Do your managing agents really understand the breakdown of their costs between fixed and variable costs? What about their overall cost of sales? What about the 'cost of a desk' for each new adviser? How about the risk ratio for their business? Managing agents often believe themselves to be 'just around the corner' from a major lift in profitability. They see lots of activity, and seemingly attractive margins - but the money just isn't there, or is quickly wiped out by a departing adviser. I am thinking of running a finance workshop for managing agencies. If you are interested in this, drop me a line.
If you have read even only a fraction of the garbage that finds its way into your email inbox you will enjoy this post.
I have notes from the Commerce Commission to the ISI on section 45 of the new Consumer Credit Contracts and Finance Act. While focusing on Consumer Credit, and associated insurance it has some interesting indications about it. The Commission appears to be trying to fix a 'reasonable' level of commission for this business. This appears strange, because the issue is not the level of commission charged to clients per se, it is the total value of the goods sold, and whether that is fair or appropriate in the context of a finance sale.
Indications are that a number of companies are happy to ignore the Commission's guideline and see the level considered 'reaosnable' tested, if necessary.
A couple of people in the financial services industry have recently completed the round Taupo bike race: congratulations to Burton Shipley and Michael Hewes. In other news about people: Happy Birthday to Tony Smith at Plantech.
I have just spent some time with the Newpark Financial Services group (run by Darren Gannon) at the annual get-together for their top producers. I had two sessions and spoke on referral systems and the adviser of the future.
The really interesting thing about the event was how different it was because there were no company representatives present. The interactions were quite different. Very, very, valuable - and good on them for making the investment to do it.
We do not appear to have a functioning market in adviser businesses. I think it would be well worth developing one. Mike Moore's new business - www.broker2broker.co.nz - will definitely help. The reason why market-makers are needed is because at present we have such wide diversity in opinions about what adviser businesses are worth. We also have sharply divergent views about what they will be worth.
Some say they are overpriced. Some say under. I am aware of a number of transactions in the market - and the average of those would be about 3.3 times.
Connected to the issue of valuation is Buyer of Last Resort terms. (BOLR). A number of advisers have said to me that they think companies are backing away from these. Will they go? This is tied to the issue of future values, and in particular what the impact of regulation on adviser business values will be over the coming months. I am less hawkish on this issue than most.
While regulation may reduce the number of practicing advisers by 'a number' they will likely be the ones with less capital. The reduction in the ability to acquire bases will likely not fall - but it may be sated for a while with greater choice. Some believe that the value of bases will fall because of the costs of compliance. But for many purchasers those costs are fixed, and have been paid for their own business, and therefore will not apply to a further acquisition.
Regular readers will know that we are hosting an industry Executive Forum in February on Kiwisaver design. The Economist notes Kiwisaver in a recent issue - because the work if a pensions review team in the UK has been looking at the ideas that are being developed here. I say ideas, because while we have an outline of the scheme much remains before it can be implemented in full. The article is "premium content" so you will need to be a subscriber to look at it - so I will not torment you with a direct link here. Just search on 'Kiwisaver'.
Gone is the talk of increasing taxes in this column, and Gareth Morgan now targets the Reserve Bank Governor unequivocally, and his next target is the burgeoning state sector and low productivity growth.
One of his best.
Philip Macalister found the results of Sean Carroll's review of drivers of adviser behaviour surprising - because commission was rated relatively low on the list. This may be a result of what economists call 'revealed preferences'. In survey's advisers tend to rate commission low as a driver - and other factors higher. Yet when behaviour is considered, the preference revealed tends to be higher.
Another interpretation is worth noting. Asteron's commissions are pretty good. So it would not be altogether surprising that this rates lower. Interestingly, few people have picked up on the economic impact of underwriting performance. Higher acceptance rates and speeds can today have a much bigger effect on realised commission than rates of commission. No wonder, then, that this was rated highly as a driver.
A Chinese insurance company is offering cover specifically against contracting bird flu. Link. http://news.bbc.co.uk/2/hi/business/4417538.stm
An significant impact on global GDP is expected – which is what you get when a lot of people die. Read this: http://www.forbes.com/business/2005/11/10/avian-flu-pandemic-cx_1111oxford_birdflu.html
An interesting “medblog” we discovered along the way. http://www.kevinmd.com/blog/
The key issues are casualty estimates and the effect these will have on insured groups. Take this article for instance. http://www.nydailynews.com/news/local/story/362820p-309055c.html
If past pandemics are a guide, then the impact will be modest. While we have had some commentators suggest that earlier estimates of casualties are overblown. With current cases of bird flu we hear of worst cases: (e.g. three people infected, two died). Using The Spanish ‘flu epidemic of 1918 as a guide some administrators in New Yorkwere estimating 25% infection with a 2% death rate. That is truly horrible. Much worse than the death rate from normal flu epidemics. But it is a lot better than the 1 in 3 relationship implied by a casual reading of the news.
Of course, clients have access to a more formal opinion.