Study: Spitzer Probe to Reduce Brokers’ Bottom Line

November 16, 2004

A new industry study claims that the reactionary tactic of many leading brokers to abandon contingency commissions will ultimately lead to a significant hole in their bottom line earnings, as much as 25 percent, and will cause many brokers to reevaluate their business model and take drastic measures to appease shareholders demands.

The WFG Capital Advisors’ study of the industry’s top seven brokerage firms reveals that there is a significant impact to their bottom line when contingency commissions are removed. The impact on “tax affected” net income represents over 25 percent of their composite earnings.

“This astounding statistic underscores the vital nature of contingents and the presumed impact to the industry’s leading segment,” said Steven Wevodau, managing principal, at WFG Capital Advisors. “At a time when product rate declines are severely punishing most firms’ organic growth, the relinquishment of this significant revenue stream presents an ominous outlook to the economic welfare of leading brokers.”

“Many of these public companies must contend with shareholder demands and market capitalization issues that press the need for continued growth and enhancement of earnings per share. If this is not likely to occur, severe deterioration of market capitalization is at risk. This will have a significant impact on the viability of many firms as shareholder confidence wanes and access to capital erodes,” adds Wevodau.

WFG Capital Advisors says the move will require that the firms take a more aggressive growth strategies approach via acquisitions in the upcoming quarters. Wevodau commented that another key area brokers will have to focus on is that many may end up struggling to retain clients due to lost consumer confidence.

“The only option available to high performing firms are to attempt to supplement lost income through an effective acquisition strategy,” said Robert Lieblein, another managing principal for WFG. “There is a lot of speculation on rate trends and if January reinsurance contracts are where we suspect that they will be, major broker will struggle to fill sizeable revenue and earnings gaps.

Lieblien added “Larger brokers are not the only ones that will be affected. Contingents flow right to the bottom line of any firm, and elimination of such a significant component would erode many small to mid-sized firms’ ability to continue to meet market demands and competition. Any time you cut 25 percent out of the profit margin of any business, you greatly impair its ability to re-invest in growth and infrastructure, while sustaining risk-based sustainability to weather the cyclical nature of the brokerage market.”

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