WAVE OF FUTURE OR FOOTNOTE TO HISTORY: INSURANCE AGENTS SELLING SECURITIES: CADARET GRANT-AIG DEAL COULD BE A PACESETTER

Cadaret Grant & Co. Inc.’s recent acquisition of American International Group’s brokerage unit could augur similar deals between broker-dealers and insurers.

Syracuse, N.Y.-based Cadaret recently assumed the stock brokerage functions for AIG’s 350-member sales force in an arrangement that keeps the reps selling AIG’s traditional life insurance policies while they delve deeper into securities.

In effect, AIG is outsourcing the broker-dealer responsibilities to a company that knows the business better, while keeping its own distribution channel, says Bruce Stefany, managing director of the Cadaret group that will house the new reps.

It’s an unusual transaction, given the strong trend toward large insurance companies buying independent broker-dealers.

interesting possibilities

To be sure, no one expects that trend to be reversed in the short term. But other insurers already have contacted Cadaret about the possibility of similar future deals, Mr. Stefany says, though he declines to name any of them.

Don’t look for anything to happen very soon, though. “Obviously, we want to assimilate the first group before we go crazy with this thing,” he says.

AIG’s move is apparently a first in the insurance industry, says analyst Jeffrey Hopson of A.G. Edwards & Sons in St. Louis. He doubts many more will follow.

“I’ve seen no indication from other insurers that they would want to do that,” he says. “Given that this is AIG and this is a speck in what they’re doing [overall], I’m not sure this is a trend for the industry.”

A spokesman for AIG in New York said no one was available to talk about the reasons for the deal.

But Mr. Stefany says AIG confronted a choice of whether to grow its broker-dealer operation or to part with it. The company didn’t want to expand a business line outside its core expertise, so it found a middle ground in which it could keep the distribution channel while shedding the operational headaches.

Terms of the deal were withheld.

AIG’s move fit
s in with other actions the company has taken to outsource functions that don’t provide adequate returns, says David Kaytes, managing vice president of First Manhattan Consulting Group.

“This is a company that thinks about the business as business components,” he says. “They say, ‘What’s our return on investment?’ Those (components) that don’t make the hurdle — they outsource them.”

Mr. Kaytes doesn’t expect to see insurers with large captive sales forces sell their brokerage units to independent broker-dealers. But insurers with small brokerage units — like Allmerica Financial Corp. of Worcester, Mass., CNA Financial Corp. of Chicago and Dutch giant ING Group — are candidates.

training comes next

A big challenge will be training the insurance agents to provide investment advice.

The sales force is housed in American Services, a separate division of Cadaret that has 20-some offices — most in California, Texas, the Midwest and the Mid-Atlantic. The company decided to separate the new reps to ensure that services to its existing force of 850 advisers aren’t diluted, Mr. Stefany says.

AIG reps work out of large offices, but most of Cadaret’s force is housed in one- or two-person shops.

“[Training] is what Cadaret is supposed to be good at,” Mr. Kaytes says. “As they get bigger, one of their core competencies will have to be rapid development of a skilled work force.”

If the move works and American Services proves successful for reps currently affiliated with insurers’ broker-dealers, it could help closely held Cadaret grow faster and ward off its many suitors.

“We’re committed to staying independent,” Mr. Stefany says. “This is one way to do that.”