״The short successes that can be gained in a brief time and without difficulty, are not worth much. ״
~ Henry Ford
Seller Always Concedes
Single source access takes two forms – one, the large buyers that you see advertise on TV and two, the Provider as auction manager that claims access to a full universe of capital sources and is likely filling your inbox with solicitations to access its platform.
As to the first, it’s not a complicated argument to understand that those individual buyers are unlikely to pay top dollar for your client’s policy. Yes, faster, but almost certainly not submitting a competitive bid.
As to the second, moral hazards and conflicts abound. That auction manager actually represents the interests of buyers with which it has contracts in place to acquire the policy at as low a price as possible. So, while there is no broker fee, the auction manager is almost certainly taking a much larger provider fee and/or acting on its representation of the capital’s interests, not your client’s.
Sellers beware...
faster and no broker fees, but non-aligned interests cost sellers dearly
Sellers lose without competition
Understanding a few basics of the incentives of stakeholders, how policies are valued, and how the channel works is critical to understanding the implications for your clients of engaging either of these to buy their policies.
Simply, and intuitively, engaging a single buyer or a single representative of multiple sources of capital invariably results in your client receiving far less for their policy than it is worth, costing them hundreds of thousands of dollars in net proceeds.
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Providers have contracts with and represent the interests of buyers, not sellers
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Provider fees, paid by the buyer, are undisclosed, as they are ostensibly a buyer expense, and come off the top of the gross offer that the seller sees
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Buyers are willing to pay $X, all-in, for a policy, and all fees paid to the Provider come out of that all-in amount
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Buyers financially incent providers to acquire the policy at the lowest possible price, including splitting the $’s saved in a bid below the buyer’s max all-in value
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Providers that are also "direct" buyers are not incented to pay the market value of a policy and, in some cases, actually disclose in media intended for investors that they purchase policies with the specific intent of reselling them at a markup
conflicted auction manager, moral hazards abound
"We represent multiple buyers"
These firms are likely bombarding your inbox, describing themselves as a means to avoid the broker, conducting an auction among multiple buyers in "their network."
Providers represent buyers - they have contracts in place that stipulate fees, bidding behavior, incentives to reduce the purchase price, etc. - not your client. They are not seeking to maximize the proceeds to your client, but rather to maximize their economic participation with their buyer clients.
So, while a single Provider acting as the gatekeeper to multiple sources of capital will likely expedite the sale of your client’s policy, the Provider/auction manager is not forced to compete and is simply capturing what would otherwise have been the broker fee in the form of a higher Provider fee (undisclosed, as it ostensibly a buy-side expense) and/or benefit sharing with the capital source that "wins" its auction.
profit by purchasing policies at below-market value
TV Advertising Buyers
Simply, your client will not receive competitive bids from single buyers, like those you see advertising on TV.
It is not in the economic interests of those firms that generate proprietary policies for settlement to bid what the market would otherwise bear for a policy. Quite the opposite, in fact. Their business model is predicated on getting the policy as cheaply as possible and unaware that there are numerous other buyers that likely pay significantly more for the policy - and they are not under any obligation to operate in the best interests of your client - and there is no reason to believe they do or will.
Lower Winning Bids
Without competition at every level of the process, your client risks ceding proceeds to those intermediaries not forced to compete. The Provider/auction manager is not forced to compete on its fee, resulting in lower gross bids.
Undisclosed Fees
What a seller gains from no broker fee they concede in a higher Provider fee, likely equivalent to what the broker fee would have been. As Providers act on behalf of buyers, the fees associated with the purchase are undisclosed.
Deficient
There are at least two major buyers with exclusive Provider relationships who will not participate in such auctions, leaving significant and competitive capital out of auctions for your client's policy, limiting the competitiveness of bids.
Opaque
A convoluted process to create a perception of complexity and value created; selective and deceptive disclosures, no meaningful audit trail.
Inefficient
Bidding takes 30 – 45 days, after a 30-day staging period (numerous, time-consuming and unnecessary steps) and a total time of >120 days.
Ineffective
Asymmetric, "common value" auction that takes far too long to complete and rarely, and only by coincidence, reveals the true max value bid.
Deceptive, High Fees
Often as much as a 30% fee often confusingly described as a function of the face value or the gross proceeds, not of the true value, gross bid less cash value.