Friday, January 31, 2014

(No.256) Canadian financial services dogma: some immaculate misconceptions

"Immaculate misconceptions: some dogma about 
the Canadian financial services business"

by Alastair Rickard

A reality few people outside the life insurance business understand (nor do many executives employed within it) is the huge difference affecting life insurance distribution between
(1) life insurance companies 'sponsoring' the life insurance licences of people in financial services in return for whatever business they may put their way, and
(2) the very many fewer companies engaged in selecting, training and developing people new to life insurance selling, people who can actually make their careers as professional advisors in a difficult business.

Also important is this reality: it is a more difficult task to find, select and recruit people who can be successful beyond a few weeks in making the harder sales of client-resistant individual life insurance compared with recruiting asset product sales people the core of whose very important role revolves around selling savings products most people actually want and tend to recognize they should buy. 

Agents who can succeed in a life insurance sales career have different skills and characteristics from sales people who do not. As the Duke of Wellington once observed: the fact that kittens are born in a kitchen doesn't make them biscuits.

It is not a major hill to climb to have dual-licensed life insurance agents make the easier sales of asset products, mutual funds in particular. For example: at one point the Mutual Life/Clarica Life career agency distribution system which Sun Life had acquired was generating 2/3 of the year's net mutual fund sales of CI Financial (the outfit for which Sun Life had traded its own mutual fund business plus the larger one built by Mutual/Clarica in return for a 1/3 ownership interest, since sold to the Bank of Nova Scotia).

However people recruited to sell asset products do not constitute the mirror image of this sales equation: trying to get them to make the harder life insurance sales with any sort of quantitative success can be a steep slope indeed. One of the best Canadian illustrations is the Investors Group mutual fund sales force -- an excellent branch office/managerial career agency-type distribution system but one that Investors has never been able to make into a distribution system in which even a significant minority of its advisors make their own life sales in any sort of quantity.

In the Canadian market-place today there are a variety of intermediaries and organizations involved in the sale of financial services products of all kinds. They are commonly referred to as financial advisors or financial planners -- and many are well qualified to provide advice, some are not. 

One sees enthusiasm expressed, often in the Globe and Mail's Report On Business, for what is actually a fantasy version of the financial services business in this country, i.e., that those who sell products and receive commissions should not be allowed to hold themselves out to the public as financial planners.

As a former board chair of the Financial Planning Standards Council I regard this sort of attitude as unrealistic and too precious by half. Whether, for example, a CFP-qualified financial planner receives (directly or indirectly) commission income from the sale of financial products should not disqualify that person as an advisor provided the expertise is there and is used to benefit the client. 

Rather this merely reflects the reality of a market place in which genuine fee-only financial planning remains a boutique segment of the financial services business and, since most Canadians show no inclination to seek nor willingness to pay for fee-only advice, it is likely to remain so.

Were it not for the financial advice being provided to Canadians by tens of thousands of licensed financial services intermediaries, including life insurance agents,  there would be a huge shortfall in advisory support as well as in the acquisition by Canadian consumers of problem-solving financial products.

But if today's recruiting or sponsoring life insurance company or agency does little more for the agent new to the business than the equivalent of what was mainly done 50 years ago -- that is, sponsor a licence, hand the new agent a rate book and inform the new agent that he (and agents then were virtually all men) would sink or swim financially based on sales from day one, then the odds against becoming a successful life insurance professional are high indeed.

Agents who sell life insurance make a valuable contribution to their communities and to society. Their market in Canada today is not "saturated" despite the use of this self-serving codswallop by life insurance company executives seeking camouflage for the latest corporate acquisition or lagging sales result and by members of the financial services paparazzi who merely repeat what they don't understand about the distribution of life insurance. In fact the market for individual life insurance in Canada today is neither saturated nor adequately served.

I have long been a supporter of the active agency system, especially the career agency distribution system, not out of some emotional attachment but because I value the social and economic benefits to society and to individuals of their having adequate individual life insurance coverage.

Society as a whole and not merely those in the life insurance business have a direct interest in whether or not Canadians are adequately insured and therefore -- whether they realize it or not -- they also have an interest in its effective distribution to Canadians, i.e., in the provision of genuine (real world) 'opportunities to buy' this core financial product.

Perhaps the hoariest cliche of the North American life insurance business holds that life insurance is not bought, it is sold. But cliches customarily attain their status because they encapsulate a truth.

Today's active agency system is involved with the distribution and sale of a product most Canadians will not take the initiative to purchase either at all or in the right amount at the right time. 
But in my experience nothing has weakened the potential growth of the active agency system in Canada as much as the poor stewardship of that distribution system by most of the life insurance companies with which it was partnered for decades.

The life insurance agent has long been the subject of a prejudice against commission-based selling that is today the stock-in-trade of those in the financial services commentariat who apparently believe that distributing financial products should be undertaken as some sort of philanthropic activity, one unrelated to anyone earning anything from it lest the member of the public be harmed by a distributor's financial incentive to put life insurance coverage in place.

Among such members of this segment of the media's chattering classes there is of course an implied exemption for fee-based activity which appears to occupy a holy place among those willing to ignore certain relevant facts. For example: that so-called 'fees' can be and often are de facto commissions however disguised (e.g., as 'referral' fees paid to 'fee only' financial planners).
One needs to calibrate the impact of these and other such industry misconceptions on a realistic understanding of how most individual life insurance coverage gets put in place; how and by whom it is sold, serviced, retained, upgraded and where necessary replaced.

I have low expectations of the ability and willingness of many media financial services pundits and self-appointed advocates when it comes to real understanding of the important role and contribution of life insurance agents to the public good as well as that of the various forms of the active, i.e., prospecting/selling agency distribution system to which they belong.

Such 'experts' enjoy the luxury available to pundits of leaving the life insurance industry's complexity and nuance to others. Indeed their attention to the subject, however superficial, is routinely uninformed or idiosyncratic or both. But like the common cold they are around for the long haul.




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Sunday, January 26, 2014

(No.255) Economical Mutual Insurance Co.: facts vs ghost milk

"The proposed demutualization of 
the Economical Mutual Insurance Company 
of Waterloo: 
facts vs ghost milk"

by Alastair Rickard

I had not intended to return to the subject of the proposed demutualization of this Canadian federally regulated property and casualty (P & C) insurance company, at least not so soon. Doubtless there are those who would argue that I have already devoted too many columns on to the Economical Mutual Insurance Company of Waterloo, Ontario during the past three years or so. (The four most recent are column nos. 241, 245, 251 and 253.)

The RickardsRead column posted on Dec.18, 2013 prompted an email from another of that fraternity of would-be millionaires ( i.e., the fewer than 1000 "voting policyholders" out of the more than one million Economical policyholders) who seek to demutualize the company and divide -- only among themselves -- the $1 billion plus equity of the demutualized company.

This Economical "voting policyholder"called on me to be factual about Economical's "voting policyholders" and their "rights". The blindness of my Economical correpondents to the actual relevant facts prompts me to focus on what some of the facts are. But first I reprint below his email complaint in its entirety.

"Re: Economical Demutualization.  Article Dec.18/2013
I wish people would quote all the facts when attacking the rights of parties entitlement. Your article of Dec. 18, 2013 fails to mention the rights of the voting members.

"Voting members signed promissory notes to finance Economical if Economical ran into financial trouble. Did the non-voting parties take this risk? NO! If a disaster happens to policyholders of Economical we the voting parties would be out money not them. Just because no disaster took place that Economical need[ed] help with doesn't mean there wasn't risk.

"Sure you talk about windfalls for voting members, where the biggest windfall would be if non-voting holders cashed out without taking any risk. They would be the real winners.

"It's the voting members who have made Economical what it is today, it's our Company. We'll fight to keep it." 

These comments from a "voting policyholder" remind me of the observation of the late U.S. Senator from New York Daniel Patrick Moynihan: "everyone is entitled to his own opinion but not his own facts".

The facts related to my correspondent's declarations actually support the federal Minister of Finance not permitting the "voting policyholders" of Economical to divide the pot of company gold only among themselves.

Several of the facts can be considered here. For example:

1. The promissory notes signed by Economical's "voting policyholders" and associated with the right to vote obligated the "voting policyholders" to help the company financially if demanded by the company to the extent of their policy premium. This financial 'risk' was picayune in comparison to the analogous insurance-related risk borne historically by, say, the individual investors in the Lloyd's of London insurance market having to financially pledge their personal assets.

For the 'risk' (de facto non-existent) of having to cough up an amount equal to a policy premium, it is argued that today's band of brothers and sisters in the Economical Insurance 'voting fraternity' are entitled to receive a least a million dollars each.

2. By company bylaw Economical did away with the promissory notes 'obligation', coincidentally(?) not long before the company publicly announced what had already been decided: its intention to request permission from Ottawa to demutualize.

If I was Minister of Finance I would be asking the Office of the Superintendent of Financial Institutions (OSFI) with which Economical would have had to file its bylaw why nothing was done at that point by OSFI to address the fundamental governance issue, i.e., fairness to all Economical policyholders?

The fact that no steps were initiated by OSFI has permitted the (de facto) risk free beneficiaries of an historical anomaly (voting vs non-voting policyholder status) to line up at a financial trough while demanding the outright exclusion from access to it of hundreds of thousands of other Economical policyholders.

3. The "right" to vote of the fewer than 1000 of the current policyholders of Economical Insurance (and hence the basis of their claim to the company's equity) is not based on federal insurance legislation as it was in Canadian federal life insurance companies. Rather it arises from the company's charter. That is why there are, properly defined, no "participating" policyholders to share in Economical's equity on a demutualization as there were by the hundreds of thousands more than a decade ago when four big Canadian life insurance companies demutualized.

In its more than 140 years of existence Economical did not demand payment from policyholder signatories of promissory notes, i.e., its voting policyholders. The financial "risk" borne by today's group of Economical's "voting policyholders" has been effectively non-existent by both amount and likelihood of demand.

Indeed, why would Economical's board (past or present) ever choose to worsen a corporate financial problem by demanding what would amount to a small capital infusion from a relative handful of policyholders. To do so would in effect be informing stakeholders and interested parties (the regulators, the media, the public and its policyholders generally) that the company was in such severe financial condition that it thought the ad hoc infusion of the equivalent of the annual premiums from even a 1,000 policies might help?


To what might one compare the real "financial risk" borne by the "voting policyholders" of Economical Insurance, particularly the current small fraternity?

It would have been on a par with The Queen inviting me to Balmoral and then asking me take on the role of Archbishop of Canterbury.

My correspondent's argument boils down to this: the "facts" show that the "voting policyholders" took all the financial risk for the company down the years thereby making "Economical what it is today".

The varnish he applies to the real facts is far from convincing. Indeed the argument is gormless based on factual ghost milk.

Hence (he asserts) the division of the company's equity among all policyholders would be a windfall for them but dividing it among the fewer than 1,000 current "voting policyholders" would not be a windfall for that small group.

Reality is not altered by an inability to recognize fact. There was no significant financial risk assumed by "voting policyholders" of Economical as the historical record shows, and even if one were to grant that there had been -- at least in theory -- it was a risk so limited in extent as to make laughable current claims to a million dollars each as the reward for the risk.

The "facts" of the Economical Insurance demutualization proposal rather than advancing it provide ample reason for Ottawa to require major amendments in order to achieve at least some semblance of fairness for all the company's policyholders.




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Thursday, January 2, 2014

(No.254) Las Vegas: no place for 'ars gratia artis'

"Las Vegas: no place for ars gratia artis"

by Alastair Rickard

In booming industrial cities of 19th and 20th century United States like Boston, Philadelphia, Detroit and Buffalo, very wealthy residents created and supported both magnificent structures as public art galleries but endowed them with great art to hang on their walls as well as the money to buy more.

As I think about how much the great American museums in just this quartet of cities have enriched our travels this past year or two, I cannot help thinking also of the sharp contrast with another of the favourite destinations Pat and I have had: Las Vegas.

While we have not wagered a penny in Las Vegas it attracts us periodically because of the variety, quantity, concentration and accessibility of its live, professional entertainment. It rivals New York in this regard. The Las Vegas 'Strip' nevertheless remains perhaps the world's leading monument to concentrated excess and bad taste.

What Las Vegas did not have as it grew from being a desert town of saloons and bordellos  to its present status as a leading world tourist destination was a wealthy elite willing to do, for example, what Edsel Ford did for the Detroit Institute of Art or John Albright for its counterpart in Buffalo.

Benny 'Bugsy' Siegel, the gangster whose name is associated with the still operating Flamingo Hotel, was not as cinema has it the visionary founder of the 'Vegas Strip' (which is not actually located in the formal municipality of Las Vegas). Nor unsurprisingly was he a supporter of public art or culture nor were the mob bosses who followed him and ran the Vegas casinos for years, nor was the reclusive and looney Howard Hughes who supplanted them as the leading Vegas mogul.

The visitor to today's Las Vegas, despite its wealth and size, will search in vain for anything that even begins to approximate a public art museum/gallery worthy of the region.

When we first began visiting Vegas there was a branch of New York's Guggenheim Museum -- the Guggenheim Hermitage Museum -- located off the lobby of the Venetian Hotel.  It was a modest but interesting space and operated from 2001 until 2008 when it closed.

When the entrepeneur and art collector Steve Wynn built the Bellagio Hotel (one of the Strip's finest, since sold to the MGM chain), he created a smallish public gallery in which he displayed some of his own impressive art collection. After the sale the hotel maintained the gallery space and brings in small special exhibitions (currently some work of Andy Warhol).

When Wynn opened his new hotel Wynn Las Vegas on the site formerly occupied by the Desert Inn in April 2005 it too included a gallery displaying some of his art collection. Unfortunately it was closed in early 2006.

The latest serious attempt to create a truly public gallery on or near the Strip is the Southern Nevada Museum of Fine Art, located on the second level of the Neonopolis complex [sic] on Fremont Street in the downtown of 'old' Las Vegas. It is an admirable effort open for several afternoons a week and seeks financial support wherever it can find it. But it has a long way to go.

It would be naive bordering on silly for anyone who admires and supports public art galleries to wring hands over the (mainly) vast wasteland for visual art in Las Vegas while so many billions of dollars have been devoted in recent years to the bad architecture that lines 'the Strip'. Still one is permitted to wonder whether there is not some way to reach the senior people in the very few large corporations that have a relationship with Las Vegas that most resembles that of a Sumo wrestler and his mat.

If such were indeed possible one might ask: is it possible for company decision makers, these permanent visitors to Vegas, to mount even a modest effort (funded by a few of the untold millions generated for them by Vegas annually) to support a decent public art gallery in the Las Vegas area, one that reflects in some small way the wealth derived from the hundreds of thousands of punters visiting the area annually?

Even Rupert Murdoch, the proprietor of London's and New York's scuzziest tabloid newspapers as well as Fox News, the latter being a major contribution to the lowering of Fox viewers' current affairs IQ, continues to maintain the superb Times Literary Supplement of London, one of the three leading book review periodicals available in English. But then even a bordello can, if it chooses, pay for the services of an accomplished piano player.

Ars gratia artis, "art for art's sake", was the founding motto of MGM Studios in Hollywood from which derives one of today's dominating Vegas hotel and casino chains: MGM Resorts International, operator of more than a dozen establishments along the Vegas Strip. However to be realistic one must acknowledge that this phrase has as much relevance currently as would the suggestion that Vegas does not have available a sufficient supply of Elvis Presley impersonators.


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