IN THE 1990s, global insurance companies snatched up independent broker-dealers in a buying spree that reshaped the industry.
American International Group Inc., ING Groep NV and American Express Financial Advisors (now Ameriprise Financial Inc.) were all big buyers, acquiring broker-dealers with thousands of representatives. The goal was to increase the parent firms' ability to sell more insurance products, as well as to become leaders in the fee-based financial advice business.
That hope, for many insurance companies, has turned into a pipe dream.
Of the three companies cited above, only AIG has retained its independent-broker-dealer business. ING sold three of its four independent broker-dealers two years ago. And after months of costly legal fallout stemming from an allegedly fraudulent private investment, Ameriprise exited the business with last year's sale of Securities America Inc.
The global economic downturn has pushed large financial institutions, including insurance carriers, to reassess their business strategies and consider retrenchment of their broker-dealer operations. The volatile stock market and the prolonged depression in interest rates have made it difficult and expensive for insurance carriers to hedge variable annuities with living benefits, an extremely popular product for independent reps and advisers to sell.
TIME TO RE-EVALUATE
Indeed, executives with top firms are telling shareholders of the need to re-evaluate all business lines. MetLife chief executive Steven Kandarian didn't mention independent broker-dealers specifically, but last month, he said: “Everything was on the table” as MetLife, the No. 1 insurer, goes through a strategic business review. MetLife is a large but quiet player in the independent-broker-dealer industry and owns four firms: MetLife Securities Inc., New England Securities Inc., Tower Square Securities and Walnut Street Securities Inc.
The trend for insurance companies to cut ties with their once highly coveted broker-dealers is continuing this year.
This month, insurer Genworth Financial Inc. sold its independent broker-dealer subsidiary to Cetera Financial Group for $78.5 million, plus an earn-out provision, according to Genworth's website.
The subsidiary, Genworth Financial Investment Services Inc., has nearly 2,000 independent reps and advisers, most of whom are tax and accounting professionals.
Private-equity-backed Cetera has been a big buyer of independent broker-dealers owned by insurance companies. In 2010, it bought three firms from ING: Financial Network Investment Corp., which has 1,800 reps and advisers, PrimeVest Financial Services Inc., with 1,400, and Multi-Financial Securities Corp., with 1,000.BAD FIT
Independent broker-dealers simply may not fit into some insurance companies' business plans, industry observers said.
Some of the scale-back “is a general trend by large financial services companies to focus on core businesses,” said Robert Belke, managing director with Lovell Minnick Partners LLC, one of the many private-equity firms that have taken a position in the registered investment ad-viser or broker-dealer industries. Last year, Lovell Minnick acquired First Allied Securities Inc., a leading independent broker-dealer.
Insurance companies make money on products such as life insurance and annuities, not their broker-dealers, Mr. Belke said. “The independent-broker-dealer business in general is in a challenging environment. It's easier for parent companies to look at their subsidiaries and find them less attractive today.”
Sifting through Focus reports filed with the Securities and Exchange Commission shows what is considered common wisdom in the industry: The broker-dealers owned by insurance companies, designed to facilitate the sale of products such as variable annuities, struggle to make money.
MML Investors Services Inc., which is owned by Massachusetts Mutual Life Insurance Co., lost $8.2 million in 2010, according to SEC filings. Transamerica Financial Advisors Inc., which is among the many Transamerica businesses in the United States owned by AEGON NV, saw a net loss of $420,000 in 2010 after posting a $4.48 million loss a year earlier, according to its most recent Focus report.
Both firms have scale: MML had $322 million in total revenue in 2010, while Transamerica Financial Advisors had $147.9 million.ADVISER PUSH-BACK
Registered reps and investment advisers who balk at the perception that they are pushing insurance products also make it difficult for insurance companies to remain in the business, Mr. Belke said.
“The clear trend [for advisers] continues to be towards independence,” he said. “It is harder to be independent as an adviser when your broker-dealer affiliation is with an insurance company.”
“It's becoming harder for the insurance companies to expect their independent advisers to find ways to push their product,” Mr. Belke said. “The trend is in the opposite direction.”
Pushing product has fallen by the wayside, in part because investment firms' product lines are much more similar than they were 10 or 20 years ago, said one executive.
“I think there was a period of time when all solutions were built around products,” said John Brett, senior vice president of the MetLife Broker-Dealer Group. “And I think now it should be built around the client.”
The process, or how advisers cash out of products for their clients, particularly retirees, takes precedence over the product, Mr. Brett said.
“Maybe the client has six different pools of money to pull from, including Social Security” he said. “It's the sequence of that distribution — when they pull it — that is going to have dramatic impact to the growth of those assets, the longevity of that income and whether they can take ups or downs in the market.”NOT ALL IN SAME BOAT
Not all life insurance companies are in the same boat when it comes to selling assets, including their independent broker-dealers, one analyst said. And not all insurance companies are looking to sell broker-dealers that offer financial advice.
“Genworth's situation is different from other life insurance companies',” said Edward Shields, an analyst with Sandler O'Neill + Partners LP.
The firm's book value is far below its peers, he said, in part due to its mortgage insurance operations. “Genworth is trying to unlock value and is therefore selling off noncore businesses,” Mr. Shields said, noting that last year, Genworth sold a business that brokered medical supplemental insurance.
“That's something that's not core to the life insurance or annuities or their other core businesses,” he said. “They're unlocking capital to employ in other businesses. Or they could use the money [from selling business units] to buy back shares, which is accretive to earnings.”
MassMutual spokeswoman Paula Tremblay pointed out that MML's recent losses stem from an effort to invest in the firm. “MML Investors Services continued to invest in its infrastructure to enhance the work flow processing and other critical services during this time period, which may be reflected in the figures [InvestmentNews] is looking at, given typical amortization schedules,” Ms. Tremblay wrote in an e-mail.
A spokeswoman for Transamerica, Laura Scully, said: “Transamerica Financial Advisors is investing in resources and technology to enhance its ability to serve clients.”
bkelly@investmentnews.com
