Security Matters

High-performing brokers have seen their compensation packages gutted and their books of business chopped up or redistributed as the result of mergers and acquisitions. They’ve become increasingly vulnerable to losing control over their own financial and life trajectory. 

They’re frustrated and looking for some kind of guarantee that the reward for years of hard work, networking and premier sales numbers will be protected. That kind of guarantee isn’t going to happen under the traditional compensation model most commercial brokerages use. It requires a fresh look at how we incentivize our best brokers.

When a brokerage is purchased, often the buyer wants to see a return on investment as soon as possible. For the insurance broker, this may mean a shifting of accounts and changing commissions. In fact, brokerage commission decreases are occurring across the industry. What was once a fairly predictable financial future has become one of uncertainty, and the pressure to secure new clients continues to intensify at a relentless pace.

Some acquirers are creative in their attempts to motivate new growth. For example, one of the largest brokerages in the industry ties broker commissions to a schedule of new business appointments over the first few years after acquisition. If brokers do not meet the demands for new growth by setting up those appointments, they do not receive a percentage of their commissions.

An Accenture survey found that the top two priorities of brokerages are retaining existing customers and creating a better, more consistent overall customer experience. However, the mandate for brokers to focus on new business flies in the face of those strategic imperatives.

Additionally, most brokerages have compensation models where new business commissions are higher than renewal commissions. New accounts are compensated at 40% or higher while renewals are paid at an average of 20% to 30%, with some going even lower than 20%. This model does not incentivize brokers to be true advisors to their clients. In some firms, the pressure to procure new business is so intense (particularly right after an acquisition) that brokers rarely interact with their clients once the policy is bound. While this may have been historically acceptable, we live in a world where client expectations are rapidly changing, so this approach increasingly presents a new risk—the inability to keep clients.

“The key variables driving overall commercial insurance customer satisfaction are insurer profitability and broker expertise,” according to the J.D. Power 2016 Large Commercial Insurance Study. J.D. Power notes the correlation between customer satisfaction and insurer profitability suggests that “the most profitable insurers are able to support more flexible underwriting standards to meet customer needs more effectively.” As far as brokers go, “The single most critical touch point between a customer and an insurance broker is the quality of advice/guidance provided,” J.D. Power says. Clients want the attention of, access to and expert advice from their brokers. When a brokerage’s model does not support that, people will go to one that will.

The Entrepreneurial Model

We have found that a different model—an entrepreneurial model—more closely aligns with evolving client expectations. This model encourages brokers to look at their book of business as if it is their own brokerage firm. As business owners, we get paid by the carriers the same for new and renewal business (for the most part) while we are building an asset. Brokers want the same thing the owners get: consistent commission levels, equity in their client base and ownership in the firm. The entrepreneurial model mimics the benefits of being a brokerage owner by paying the same new and renewal commissions, providing a contractual equity for brokers’ individual clients and offering the ability to buy stock in the overall firm.

In the entrepreneurial model, customer service reps, account managers, account executives, claims advocates and other key players remain critical to the client experience. Having best-in-class subject matter experts and customer service teams is just as critical as having an ongoing relationship with a broker/advisor. However, unless the broker is leading the strategy, directing teammates and executing the game plan, clients often feel they are missing a critical piece of their overall engagement with their brokerage.

It may seem scary to revamp your compensation approach and give brokers greater ownership over their book of business. There are some definite downsides to this model that need to be taken into consideration. For example, selling the company becomes more complicated since broker equity in the client base would have to be taken into account if the firm is sold. There will be a compression of the EBITDA percentage when renewal commission levels are increased. But in time, the higher retention levels of both clients and brokers should more than offset those dollars. The focus of an entrepreneurial model has to be on building a better company and seamlessly serving clients, not on short-term EBITDA.

While this type of plan might appear to cause brokers to rest on their existing book, we actually have found the opposite to be true. Equity and ownership builds a sense of pride in their book that causes brokers to want to see it grow. They are building something that has value; they don’t want to see that asset dwindle.

And it affords them an opportunity to generate income upon retirement. This is accomplished by paying retiring brokers a lesser percentage of the commission as it renews than what they are paid while working. The difference between the active commission level and the retirement commission level is paid to a new broker, who has the responsibility for servicing those accounts. When retired brokers are paid out for their equity in that client base, the equity position transfers to the new broker, and the cycle continues. This allows for a seamless perpetuation plan without further erosion of EBITDA.

When I speak with brokers about our model, there is immediate disbelief followed by a lot of questions. The difference in their ability to pursue and retain clients, the quality of tools at their disposal, the increase in their compensation, the option to own and the retirement path all seem too good to be true. It’s not, but there is a catch. As is true for all successful business owners, they must be entrepreneurial with the internal drive to build something for themselves.

The traditional brokerage is all about the shareholders, so profits by definition have to be their first priority. In the entrepreneurial model, the owners are brokers, so the interests of the two parties are the same and, therefore, aligned. The result is that it creates a place to build a career and a life.

Jeff Lagos is president of Insurance Office of America. [email protected]