Mitch Wein and I recently hosted Aite-Novarica’s quarterly Broker-Dealer Research Group. As 2021 comes to a close, broker-dealers must grapple with complex compensation methods, regulatory changes, and the future of work in a post-pandemic world. The rapidly changing regulatory landscape and expectations from producers require broker-dealers to continuously evaluate and update their technology or risk falling behind the competition.
Aite-Novarica’s recent study of insurance-owned broker-dealers highlighted the complexity of supporting producers with different types of employment and contractual relationships, leading to a mix of tax reporting and related issues such as benefits eligibility. Similarly, decisions regarding the usage of commercial packages vs. homegrown solutions are at the forefront of most organizations’ compensation environments.
Compensation Strategies
Most broker-dealers support their producers as independent contractors, using 1099s as a tax reporting mechanism, while some have employee relationships (i.e., statutory and otherwise) stipulating they use only W2s as the reporting mechanism. Approximately one in six support both types of producers simultaneously.
Those supporting an array of different producer types, necessitating the mix of tax reporting and compliance regimens, face substantial risks with regulation at both the state and federal level. The increasingly challenging regulatory environment has caused greater demand for technological and operational solutions to mitigate those risks.
Participants spoke to their experiences with additional benefits for producers, including health benefits and deferred compensation. Some broker-dealers noted that, despite the complexity and regulatory constraints, offering the largest 1099 producers deferred compensation is seen as a huge plus in a highly competitive space where the “war” for talent is both persistent and likely to escalate given the competitive pressures these organizations face today.
Providing a broadly functional and competitive array of producer solutions to manage their own practices is critical for retail broker-dealers, who face the ongoing challenge of providing the best set of capabilities within a compliance framework that is effective and capable of dealing with the evolving regulatory requirements.
Regulatory Changes
New guidelines from the Department of Labor (DOL) have renewed broker-dealer interest in technologies which can be used to track compliance with PTE 2020-02 and PTE 84-24. Most participants told us that they were using internal systems—ranging from simple spreadsheets to fully developed homegrown solutions—to track compliance.
Members of the research group expressed interest in the transition to the cloud and how it might make it easier to handle frequent regulatory changes and the resultant versioning of solutions that are key from an operational and functional standpoint. Cloud-native environments—as opposed to simply shifting storage and computation to the cloud—offer a significant amount of flexibility. Longer term, migrating to a cloud-based environment can alleviate many of the pain points that arise from frequent changes in business dynamics and market forces, as has been seen in other portions of the financial services industry.
The Future of Work
Economists have started to discuss large-scale changes as we approach the end of the pandemic, akin to those in the immediate aftermath of the World Wars. As economic power shifts from employers to employees, companies are facing a new world wherein employees are considering shorter tenure than has been the norm and where a combination of low unemployment and high competition for critical skills has inspired battles for talent.
As a generational cohort, millennials have seen career advancement as a series of “tours of duty” spanning 3-4 years on average, rather than specific committed relationships that could have lasted 30-40 years in the past. This change brings greater potential flexibility across the economy but carries with it an enormous burden in terms of knowledge management.
Companies must also come to terms with the steep regional differences in compensation costs. In a world where work was primarily done in office environments, this may not have been so significant. Today, however, with remote and hybrid work becoming normalized rather than outliers, the resulting transparency has created new challenges and opportunities. Many insurance carriers and their embedded broker-dealers have suddenly and unexpectedly found themselves in a national rather than regional labor pool, which has created shifts that few were prepared for prior to the pandemic’s arrival.
Aite-Novarica’s Broker-Dealer Research Group is a moderated forum open to insurer-owned broker-dealers which meets quarterly. We are looking forward to our next session on April 14, 2022. For more information, please reach out to me at [email protected].
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