Novarica recently had the opportunity to host a Special Interest Group meeting for broker-dealers that are subsidiary operations for insurance carriers. This is a fascinating element in the broader financial services space, bringing together a critical distribution capability that creates an experience for consolidating a range of investment and insurance products.
These organizations are at the crossroads of complex compliance issues from state and federal regulatory authorities. The session, with more than a dozen carrier participants, provided a lively exchange change of ideas and perspectives on issues that will be driving plans for the coming year. The following are the key issues that emerged from these discussions.
Data is at the heart of many issues, including sales, compliance, and compensation
Broker-dealers receive and process data from a variety of sources for proprietary product sales. Sources include fund companies, industry clearinghouses (e.g., DTCC), and parent companies. This information arrives in a variety of formats, as many industry “standards” operate more as “suggestions” that are open to many interpretations. One company noted that the interpretations from individual companies could depend on the individual responsible for sending data.
Broker-dealers need to transform the data they receive into consistent and consumable forms so that the organization can process it through compensation, compliance, and operations, and populate locally managed books and records platforms. Data transformation is often a manual undertaking that requires care since any results support mission-critical activities.
Broker-dealers have tried many different solutions to address data management and transformation; these issues remain top-of-mind. We explored some analogous situations, such as those impacting the group benefits and health insurance industries, where InsureTech solutions have started to show intriguing promise. Novarica has written profiles of data management and transformation companies in our recent Novarica InsureTech report. New compliance concerns—e.g., the California Consumer Protection Action (CCPA) and other GDPR-like regulations—further compound these data management and transformation issues.
Business models are changing, but the levers of control vary by business model
Novarica research has highlighted a series of changes in the retail investment space, including a decline in the number of broker-dealers. The importance of RIA functions and consolidations has increased at the same time, as some companies choose to leave the retail distribution business (e.g., Jackson National) and others focus more attention on it (e.g., MassMutual).
Many carrier-owned broker-dealers see themselves as independent entities. They want to mirror the capabilities of large and unaffiliated organizations (e.g., LPL, Raymond James); there are, however, notable differences in terms of scale, productivity, and organizational governance models. Carrier-owned broker-dealers are also balancing the distinctions between brokerage-platform-based capabilities and direct (i.e., “check and app”) business models. The former offers significant control and compliance structure; the latter may be economically advantageous to individual producers.
The internal structural models for broker-dealers frequently dictate how quickly and how far they can drive change. Internal structure impacts the pace that a brokerage solution can become the preferred operating model as well as the breadth of selling agreements available from broker-dealers.
Key vendor consolidations impact the available solutions for retail broker-dealers
The number of broker-dealers is in decline, even as revenue increases. Pressure has mounted on solution providers to also focus on improving their economics.
The notable consolidation that took place in other parts of financial services (e.g., banking solution providers for core systems) is now reducing the number of core capability solutions available to retail broker-dealers. Examples include Broadridge’s recent acquisitions of M&O (i.e., Miningham & Oellerich) and Caesar. Consolidation may reduce available options, but it may also inject much-needed capital and managerial expertise into these solutions to facilitate carrier broker-dealers in the future.
Another interesting development is the work MassMutual Investor Services (MMLIS) is doing the independent entity Commonwealth Financial to create capabilities, via Advisor360°, which can become available to other firms. Broker-dealers looking to modernize the technology they use to support middle-office operations will want to consider future-state options as well as the trajectories of potential strategic vendor solutions.
Finding the balance between enterprise technology solutions and tools specific to the investment business remains a challenge
Broker-dealers combine various proprietary and non-prop products into an ecosystem that supports the ability to provide informed choices to end customers. Producers in this space frequently value their independence, including on the tools they use; this can be at odds with life carriers, many of whom may want to reduce options.
This drive to reduce options may be for compliance purposes, or it may be a function of the expense pressures parent firms are feeling in an environment of persistently low interest rates. Resolving this conflict is critical, however, if broker-dealers are going to fulfill their missions of supporting productive field partnerships.
One approach we discussed was to have the broker-dealer identify a trio of acceptable technical options for major functions, striking a balance between flexibility and control. Another was broadening the mandatory use of SFDC to support key roles. Finding this balance is part of the solving simultaneous equations that can have a significant impact on future successes in a variety of performance metrics.
Digital capabilities are increasingly important, but broker-dealers walk a fine line when driving adoption
Broker-dealers, like much of financial services, are grappling with changes in customer expectations and demographic distinctions between customers and producers. A recent Novarica study showed the average age of registered representatives to be about 54, considerably younger than the industry average for insurance agents (59.5). This discrepancy makes rolling new capabilities out a tricky proposition at best. One successful approach that the group discussed combines an outside-in perspective and separate deployments to cater to the needs of different user cohorts.
The day provided an open and lively discussion that has since spurred additional information sharing between participants. Discussions of how to respond to new compliance issues (e.g., the SEC’s Reg BI, NYDFS Reg 187) are providing new opportunities for information exchange. Many participants now plan to be part of a Broker-Dealer Research Group that Novarica is forming for 2020. The new year promises to be fascinating on many different levels.
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