Despite an appeals court ruling tossing out the Department of Labor fiduciary rule, the number of independent marketing organizations (IMO) can expect to eventually shrink by an estimated 30 to 50 percent, an expert said.
IMOs help agents sell life insurance and annuities and there are an estimated 350 IMOs in the U.S. serving agents in the independent channel, the dominant sales channel for fixed indexed annuities (FIAs), a $54 billion market.
“There’s going to be more consolidation happening in the independent channel among IMOs and BGAs (broker general agencies),” said Sheryl J. Moore, president and CEO of Moore Market Intelligence and Wink Inc., publisher of Wink’s Sales & Market Report.
“Will the 350 IMOs in the market shrink down to a dozen? Probably not,” she said. “But I can see it shrinking in half, or by 30 percent. There's no reason to have 350 marketing intermediaries for life and annuity market.”
IMOs shrinking to a dozen or so was a brief possibility. A little more than a year ago, regulators set a high bar for IMOs to qualify as financial institutions on a par with insurers, banks, broker-dealers and registered investment advisors.
The subsequent partial implementation of the fiduciary rule last June and numerous court rulings had many IMOs betting on a bit of reprieve, yet still unsure of how to proceed.
Some IMO owners decided to sell as they feared the value of their business would drop. Others decided to remain in the market in hopes of fetching higher prices for their businesses.
Survival a Matter of Scale
But even if the DOL rule goes away, small IMOs with a book of $1 million to $4 million in life insurance premium and between $20 million and $100 million in annuity premium are going to find it difficult to compromise, said Scott Tietz, CEO of Partners Advantage.
“I’ve talked to a half dozen independent marketing companies in the past six months looking to buy and I’ve talked to about 20 of them looking to sell,” Tietz said.
AMZ Financial, in Urbandale, Iowa, recently merged with Riverside, Calif.-based Partners Advantage.
Larger IMOs offer agents broader training and more robust compliance and technology platforms, considered must-haves in a world moving toward a fiduciary standard.
“You need scale in the IMO space,” Tietz said. “Technology is a huge factor, the low (interest) rate environment is a huge factor, training and agent support is a huge factor.”
Forward-thinking IMOs are likely to do deals before the Securities and Exchange Commission steps in with its own fiduciary standard.
“The smart guys are saying let's get together and build something bigger and what shops need is $100 million of target life premium and $1.5 billion in annuity premium to make a go of it,” Tietz said.
Multiple Fiduciary Fronts
The decision by the Fifth Circuit Court of Appeals removes the barrier the DOL fiduciary rule placed on the ability of IMOs to sell indexed annuities.
The ruling takes effect May 7, unless the government responds. The Trump administration could request an en banc review by the full judiciary, petition the Supreme Court to hear the case or simply let the rule fade away.
Regardless of what happens, that doesn’t mean pressure from other regulation is also gone, said Scott Hawkins, a director at the insurance and asset management consulting firm Conning.
The SEC is working on its own version of the fiduciary rule, the National Association of Insurance Commissioners is examining the annuity suitability rule and New York, Nevada, New Jersey and other states have moved to produce their own best-interest standards.
“As a result, while short-term pressure to pursue mergers and acquisitions because of the cost of new regulation may be lowered, medium-term fiduciary regulations remain a reason to anticipate further consolidation among distributors,” Hawkins said.
Even with the drag from the DOL fiduciary rule gone, FIA distribution market share is changing and that will affect IMOs and their alliances.
Independent agents’ market share of FIA sales fell below 60 percent in each of the four quarters of 2017 for the first time since FIAs were created more than 20 years ago, according to new data.
Conversely, FIA distribution by banks and broker-dealers are rising and that will also put pressure on IMOs to realign themselves.
InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected]
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