transcript of a portion of a speaker's presentation made at an industry conference or during an interview. This transcript solely represents the view of the individual who spoke, and not the view of Financial Advisor IQ or any other group.
Source: FA-IQ, Jan. 7, 2015 

TOM COYLE, ASSOCIATE EDITOR, FINANCIAL ADVISOR IQ: MetLife, Northwestern Mutual, Prudential — just a few big insurance companies with substantial broker-dealer sidelines. But are these retail investment and advice operations even worth having?

Market research and consulting firm Aite Group asks this provocative question in a recent study called “Insurer-Affiliated Broker-Dealers at a Crossroads.”

Point is, these business units are under pressure because, says Aite, they’re expensive to run, and per-client assets under management are modest compared to those of other brokerage channels.

Add to this the need for complex operational support, including compliance, for businesses that are not the main thing these companies do in the first place, and you might not be surprised to learn that some of these companies are rethinking their strategies.

In Aite’s view, they are — as its title suggests — at a crossroads. Insurance companies can commit more money in a bid to fight their way upmarket — MetLife seems to be trying that, by the way. They can continue running retail investment sidelines as complements to their insurance mainstay. Or they can get out of the business altogether.

As an aid to this analysis, Aite provides a breakdown of revenue sources for independent broker-dealers, self-clearing brokerages and insurance-affiliated outfits. And it’s pretty interesting.

Recurring fees on AUM and commissions account for 69% of sales at self-clearers and 66% at IBDs — but just 34% at insurance shops. The insurance-based brokerages have 61% of their revenue coming from insurance and annuity sales — other brokerage platforms. And that’s compared to roughly 24% at self-clearers and just shy of 30% for IBDs.

In short, as far as revenue goes, anyway, independent and full-service brokerages run roughly analogous businesses — they’re in the same ballpark. Insurance-affiliated brokerages don’t — in fact they stand out as quite different from the mainstream.

That’s not a qualitative call, by the way. It’s just an observation.

I’m Tom Coyle and this is FA-IQ.