Brokerage Ops the May 2021 issue

Flight to Quality

What are the options for quality, consultant-minded brokerages that need capital to grow?
By Phil Trem Posted on May 2, 2021

Take remote working, or work from home, as an example. Over the past five years, I was involved in countless conversations that spanned hundreds of hours debating whether the culture of a brokerage could survive a work-from-home environment. Some firms created contracts with their colleagues to ensure there would be no dependents (parents or kids) at home during core work hours. Some discussed what metrics could be used to ensure productivity stayed consistent compared to working in the office. Fast-forward through a pandemic year and there’s a realization that productivity for most people is actually greater when working from home. Organizations are working through plans to allow multiple days, or even weeks, from home as a permanent accommodation even as offices begin to reopen.

Other aspects of the industry have changed as well. Valuations for acquisitions are on the rise compared to pre-pandemic pricing. This is primarily being driven by an increase in demand from financial investors (private equity firms, family offices, etc.) showing an even greater interest in the industry after its strong performance during an economic downturn. Organic growth rates have held constant compared to prior years, but profitability in 2020 was up for most, as certain expenses like travel, entertainment and office supplies were down dramatically due to the pandemic.

Another significant change is tied to a shift in thinking by many insureds. As they are navigating the waters of change in their own business or industry, many are looking to their insurance agent/broker to be more of a consultant. Clients want insight into more than just the cost of their insurance. We are hearing from many firms that their clients are pushing them to take a more hands-on and supportive approach. Advisors are helping navigate business interruption claims, dealing with safety and return-to-work decisions, and providing context on general business topics that cut across a specific industry. Owners are looking for insight into what other businesses like theirs are doing to proactively combat the tumultuous times.

Firms with younger ownership groups are deciding to test the market. This could lead to more dramatic consolidation in the next 24 months, which is also being bolstered by potential tax changes.

Firms that were already more progressive in their thinking and approach were well positioned to provide this level of service to their clients throughout the last year. Brokers who already shifted their mentality to that of a risk management or consulting approach have had the opportunity to write more new business than in past years because they are finding their capabilities to be in higher demand in the current environment.

The pandemic has created an opportunity for some of these firms to break through the personal relationships that have been keeping them from converting certain prospects into clients. It is typically hard to break the ties between in-laws or college roommates who have done business together simply because they are close. But in a tough economic environment, there is more opportunity for the consultative broker to convert some of this business by truly addressing client needs. As one client said to me, there is definitely a “flight to quality” in the industry. He meant that insureds need a quality broker who can help with more than just the cost of insurance. Firms who have positioned themselves to be more consultative in their approach stand to gain from this shift in their clients’ thinking.

Over the next calendar year it’s likely that the gap between the average firms and the best performing firms will grow more dramatically—and the spread between new business written and organic growth rates—will widen compared to pre-pandemic years. This trend has already started to impact mergers and acquisitions. In college business classes, we learn about a strategic pivot to either build or buy the tools and resources a business needs to expand. Well, there is now a third option that many brokerages are considering. In an industry that is already crowded with competition, many firms are now considering whether they should build the resources, buy the tools, or sell their business to a firm that has already decided to buy or build for itself. This third option is an accelerating phenomenon, as the “flight to quality” has made it even harder to compete.

Market conditions are primed to put brokerages in a tough spot. Do they remain independent and risk their own capital to continually invest to grow and remain competitive? Or do they try to find one of the 50+ strategic acquirers or financial investors to partner with? The latter option can give a good brokerage the tools and resources to become a market leader without creating a financial and resource burden. With so many options of partners, many firms that are not necessarily “for sale” decide to explore the market as they contemplate the next move for their firm. Finding the right partner could create career opportunities for the owners and key colleagues of a growing brokerage, expanding their horizons, and giving their organization access to all the resources they could ever need to sell and retain new accounts.

Only time will tell how this new trend will play out. Firms with younger ownership groups are deciding to test the market. This could lead to more dramatic consolidation in the next 24 months, which is also being bolstered by potential tax changes.

However, the days of the spreadsheeting agent are over. Firms need a plan to provide quality consultation and service to their clients if they want to be able to not only survive but grow. If you haven’t yet considered your strategy, it’s not too late. But don’t wait too long for your flight to quality, or the opportunity may pass you by.

Investment banking services offered through MarshBerry Capital, Inc., Member FINRA Member SIPC and an affiliate of Marsh, Berry & Company, Inc.

Phil Trem President of Financial Advisory, MarshBerry Read More

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