(September 27, 2004) The current Insurance Specialist (IS) model employed by IDA member firms must change or risk irrelevance in the market, according to a leading insurance consultant.

“Growing one IS at a time is too slow and is susceptible to market swings,” said Byren Innes, senior vice-president and director of NewLink Group Inc., in a white paper entitled The Challenge of Leverage in the Insurance Specialist Model. “IDA firms need a quantum leap to be meaningful parts of their enterprises.”

Innes presented his white paper at the Advisor Group’s Premium Practices Symposium, a strategy conference for estate planning and insurance specialists held last week in Niagara-on-the-Lake, Ontario.

Innes says despite great individual success stories, the strategy is not working out for IDA firms or their insurance suppliers. While insurance sales on the MFDA platform are hitting their targets, IDA firms were dealt a blow by the bear market from which they have yet to recover.

“You’ve got to change. You’re doing a lot of things right, but you’ve got to change,” says Innes. “The reality is today that the firms you work with and the insurance companies supporting you are not necessarily having success.”

Sales have slumped since 2002 and while 2004 was expected to mark the turn-around point for the IS model, sales have not lived up to these expectations. Innes points out that not only have sales dropped off, but the number of specialists has fallen from a high of 149 to just 118 across the country today, while the number of investment advisors (IAs) at IDA firms has contracted from close to 6,000 to about 4,800, of which 4,200 are insurance licensed.

Contrary to conventional wisdom, the insurance market turns out to be very cyclical in the IDA channel, because when the market is down, the IAs “hide from their client.” In the MFDA channel, where the idea of financial planning is more strongly rooted, insurance is less cyclical. Sales may still drop in tough times, but far less so than in the IDA channel.

Because of the massive downturn in sales, the IS model needs to double its performance just to get back on track, before it can “settle into” its 30% growth targets.

He says insurance specialists are not meeting their targets in part because they are ignoring the basics, simply because they are not interesting to present to the IAs — they are ignoring, for example, simple strategies such as insuring RSPs.

“This is really boring, so we stopped doing this kind of stuff,” says Innes. “The reality is that the 50-year-old clients that we didn’t sell that to ten years ago, are 65 today. You stopped talking about it, so the IAs stopped talking about it.”

Innes says success in the insurance specialist’s market will only come from proper segmentation. But the most successful IAs at the IDA firms continue to direct their ultra-high net worth (UHNW) clients to private boutique insurance advisors, rather than the specialists within their own firm.

Such outsourcing arrangements are typically contrary to the IDA firms’ internal rules, but transgressions by “Chairman’s Council” top producers are often overlooked due to the immense political power they wield within the firm.

“The chairman’s council producer has got this network out there and he’s not going to let it go,” he says. “He’s going to continue to get referrals from the high-end top of the table life producer who’s not in the investment business. It’s how he feeds his business.”

And because there are so few of these clients in the Canadian market, Innes says the IS needs to focus on the HNW market.

“While the IS can and should play a key role in the future, their role should remain focused on the HNW segment while the firm works with the entire sales force to create leverage in the UHNW and Mass Client segments.”

Innes recommends the firms accept that even minor success in the UHNW segment will have a dramatic effect on their bottom line, while they empower their IAs to drive mass market sales at the branch level.

“The reality is, there’s an opportunity here because collectively there are tens of thousands of these people,” he says. “Do something with this segment, but don’t ignore it. You need to find a cost-effective way to mine this segment, but it’s not you guys.”

“Empowering the IA is the key to this [mass-market] segment where smaller, simpler needs-based sales can be quickly done,” he says. “Compliance may be a concern for some firms, but automation can mitigate this to a large degree.”

Currently, the IAs do not have the skill set to sell insurance, even if they are licenced. The cost of maintaining the 4,200 licences is massive and Innes says that the money spent is wasted if the IAs are not qualified to sell directly.

“An IA who is engaged in insurance, is aware of insurance and will find opportunities,” he says.