Headhunting brokers: Fair game?
A certain life insurer is offering independent advisors exorbitant fees to join the company, and many intermediaries are blind to the expectations attached to the offer, such as churning. Such practices have serious implications for the industry, the advisors and the consumer.
In any competitive business environment, organisations often approach talented individuals in competitor organisations to join their business. “In this context, headhunting competent financial planners is no exception,” says John Mill, Head of Momentum Financial Planning of Momentum Financial Planning. “Companies apply a variety of methods to recruit candidates. For more specialised roles, such as financial planning, it is inevitable that a company would identify and approach experienced individuals externally.”
Ian Middeton, Masthead managing director says that in some instances headhunting can be a healthy practice for the industry. “If an established broker with an excellent track record is approached by a company with view to grow a business, acquire new customers or outlets or preserve assets, then acquisition through this headhunting practice can assist in developing the industry.
“From an employer’s viewpoint, there are significant advantages to hand-picking the right candidate to fill a position. If a company targets experienced successful brokers with established client bases, they not only have a better idea of who they are employing, but they achieve growth and success in quicker time.”
Benefits both ways
Denise Shaw, Managing Director, Standard Bank Insurance Services adds while it is critical for organisations to employ the right person for the right job, it is equally important for employees to work for a corporation that will help them succeed, and make their vocational aspirations a reality.
“Headhunters play in key role in bridging this gap: matching the needs and wants of the organisation to what prospective employees are looking for. For ambitious individuals who want to get to the top fast, having an agent scout for opportunities that offer more money, personal growth and job satisfaction certainly makes sense.”
Fair game?
However, not everyone in the industry plays a fair game when it comes to headhunting or acquiring broker businesses, and some headhunters’ offers are based on dubious practices.
“When headhunters induce brokers with unfair practices or objectives in mind, this behaviour is detrimental to the broker, to clients and to the industry, says Middeton. “For instance, it is not uncommon for brokers to be headhunted with the objective of churning their client bases in favour of the headhunting company’s products.
“Some offers include upfront cash payments - a ‘signing-on fee’, single large allocations of company shares in the form of options or outright ownership, deferred payments and agreements to keep additional broker contracts open. Offers of upfront payments may very likely result in churning, as the headhuntee is incentivised to offer his/her clients the employer’s products. Ultimately, this is where the investment pays off for the headhunter company.”
Implications for the industry
“There are healthy but certainly also many unhealthy practices in the industry at present,” comments Jaco Coetzee, General Manager: Sanlam Financial Advisers. “Head-hunting in general is normally to the disadvantage of those companies who invest significantly in the training and development of new advisors.”
Shaw adds that there is a downside to this practice. “Headhunting has the potential to lead to inflated market salaries and to create certain expectation on the part of the individual seeking employment.”
Implications for the clients
The consumer may well be affected by the practice of churning policies, which may be part of the headhunting process within certain companies.
“The client value proposition of investment as well as protection products has improved significantly over the past few years. Any movement of financial planners between product providers will raise the awareness of the differences in the various product value propositions,” comments Mill. “However, any policy replacement must still benefit the consumer and comply with FAIS requirements. We have therefore no reason to believe that headhunting is a major driving force in policy replacements.
“In addition, the majority of financial products available in the industry remunerate intermediaries on an ‘as-and-when basis’, which implies a limited benefit for a financial planner when engaging in policy replacements.”
Implications for brokers
Yet, in reality, remaining independent is one of the biggest challenges independent brokers face. “With headhunters in the industry enticing successful independent brokers into tied sales forces with lucrative offers, brokers need to carefully consider the financial, practical, legal and moral implications of losing their independence, both for themselves and their clients,” says Masthead, who has assisted members targeted by headhunters by analysing the offer and explaining the implications.
“The brokers we have assisted understand that by giving up their independence they no longer work for themselves: they become employees, share commission, give up ownership of their customer base, become subject to corporate targets and are limited in choice of company and product options.”
Creating loyalty
Coetzee says that Sanlam has often found that the few and very select advisors who have been headhunted by the company do not show the same persistency as those who came from their own moulds may from time to time headhunt independent advisors. “Headhunting therefore represents a small fraction of our annual recruitment. Our practice is rather to build a loyal and sustainable advisor corps.”
“Remuneration is not the only factor a prospective employee will take into account. What the organisation offers in terms of growth and development opportunities, how much of a responsible corporate social citizen the organisation is, and the organisation’s reward and recognition philosophy, can be more important,” comments Shaw. “Furthermore there has to be a meeting of the minds in terms of the organisational culture and climate and the personality of the individual. In other words, the fit has to be right.”
In terms of the unethical headhunting practices in the industry Coetzee adds that, “An advisor will never be loyal if he/she is denied the opportunity to make an informed decision which includes transparency in respect of the negative aspects and expectations of joining a tied agency. Money does not make someone loyal. At Sanlam, we strive to be the most professional advice giving organisation in South Africa. In line with this, we offer intermediaries advanced support to grow their businesses within a business model such as Sanlam's BlueStar Businesses,” says Coetzee.
“Dedicated specialist managers assist intermediaries to implement a unique business model focused on building up equity, which creates the potential to sell the practice and retire. Other less tangible benefits include dedicated and specialist support and managing business processes that focuses on ease of doing business. An adviser who joins Sanlam would need to adhere to a culture of Integrity and Ethics and client-centricity.”
Momentum says that, as a business, they constantly challenge themselves to ensure they provide relevant and market-leading products and services that assist intermediaries in their financial planning endeavours and, at the same time, satisfy the needs of their clients. “Our product solutions must offer value for money,” says Mill. “This in turn is supported by a strong brand and efficient business processes. Thus, we offer a compelling value-proposition to all our stakeholders. In the long run, this is the only sure way to ensure staff retention, be it for financial planners or any other discipline within our organisation.”
Ethical issues
Coetzee says that unacceptable headhunting practices can only be curbed if properly regulated and governed by the regulator, which would require a replacement process that focuses on substance and quality and not only on form.
“It is doubtful whether the unacceptable headhunting practices will end, as often the economic benefits outweigh the collective moral will or desire not to do it,” adds Middleton. “Although the impending Conflict of Interests regulations may limit these practices, attempts to end these practices through regulation have been ineffective due to inadequate policing and enforcement. Where there’s enough money, there will always be creative ways of side-stepping regulation.”
In the end, it still remains up to the independent brokers to act in an ethical manner and to protect the interests of their clients, even in the face of lucrative, but unethical headhunting offers that certainly offer an easy, enticing and compelling alternative to the challenges of remaining a truly independent advisor that places the interest of their trusting clients above all else.
