You are thinking about retiring and you have one question. What are your options in regards with your block of business? If you have sold mutual funds, the answer is simple and you must sale. For an insurance block of business, it is entirely different. You have the option of keeping the ownership of your block of business and the commission it generates.
First a little bit of ground rules. What I am writing here is about blocks of business for independent producers or brokers. It does not apply to captive or career agent books of business since there is no question of ownership relating to these blocks of businesses. In the end these blocks of business belong to the insurer. In the contract between the insurer and agent, there may be an exit clause which provides a compensation or buyout. But in the end the blocks of business always belong to the insurer. When you leave the insurer, the block stays behind. It’s a bit like the insurer is renting to its agents the rights associated with the blocks of business they have worked so hard to create. In other words, when you move out you don’t get to keep the house…
For independent life producers and MGAs, the insurer does not own the blocks of business. As a result, an advisor can keep or sell his block without the approval of the insurer.
First legal question to answer: Is it legal for an unlicensed advisor to receive servicing commission?
Here is an unbelievable fact! Before this question was answered, an independent advisor who became unlicensed could remain the servicing advisor on a life policy or segregated fund even if he was not licensed anymore and not having a servicing contract with the insurer. The unlicensed advisor just had to hide to his clients the fact he was unlicensed and unable to service their policies. Amazingly insurers do not inform clients of a change in the licensing status of their independent agent or cancellation of a producer contract. The insurers do not require an unlicensed advisor to inform clients of their new status and the insurers do not require that a new licensed servicing agent be named by the client or by the advisor. Please note that this problem is and was quite prevalent with direct distribution where the independent producer is not using an MGA and is signing a distribution contract directly with the insurer. I have found MGAs to be more proactive on this issue but still the problem remains even in this distribution channel.
I was absolutely against this situation and status quo and I decided to do something about it. Face with unrelenting pressure on my part, the AMF was finally forced to answer this question. In a communiqué published at the end of the year, the AMF stated that it is legal for unlicensed advisors to receive servicing commission for life policies based on two conditions:
1) The advisor must have sold the original policy
2) The advisor or insurer or MGA must arrange for a licensed advisor to service the policy. Please note this is a big change as it is not the responsibility of the client to find a servicing agent. It is the responsibility of the unlicensed advisor/insurer/MGA to arrange this.
(Note: Most industry experts including me and the compliance department of La Chambre Financiere were in the opinion that it was illegal for unlicensed advisors to receive servicing commission. On the opposite side were the insurers. The AMF sided with the insurers.)
Here is the catch. The question that the AMF answered was in relation to life policies. However from a licensing perspective (and many people forget this) a segregated fund is a life policy. The right to sell and receive commission on a segregated fund is determined by your life license.
Therefore it is legal for an unlicensed advisor to receive servicing commission from a segregated fund under regulatory law. However and this is because of me, it is now illegal for any life policies including segregated funds not to have a licensed servicing agent.
Now let’s look at this under contractual law. Here I will look at an insurance contract signed between independent life producers directly with Manulife.
Now we have seen that the commission remains with the original advisor for a Universal Life and other life products when the servicing agent is changed. This does not happen for the segregated funds. Most advisors believe this is because of existing vesting provisions for the UL and other life products with such provision not existing for segregated funds. This is false. Servicing commission for UL and other life products are not vested. The difference in the treatment of the servicing commission between these two products is purely administrative. For the segregated funds a change to the servicing commission is automatic with the change of servicing agent. That’s how the administration is built. For life products it is not automatic and must be initiated by the client. Therefore contractually there is nothing to prevent or limit the right of ownership of an unlicensed advisor and his right to receive servicing commission on life products he sold including segregated funds.
Can an unlicensed advisor keep the servicing commission of a segregated fund? As we have seen and as answered by the AMF, you have the legal right to keep this commission and ownership of your block of business. As we have seen under the agent contract there are no specific clauses that prohibit this. However there is an administrative clause that impacts segregated funds. Whether you are able to keep your block of business and your servicing commission will therefore depend on the structure you adopt in relation with the service on your block of business. Here are the options now available:
1) Sell the block of business to the new servicing agent: In this structure since the goal is to receive the servicing commission for life, the price of the block of business is a payment equaled to the amount of servicing commission paid for life. “Wait a minute, you are saying. Nobody will pay this. I have been offered 3 times servicing commission” Well you are wrong. I know a lot of advisors that are accepting the responsibility of taking over orphan block of business from insurers where they will receive no servicing commission since it will continue to be paid to the original agent. If this agent is willing to take over a block of problem clients for nothing, he should be willing to do the same for a good block of business where he can get paid at least on the growth of this block.
2) You don’t want to sell because you feel there are advantages in retaining the ownership of the block. Since you are invested emotionally with your clients, you want to retain some control over the service that will be provided to the clients. For example, if the servicing agent you have selected is not doing his job, you can fire him and select another one if you retain the ownership of the block. You may want to continue working as an unlicensed expert by offering your expertise and coaching to the new servicing agent as an insurance specialist. Maybe you want to take an administrative role as an assistant. These are duties that do not require licensing. (NOTE: If you act as a coach or insurance specialist with the new servicing agent and you accompany him in his meeting with your clients and you are unlicensed, it is extremely important that you make your client sign in writing that he understands that you are not the advisor. Remember if there is a complaint 5 years later and the regulator investigates, will the client remember who was there? He will remember you this is for certain but will he remember the licensed advisor…)
To achieve these goals, if you want to retain ownership of your block and retain the servicing commission of your segregated funds, you must adopt a corporate structure.
In Murphy versus the AMF, this is what was done. Basically, Murphy remained the servicing agent on the segregated funds even if he was unlicensed (which I am against and which is now illegal) until the client needed service. When the client called for service he was referred to a licensing agent selected by Murphy. A change of servicing agent was done on the existing policy and Murphy would therefore lose his right to the servicing commission. However as per the contractual agreement signed between Murphy and the new servicing agent, Murphy’s interest in the policy would be considered at this point to be sold to the new servicing agent and the price would be shares of the corporation where the new servicing agent was attached. In the contract there was extensive buy back provisions in case Murphy became licensed again where he would automatically become the servicing agent for these policies.
There are quite a number of other corporate structures that will allow an unlicensed agent to name a servicing agent while retaining the servicing commission of segregated funds. However I can’t list them all and they will vary dependant on the contract you have signed with each insurer. Truly, this corporate structure and legal agreement has to be drafted by lawyers who have the necessary expertise of regulatory law and contractual law.
Murphy versus AMF
In the cause of the lawsuit of Murphy against the AMF, the structure adopted by Murphy was reviewed by judge Alain. What did he think?
First before talking about this, let’s look at some facts. Murphy paid a lot of money to expert lawyers in the drafting of this agreement to be certain that it was legal under regulatory law. This agreement was submitted to the AMF for their review. The AMF did not oppose the agreement or the fact that he was receiving servicing commission while being unlicensed (at the time of the drafting of the agreement it was not known whether it was legal or illegal for an unlicensed advisor to receive servicing commission as the AMF was refusing to interpret the law). The AMF however seemed to have a problem only with the buyback provision but could not officially oppose this aspect of the agreement.
As we have seen in the Supreme Court on the Sovereign case against the AMF, where the law is unclear regarding whether you are committing an infraction or not, you have to do everything in your power to make the right interpretation and this mean paying for expensive legal counsel. If you have done this and the regulator is aware of what you are doing and does not inform you it is illegal and why it is illegal, then and only then you have the right to assume it is legal.
Well the decision of judge Alain in the case of Murphy versus is riffled with errors. Sadly this judgment will not help is creating a precedent that will clarify the situation. Right from the start there is an error in stating:
“Mr. Murphy was advised repeatedly on a period of many month that since he did not have any licenses, he had to let go of his bloc of business and to transfer his files to a person who had a valid license.”
The AMF has stated clearly that an unlicensed advisor can retain the ownership and therefore retain the commission of a life block of business. The AMF as per its communiqué only has the right to require that a servicing agent with a license be named. So right from the start, judge Alain does not know what he is talking about and since all of his argument is based on the fact that Murphy was obligated to let go of his clientele which is not true, then all the arguments of this judge Alain are wrong. It is in fact a funny situation. Will the AMF appeal this decision of judge Alain where the AMF won but which contradicts the position of the AMF if this means the AMF would then lose as a result its case against Murphy? But then again if logic was a factor in the Murphy case, two plus would have to equal five.
I still believe that unlicensed advisor as in mutual funds should not have the right to receive commission for life products because then unlicensed advisors can sit on a block of business while minimizing the client’s right to service. This is what I believe but it’s not the law. However, having to accept the law, my preference and my suggestion for any independent advisors wanting to retain the ownership of their block of business when they become unlicensed is to prepare ahead of time.
My favorite structure to do this is for such an advisor to recruit a junior which he will groom over a 5 year minimum under a corporate structure. As the junior gains more experience, he will be able to take more and more of the bottom clientele allowing the senior advisor to focus on key relationships. There is a value that the coaching the senior advisor will provide the junior. It is important to recognize the economical value of this coaching right from the start as this will facilitate the transition of the senior advisor to an advisory role when he become unlicensed.
If you are an independent advisor why would you want to walk away from your business? It is the time your knowledge, experience and brand has the most value. So when you become unlicensed why would you disappear? I am certain at times you felt it was lonely as an Independent advisor. You had to make all the decisions and who could you use and trust for an opinion. Even if you are unlicensed you should continue in a remunerated (remuneration equal to the amount of servicing commission you want to retain) advisory role for the junior who is now the senior. You still retain part of the ownership of the corporation. You still have an influence over the decision of the business. You are the board of director for this business and a mentor and a friend for the junior who you have groomed. In fact one of the roles I like a senior advisor to take is the compliance role for the corporation.
With a bit of planning you can have your cake and eat it too and even share it with everyone. In such a structure everyone wins.
There is no walking into the sunset for a senior independent advisor. The only way to get there is to fly there when you become an angel… until then it will always be your business one way or the other…