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On Loyalty
Tuesday, 21 May 2013 10:34

I learned about loyalty during my first year as a career life insurance agent. Yesterday, I was reminded about the value of loyalty.

According to Merriam-Webster, Loyalty means "the quality or state or an instance of being loyal."

Synonyms: adhesion, allegiance, attachment, commitment, constancy, dedication, devotedness, devotion, faith, faithfulness, fastness, fealty, fidelity, piety, steadfastness, troth

Antonyms: disloyalty, faithlessness, falseness, falsity, inconstancy, infidelity, perfidiousness, perfidy, treachery, unfaithfulness

I was fortunate to enter the insurance business in an agency managed by my father. One of the things he did with all career agents was go over their career contract with them, making sure they understood the important parts, such as the "first right of refusal" clause and what products that clause applied to. For his agents, that clause applied to two products - Life Insurance and Disability Income Insurance.

In exchange for a benefit package that included health insurance, 401(k), pension plan, matching FICA and Medicare taxes, advanced commissions, office space and local support, we were promising to the company our loyalty to give the company the first chance at any business where their flagship products were suitable solutions to our client's problems.

I believe that loyalty is a two-way street. It may not be spelled out in the contract, but if an agent promises their loyalty to a principal, then the principal should return the favor. Doesn't that sound reasonable?

As an agent of the company, I was encouraged to become a Registered Representative of the company's wholly owned subsidiary, a Broker/Dealer that manufactured and distributed Registered Securities, like mutual funds, variable life, and variable annuities. For those that aren't aware, when a person becomes a Registered Representative of a Broker/Dealer, it's not unlike a marriage. The loyalty of the Registered Representative is not only required by contract to the Broker/Dealer, it is also required by the so-called Self-Regulatory Organization, which at that time was the National Association of Securities Dealers (today it's known as FINRA, or the Financial Industry Regulatory Authority, which is a private corporation, not part of our elected government).

Polygamy is illegal in the United States. Likewise, a Registered Representative cannot be a Registered with more than one Broker/Dealer.

Our loyalty to the Broker/Dealer is not only by contract under the law of agency, it's also enforced by the powers that be: The regulators.

If we step out on our Broker/Dealer, and broker a transaction that they have not approved, in writing, in advance, that's called "Selling Away" and it's a "termination for cause" offense. For comparison, it's like cheating on your spouse. If you get caught cheating, or "selling away," then you're going to be kicked to the curb.

The reason for this prohibition on Broker/Dealer "polygamy," our compliance officers told us, is that the NASD wanted an "unbroken line of supervision." What I've learned over my career, aided by reading the commentary of an attorney I respect, Bill Singer, is that the so-called Self-Regulatory Organization wants to be able to levy a fine on as many people as possible, so the "unbroken line" here is to the personal bank accounts of every person in the food chain of securities distribution.

Bottom line: As both a captive career life insurance agent AND a Registered Representative of a Broker/Dealer owned by the same life insurance company, I had promised my loyalty, as well as accepted the risk of substantial financial penalties, and even the loss of my career, if I failed to live up to my promise of loyalty.

During my first year as a career agent and Registered Representative, I worked diligently, putting in the prerequisite long hours required to build up a book of clients. One of my first clients was self-employed and earned a substantial income. Through the financial planning process, we determined that a Simplified Employee Pension, or SEP IRA, was a suitable solution to his need to save for retirement with some tax advantages.

My client wrote a check for $22,500 to fully fund his SEP that year. As a Registered Representative of my Broker/Dealer, I did my duty and recommended the client invest in the proprietary mutual funds that my Broker/Dealer manufactured. I demonstrated loyalty, just like I promised.

The mutual funds I sold had sales charges, or "loads." I was paid a percentage of this "load" by the Broker/Dealer as a commission for the sale.

A few months later, my client called me wanting to have a meeting. I went to his home where he handed me a letter from my Broker/Dealer's home office. The letter thanked him for his business, and then went on to say that if he called the home office direct on a toll-free 800 number, he could make all his future investments in the same mutual funds I had sold him...without a sales charge!

My client demonstrated loyalty by sharing this letter with me. He knew what this letter meant. The company I promised loyalty to by signing my name at the bottom of a contract was not keeping up their end of the deal. They were not loyal.

I asked if I could make a copy of the letter. My client said "Keep it, I have no desire to do business directly with them, since they are so eager to screw you." He went on to ask if we could invest with other mutual funds besides the proprietary funds I had recommended. This is the free market at work. People invest where they are rewarded, and stay where they are well treated. My client no longer wanted to stay where he felt the company was not trustworthy, because it was clear that they were not loyal.

The next morning, I brought this letter to my father's office so he could read it. I recall vividly his facial expressions as he read the letter. I know when my father is angry. He said he needed some time to think before he called the home office, at which point he went inside his office and closed the door.

I was not present in the room when he made that phone call, so I do not know what was said. All I know is that I was told that it would not happen again; my clients would not be solicited by the home office anymore. I later found out that the home office's promise had an expiration date: When the mountebank manager in Mecca that came up with this idea to cut out the Registered Representative was promoted to his next level of incompetence, his successor would dust off the same scheme to defraud Registered Representatives of their income, and that scheme would be employed again, and again, and again.

So much for loyalty.

The lesson was a painful one. I remember the feeling in my stomach when I read that letter the first time. It forever tainted the halo that we were indoctrinated to believe floated over the heads of the people in the home office. I had been raised to believe in the goodness of people, and a corporation (or mutual life insurance company, or Broker/Dealer) is nothing but a bunch of people. Surely they would be good people, right?

A company behaves only as good as the people in the company.

Good people = good company. Bad people = bad company.

When my career started in the life insurance business, approximately eighty percent of new business was produced by captive career agents. I started out as a captive career agent. They are easy to spot: They have an insurance company's name and logo on their business cards.

The other twenty percent came from other distribution channels, such as independent brokers, or through direct to consumer marketing (the latter has always been the smallest percentage, much to the chagrin of the seemingly endless supply of middle managers that enter home offices from outside the life insurance industry). An independent life insurance broker is easy to identify, too: We often have eponymous named firms, like "Brent D. Gardner & Associates" or "Gardner Financial Group," even when it's a sole proprietorship of one person. We may even have another name on our business cards, like Life Solutions

Today, the distribution of life insurance has flip-flopped. Fully eighty percent of new life insurance business is produced by independent life insurance brokers, which is what I am today. Less than twenty percent of new business is produced by captive career agents, or other direct to consumer marketing efforts.

This change in life insurance distribution has many causes, but I submit that it largely reflects the lack of loyalty I learned about during my first year.

Life insurance agents are talent. They are human capital. Talent and capital flows to where it is best rewarded, and stays where it is best treated. The talent in life insurance distribution business has flowed to where they are best rewarded, and they are staying where they are treated well. Today, that's the independent brokerage channel.

One of the axioms of the life insurance business is that our product is "sold, not bought." What this means is that without the aggresive marketer, the catalytic agent to initiate the purchase process, very little new business is sold. The insurance business requires a steady flow of new premium, and new insureds, so that the law of large numbers works, and the industry is profitable while serving it's high calling: Providing cash when needed most to survivors.

For those of us who are students of history, we know that since the beginning of the life insurance industry in the United States, home offices have tried every marketing scheme, every possible permutation of alternative distribution, in a vain effort to replace the life insurance agent. I understand their motivation. We're not cheap. Life insurance agents deal with a very high level of rejection in their marketing and prospecting efforts. The dominant form of high compensation as a percentage of first year life insuance premium reflects this reality. We take several years to train, and that training is expensive. Plus, we have a very high turnover rate. Somewhere north of 90% of agents do not last a full year.

Anyone with a $2 calculator that doesn't understand how life insurance is sold can look at an insurance company's books and think "If we cut out these training costs and high commissions, we'll be able to offer the lowest premium in the industry, and be the dominant company overnight!"

I suspect that's where the disloyalty starts: Bean counting executives that have never worn the tired soles of a life insurance agent's shoes.

The life insurance companies that continue to grow profitably today, in an industry that's been flat for three decades, in this artificially low interest rate environment that puts extraordinary pressures on every aspect of our business, are the companies that take care of their distribution talent. These are the companies that demonstrate the highest level of loyalty to the hands that feed them: The life insurance agent.

Yesterday, I received an email from a company I do business with. It's not a member of the insurance industry, but it's a financial services company that I selected for some of my clients because the company was innovative; they are a technological leader. Unfortunately, this company has the same problem some life insurance companies and some Broker/Dealers have shown me over my career. The email is copied and pasted below (emphasis mine): 

"The above account contacted Customer Service to request a cancellation letter. We did attempt to retain the merchant, however they still wish to close their account. We recommend that you contact the merchant to see if there is anything you can do to save the account. Please advise within 24 hours if you were able to retain the account. If we haven’t heard from you by the time the cancellation letter is submitted to us, we will proceed with the closure. Please be advised that in the future we may reach out to the account internally in order to bring them back onboard. If they decide to re-open their account as a result of this contact, they will no longer be part of your portfolio."

I know this is just a form letter, because my client did not call Customer Service. I made the phone call, at the request of my client. My client needs to cancel a service that is no longer needed. My client has been loyal to this company since 2009, and has been loyal to me for many more years than my client's relationship with this particular company.

The final sentence in the form letter is what turns my stomach. The company I reward with my client's business is threatening to cut me out of any compensation from a relationship they would never have in my absence.

In a nutshell, they have failed to demonstrate loyalty, just like my first Broker/Dealer did when they went behind my back, direct to my clients. The one upside is this company at least showed me their hand so that I may deal with their threat accordingly.

Fortunately, since I'm an independent distributor, I can take my client's business anywhere I want. As a business owner, financial advisor, and independent insurance agent, I have always been loyal to the companies I represent as their agent. Likewise, I am loyal to my client's to provide my best efforts to help them achieve their financial goals. This is why I will reward my client's business to the companies that demonstrate the same loyalty to me, as I have shown to them.

In my opinion, this is reasonable, logical, and fair.

Recommended Reading: Why Loyalty Matters


Brent D. Gardner, CLU, ChFC