Dearly beloved, we are gathered here today............
Ginger Group and TNP have finally concluded their discussions and the merger, amalgamation, or whatever is the appropriate term, has created KEPA, the combined commercial entity named after a legendary Maori warrior chief. The courtship has finally produced a result, so best wishes to the happy couple for a long and fruitful union.
The process which has been observed from a distance by many has created some traffic in the financial services industry media, ranging from “well done, lads” to “just more money for the head honchos”.
Well, I guess both points of view have validity, albeit the latter smacks a little of envy and/or sour grapes.
After all, the individuals involved had the foresight and backbone to form TNP and Ginger Group respectively and back themselves and their respective organisations to carve out a piece of commercial action in the turbulent and uncertain market conditions which prevailed a few short years back when regulation was imminent.
Both organisations were able to convince a significant number of advisers that there was indeed strength in unity, and that there were sufficient benefits to be had within such a structure for advisers who otherwise may have struggled for survival in the face of a rapidly evolving industry.
There are turning points in every story and the moment of truth for Ginger Group, TNP, and the other dealer groups was precisely when Newpark was ostracised by its then primary carrier, Sovereign. From that event going forward, every other product provider entertained approaches from almost every dealer group, offered sufficient over-ride commission terms to make formation of a dealer group entity viable, and gave the competition a platform from which to attack Sovereign’s then dominant share of the IFA market.
Having worked on the corporate side of the industry, I can follow the logic from Sovereign in deciding to terminate the Newpark relationship. The dealer group entity carried no direct responsibility for lapses, had no agency relationship with any of its members, had no common systems management or shared corporate structure and Sovereign believed that it was merely ceding shareholder funds for business which would have been received anyway. The view held was that the dealer group could have merely contacted an adviser, discussed the weather or the weekend’s footy results, then claimed that adviser as a member of the group and apply for the over-ride on all business produced by said adviser. As none of the dealer group over-ride was ceded to the adviser –at least none that would be admitted to – the adviser carried on with business as usual, and the dealer group became just a little wealthier as a result of the membership ‘nomination’.
Now, before any of my industry colleagues start dialling their legal eagles, I’m not claiming that this actually occurred, but I believe that this is what Sovereign perceived was occurring, and that ending the relationship would make little difference to their production, as the agency relationship that existed between Sovereign and the adviser was built on strong relationship foundations which would survive any such confrontation, right?
Well, almost right.
Had we been contemplating the Sovereign which took the market by storm in the 1990s, that prognosis could well have been valid. But the Sovereign of the more recent past is a different entity altogether. As a bank-owned entity the criteria, drivers, and cultural foundations were vastly different from those of the company’s founders – not better, not worse, just different. The basis of Sovereign’s early day success was the attention paid to independent advisers and brokers – those who did not wish to be tied to one provider and that provider’s product range. Even before the ASB arrived on the scene to buy Sovereign, the distribution strategy had moved beyond the IFA channel, and other product providers saw a window of opportunity opening up to them with the multichannel distribution strategy which Sovereign adopted in the mid 1990s.
In these circumstances, Sovereign’s share of the IFA market was under attack and while the in-force market share held up, a new metric entered the analysis for consideration. The company’s new business market share percentage was now lower than its in-force market share percentage – with the inevitable conclusion that the company had reached maximum market penetration deploying the current strategy.
So what to do next and where to go for more new business?
The dealer group solution seemed obvious but the distraction from the shareholder was the sleeping giant represented by the bank’s client base. New business could be extracted here at much lower cost than pandering to the whim of the dealer group which, in any event, was not discouraging business being placed elsewhere.
So the relationship was duly terminated, and Sovereign declared its position of non-support for aggregator-type dealer groups. The competition climbed aboard the dealer group vessel enthusiastically, and teamed up with whatever combination or commercial association of advisers came along.
TNP was an early entrant and quickly established the concept of adding value by guiding advisers to higher and more profitable productivity gains. Ginger Group emerged from the negotiations between Kevin Smee’s Brokers Independent Group (BIG) and Maurice Trapp Group (MTG) which had already concluded merger discussions with Professional Investment Services from Australia. PIS had never quite achieved the success in NZ that it had enjoyed in Australia, so the merger made perfect commercial success, particularly in the light of the failure previously to conclude a deal with Newpark. Both BIG and MTG brought immense experience and energy to the membership, and the merged entity, along with its compliance and coaching capabilities, quickly gained momentum.
Yet still Sovereign refused to entertain a relationship with any dealer group, and its market share of the IFA market continued to be eroded by the dealer group structure which was evolving rapidly to offer advisers a relationship based on a shared understanding, common goals, and added value from advisers to advisers. Despite best efforts to position themselves otherwise, product providers have different pressures, different priorities, and different objectives, most of which are not aligned to those of the distribution network from which they seek new business.
So Ginger Group flourished, TNP continued to advance, and at some point, the conversation about joining forces, rather than each group competing for the same advisers’ loyalty, was inevitable
So I say good luck to all the Directors and founders – the future looks bright and full of promise.
But what of the future?
Well, I believe there are a number of critical areas for the new entity – and other dealer groups for that matter - to contemplate.
- The added-value offering needs to contain real substance from diverse specialist resources. A good start has been made with this, but much more needs to be done to engage with external resources. After all, one of the advantages of the dealer group structure is the leverage which can be applied on external suppliers, and I don’t mean insurance companies in this context. And, with respect, sharing the vast experience of the principles can only go so far in improving the lot of the new generation of advisers. Relating fireside tales of success or picking up on the latest overseas innovation explained by veteran advisers/directors is no longer adequate and specialist knowledge of such leading-edge developments needs to be delivered by those who specialise in the field.
- The dealer group structure has largely been built on the commission over-ride offered by product providers. This financial dependency on the insurance companies is unhealthy and the focus needs to be on negotiating a different support relationship and on providing enhanced remuneration to the individual membership entities with an agreed membership fee payable to the dealer group. This will require the abandonment of the ‘aggregation’ structure and the establishment of tangible, measurable, and meaningful advantages for members. In reality, dealer groups are now competing with QFEs for adviser loyalty and some of those QFEs are owned by insurance companies.
- The interests of the adviser/agency holder need to be more actively and ably represented by dealer groups and their legal resources, if and when applicable. Specifically, the sale and purchase of books of business based on a derisory multiple of renewal commission – maximum 3 or 4 times – when Life Office actuaries calculate embedded value of the books well in excess of those multiples, is indefensible. A more realistic valuation basis needs to be engaged which more accurately reflects the value of in-force premium income to both parties in a more transparent manner, reflecting the integrity which should prevail in such transactions. Many advisers are of an age now when realising the value of their businesses is critical, and dealer groups should be providing material resource support for members in this context.
- Equally as acrimonious and inappropriate is the insurance company practice of preventing an agency sale if they believe their interests might be prejudiced by the new owner. The sale and purchase clauses in the agency agreement, usually qualified by words like “and shall not be unreasonably withheld”, are anomalies and should be deleted from every agency agreement forthwith. Insurance companies have the discretionary, and potentially mischievous, option to defeat valid commercial development, and the wallet to ensure that their will prevails. The fear of a wholesale shift of existing business by a new owner may be real or perceived. Either way, the agency agreement is no longer the appropriate vehicle for such fears to be addressed. Legislation and regulation contain specific references to moving existing business from one product provider to another, and supervision and enforcement of these provisions could visibly be adopted by dealer groups and/or the FSC to the benefit of all parties. Blocking sale or purchase transactions only creates bad publicity, ill-feeling, and reflects poorly on industry maturity.
Just as the industry is evolving and developing, as witnessed by the advent of regulation, the rationalisation of product providers, and the recent marriage announcement from Ginger Group and TNP, so the dealer group entities need to evolve and develop. Perhaps some of that evolution can be facilitated by closer attention being paid to the aforementioned points.
In the meantime, KEPA faces a bright if challenging future and the nuptials need to deliver to the merged membership enhanced value propositions which reflect the strength, experience, and resources at their disposal.