10 Crucial Questions to Ask Before Joining any Insurance Agency Group
Upfront fees, commission splits, NO profit-sharing, and lack of ownership.
These are the hallmarks of most of the agency groups or 'cluster' programs prevalent in the market today. IF you are considering joining an agency group, you must understand the most critical program aspects and ask the right questions, so you don't end up making a costly mistake.
How can you make an informed decision before taking the plunge? Start by asking these 10 crucial questions:
1: Is there an upfront charge, and if so, what does this cover?
It is typical for groups to charge upfront fees. However, if those fees are anywhere north of $5,000, then it may be time to look elsewhere. A group will incur costs when setting up and onboarding new agencies to its group, and sometimes they will pass these down to the new member. But there is a point where the fee becomes unreasonable for the services that are provided, so be cautious when these fees feel excessive. Better yet, find a group that doesn't have upfront fees.
2: Are there monthly fees? If so, what do these fees cover?
Many groups charge monthly fees. Sometimes these fees cover a minimum amount needed to run the group at the management level. Other times it covers 'technology' requirements mandated by the group. These fees are common and can be reasonable, but you need to ask what they are and why they are charged.
3: What is the commission split?
Most organizations or groups make money by splitting commissions with their member agencies. Do the math! How much is that commission split really costing you? It may not be much today when starting your agency, but what about when you build an agency with annual commissions of $150,000? At that commission level, if you join a group that takes a 20-50% cut of your renewals, that equals $30,000 - $75,000 PER YEAR!
Instead of a commission split arrangement, look for a group that charges a flat fee. Then you can truly grasp your cost of doing business with that group.
4: If there is a commission split, am I required to pay you on business I write outside the group?
This may seem like an outlandish question, but make no mistake, it is common practice. According to their contract, many groups require a cut of any business written directly with carriers that are outside the group. Some groups won't even allow an agency to write business with carriers not offered through their platform. Be careful and read the contract carefully.
5: Do you offer profit-sharing or carrier bonuses?
I see the following scenario frequently: A startup independent agency is looking to get access to the BIG carriers and decides to start a relationship with a regional MGA that offers a commission split arrangement of 80/20. They receive ZERO profit-sharing, and because they come from a captive agency environment, they don't even ask about these carrier bonuses!
In contrast, look for a group that splits the profit-sharing bonuses with its members. Retaining a PORTION of the carrier bonuses is fair for any group or cluster, but it gets greedy when that percentage is 100% to the group ownership and 0% to you.
6: What happens when I want to exit the group?
It's very common for agency owners to overlook this scenario. Quite simply, think ahead. Agency owners get excited about joining a group and don't consider a situation where they would want to leave.
The most common exit fees are based on a percentage of annual revenue. For example, many groups charge 20% of annual revenue to leave the group. What does this look like in REAL dollars? Let's assume you have built a $1.2MM book of business with annual revenues of $150,000.
In this scenario, you would have to come up with $30,000 to leave the group and keep your customers! I have seen situations where agency owners must take out loans for six figures to get out of the grips of an agency cluster! Don't make this same mistake.
7: If I want to sell my agency, can I do that on the open market, OR do I have to sell it back to the group ownership?
Requirements to sell back to the group or cluster have become more common in recent years. This practice is prevalent in the captive environment and is now something to be cautious of in the independent world as well. 'Franchise' groups are the biggest culprits here, and I have seen arrangements that require selling back to the franchise group for a ridiculous factor of .75 x Annual Revenue. When compared to a 2.5 factor on the open market, this is an insult to an agency owner who has worked hard to build a business.
8: Do I have binding authority with the carriers?
This is commonly an issue with MGA arrangements, but I have also seen this with franchise organizations. If you don't have binding authority, you will be required to request this from the home office of the group. This will almost always cause a delay in getting business written and may cause you to lose business. You want to have the ability to quote and WRITE business immediately, so make sure the group gives this authority to you!
9: Am I required to put the group/franchise name on my signage and marketing material?
This may not be a big deal for you, or it could be a deal-breaker. Will you be marketing yourself and your agency's name? Or will you be required to post the name of the group on your door and business cards? You want to ask the question and be willing to accept the arrangement if you sign on the dotted line.
10: How does your organization make money in this arrangement?
Unfortunately, greed abounds in this sector of our industry. When speaking to any agency group, ask this simple question to gauge any level of greed. If you immediately get pushback, then it may be time to move on. Ask the hard questions and find out about the termination agreement.
Not all agency groups are bad. In fact, once you find a group that is FAIR and TRANSPARENT, there are many benefits of joining a group. Just exercise caution, and don't be afraid to ask questions when speaking to a group.
As with many other situations in life, if someone is trying to hide something from you, they will get nervous when you start asking questions. If they are open to your questions and seek to provide you with thorough answers before you make any decisions, you have probably found a winner!
To find out more about our agency group, visit us at www.isgunited.com/the-difference, and please, ask us the hard questions!