Retirement Income

Harry Stout heads-up the $80 Billion Retail Annuity Group of ING. He is exceedingly aware of the long-term nature of annuity contract guarantees and has focused ING on managing risk “,…..very intelligently and very aggressively to make sure that you honor all of the economic policies and guarantees that you have in the contracts that you offer.” Stout believes that larger insurance organizations are inherently advantaged in terms of their potential to successfully manage complex financial risks.

In April of this year Stout moved aggressively to institute suitability standards for indexed annuities. This is in keeping with his long-term vision that fixed and variable annuities will “harmonize.” I wrote about this action in several months ago.

In the past I’ve publicly cited ING as a company that has consistently placed a high priority on the interests of consumers as evidenced by the comparative high quality of its annuity contracts. From my years of observing the company I never saw ING seek to boost its short-term sales by either compromising on quality or catering to agents and wholesalers seeking the highest commissions.

Macchia – Harry, It means a lot to me that you could do this. Thanks again. Let me begin by asking you to describe your title and the specifics of your role at ING.

Stout – Sure, I’m President of the US Retail Annuity Business Group and I have responsibility for the profitability, sales and management of all of ING’s variable and fixed annuity sales to retail outlets throughout the US.

Macchia – That’s obviously a very significant role and one that you would imagine would only grow in importance as the Baby Boomer retirement thrust begins to take hold. As you think about the Boomer retirement opportunity, Harry, how do you see the role of annuities and insurers specifically going forward? What’s your outlook on the viability of insurers in terms of reaching their potential in this opportunity?

Stout – I think that the products that we offer to consumers hit the sweet spot for so many of their retirement needs. There’s just no doubt about that. In terms of my outlook, I think that my outlook is tempered by the fact that our products are perceived in the financial press as being so complicated and so very expensive that consumers should not purchase them, when, in fact, an educated advisor will take a look at the products and the qualities and benefits that they have, and realize that these products fit very nicely for a portion of Baby Boomer savings or investment dollars.

Macchia –As you may know, you probably do know, much of the effort behind this blog is devoted to an exploration of just what you talked about, Harry. It’s the idea of your optimism being tempered by a prevalence of negative perceptions around insurance and annuity products. I wonder if part of the reason that we are where we are is that the very specific way the industry has fired back when criticisms have been levied against it. It’s responded with statements to try to show that perhaps what was said in the press was inaccurate or misleading, but to a large extent there has been no concerted efforts to address the sometimes legitimate criticisms that are foundational and seemingly intractable, and which lead to the bad publicity. I wonder if you buy into this and if you believe that there are some things at that level that need to be addressed before the industry can realize its full potential.

Stout – To tell you the truth, David, I don’t know if it’s as black and white as that. I think that the reason that our industry is not growing, say beyond the rate of GDP, despite the large Boomer population segment coming to fruition with their needs, I think it’s a combination of a number of issues that you described, while at the same time I think that it is a number of consumer factors including reluctance of the Boomers to want to deal with their retirement.

I don’t even know if I want to call it retirement, it’s just their livelihoods and their financial well-being as they age. I think there’s a combination of consumer awareness as well as a number of the industry issues that you’ve described.

Macchia – I agree. I think about consumers, it’s easier for them to avoid addressing these difficult issues. But I think a lot of it comes down to the advisors. I know you’re responsible for variable annuities, a very important product line.

When I look at the VA marketplace I see a very unique product which offers many benefits to consumers, but one which roughly four-fifths of advisors shun. Don’t you think that it really starts there, with the advisors, with reformatting their thinking so they can get a more accurate perception of how these products can be beneficial?

Stout – Yes, I do think so. I think that there’s a fairly broad perception that we’re still selling the first generation of variable annuity products and that a lot of advisors really haven’t taken the requisite time to take a look at the products that are offered, the guarantees, the options that are built into these products and how they fit in terms of their use in planning the financial futures of their customers.

There’s definitely an effort there of having education and awareness, and today I think a lot of the advisors are simply very, very busy. They’ve got a tremendous amount of things going on in terms of their practices. They really need to take the time to take a look at what these products are all about and the value that they have to offer.

Macchia – Is this not a challenge more of communications than product? Is it not an urgency to expand people’s thinking and do a better job of conveying about the needs based-benefits that the annuity business offers?

Stout – Well, I think it is a communication and education effort. There’s no doubt about that. I think that in the last number of years the number and complexity of our products’ benefits has increased substantially. If you’re going to be in this market there’s a significant element of education that you need to take on, and it has changed a lot year to year.

I think we have a communication and an education effort, but fundamentally I believe that what we are selling is very, very good and dips again into the planning for the financial futures of so many of the aging Baby Boomers.

Macchia – The popularity, Harry, of guaranteed benefits in VA contracts is absolutely clear. I want to ask you how products morph overtime and what the implications may be.

What we’ve seen is the VA take on characteristics more and more of a fixed annuity. Over the past 10 or 12 years we’ve seen fixed annuities arguably take on the characteristics (for instance, equity linkage) that you typically associate with variable annuities. As these two product lines tend to morph and come closer together, what do you see are the implications in terms of the retail landscape and also potentially the regulatory landscape?

Stout – I believe that success for those companies involved in the manufacturing of the annuity products will mean that they need to offer both fixed and variable products, and have expertise in both areas. That’s going to be critical on a go -forward basis.

I agree with you. I think that the markets, to a certain extent, are harmonizing and moving together. Along with that I believe that regulation, selling practices, disclosure, licensing…. all of those key elements of the sales process are going to begin to harmonize and look more and more like each other. And the prior regulatory schemes for fixed and variable products will change. I think with recent initiatives and commentary by the NASD and the NAIC that you can see it happening.

Macchia – I saw ING show some real leadership in this area when you, not long ago, announced suitability processes for the purchase of fixed annuities. What went into your thinking in making that decision?

Stout – Well, David, I think this action along with a number of other actions that we’ve taken is important. We’ve tried to work over a 24 month period to begin to harmonize our fixed and variable annuity offerings, and so suitability, disclosure, these are all items that we’re working on to make the two, become more and more alike in terms of how the business is conducted.

Macchia – Harry, I heard you deliver an address at a NAFA conference in April. You were very articulate, in general, but very compelling on the point of larger companies having some intrinsic advantages as products become generally more complex, and that a greater level and a different type of resource set is required to be successful.

For instance, you mentioned financial engineering around guarantees and some of the risk management aspects of annuity products. I remember you talking about the staff of financial engineers that you have and it made me think that viability going forward, to some extent, may favor larger companies that are able to bring this level of resources to their enterprises. Do you fundamentally agree with that?

Stout – Yes, I do. I’ll cut through it with a very simple approach. The way we try to manage our business at ING is that recognize that we live longer than the policy owners that we insure.

If you take that as an approach, what you want to do is manage risk very intelligently and very aggressively to make sure that you honor all of the economic policies and guarantees that you have in the contracts that you offer. To do that I believe that organizations that are larger, who have larger balance sheets, who have significantly expanded their capabilities and competencies in the risk management area can take on, manage and diversify risk in a way that’s going to generate these long term benefits.

Along with that, David, I just believe that this is going to be more and more what this is all about. We’re really helping an aging demographic to risk manage their incomes and risk manage their retirements. The products that we have to offer are really fundamental to that process.

Macchia –Harry, as the blog has grown and has been the beneficiary to more and more contributions by smart people like you, certain themes seem to be repeating. One of the themes is that in terms of the insurance industry’s growth potential that what may hold it back, or what may be the key to igniting just a tremendous amount of growth in the future, is whether or not the industry confronts the challenge of providing a greater degree of transparency into its products.

For instance, Moshe Milevsky was very articulate on this point, not only calling for transparency, but even a mark to market for all types of insurance products, which is certainly a very aggressive vision. Others including Jeremy Alexander have said that transparency is going to be a real key to the growth formula going forward. I’m wondering if you agree with this assertion.

Stout – Yes, I very much do. I personally do. I think that as the demographic ages and more and more consumers look to purchase the products, they are going to want to really understand clearly what they’re buying, what the benefits are and what the costs of those benefits are.

I think over time this whole subject of transparency and being able to see clearly what you’re paying for in terms of the various benefits that you’re getting is going to be key.

Macchia – As transparency becomes more real, people are able to see more clearly into the cost structure of products. The pressure then is to reduce compensation. I wonder if you believe, looking 5 or 10 years down the road, in terms of how intermediaries are compensated on annuity products, that we may see something that takes root that looks much different than today. Do you think that’s a possibility?

Stout – I think that if we talked about advisor compensation that you could have a very lengthy discussion, a philosophical discussion about how individuals should be paid. I think that we have enough different compensation structures that are available for the financial advisor of today that we can accommodate almost anyone’s particular need.

I think that on a long term basis consumers are not going to be willing to take significant portions of their assets and to put those assets into a product or service without having the advice of an advisor. Therefore, we as an industry are going to miss a key part in how we deliver products.

We need to make sure that advisors are appropriately compensated for what they do. I don’t think that advisor compensation is going to be a key part of what happens on a go forward basis, David. I think market forces over time will determine what the appropriate level of that compensation is, but that it’s a key element for almost all of the carriers going forward.

Macchia –At Wealth2k, we’ve staked a large bet in terms of trying to create technology that will help the advisor become more successful, more productive and able to communicate his or her services to a greater volume of people, prospects. This comes out of the belief that, among other things, that the Baby Boomer cohort is so large that advisors are going to have to necessarily touch more people and interact and provide guidance to more people than they do currently. I’m wondering if you see it this way?

Stout – I would say this: I think that there’s going to be a segmentation of the marketplace based on the amount of investable assets that an individual has because with those individuals with smaller amounts of assets it’s going to be very difficult to provide face-to-face advice on a long term basis.

I think that’s a difficult proposition. I think new techniques are going to come to the technology base to be able to provide service to segments of the population. I do believe that they need service and they need the advice of a financial advisor, but I think there are going to be different models to reach them. I think those individuals with significant amounts of assets will continue to receive that face-to-face advice from an advisor, but I do think that new models, technology based, will emerge to help serve the broader mass of the marketplace.

Macchia – I’ve stated many times, Harry, my personal belief that given the high stakes nature of the Boomer retirement opportunity, and given the tremendous ongoing efforts in terms of the development of new products and processes, that while all of that is very important the enduring winners in Boomer retirement won’t be those companies that necessarily have the best products, but rather will be those companies that ate most effective at compliantly communicating their value to a large and fluid audience of consumers. I’m wondering if you buy into that belief.

Stout – Well, you know, I might look at it a little differently than you David. I think what I would look at is the process by which the industry delivers its product to consumers has to be better, has to improve. I think there are a number of investments being made by a number of organizations throughout our industry to improve the quality and the customer experience. Now, I think that one aspect of that experience is communicating key information about products and services rendered, but there’s got to be a better way for us collectively to be able to sell our product to secure the necessary signatures, disclosures.

I think there’s so much of an improvement there and I think that that’s another reason why these products are perceived as being harder to sell and haven’t reached their market potential because there is so much regulation and requirement around them. That’s okay; I’m fine with that, but I just think that there’s got to be a way to package and deliver what we offer in an easier and better way.

Macchia – So, for instance, if simple straight through processing were a reality right now for all annuity products how would you see the landscape different?

Stout – I think it makes the whole purchasing process so much easier, and I mean, we don’t have consistent standards on straight through processing at this time, although there is significant effort now underway with the regulators and the industry to come up with a way to do that. I think that’s got to help tremendously.

I go back to the days when it used to take you… look at the mortgage business; 60 to 90 days to get a mortgage, and now if you have all of the requisite forms and disclosures you can do it in several hours. I think that over time we’re going to have to condense all of the requirements that we have, the regulatory requirements that we have, which protect consumers and protect all parties in the process, if you will, and find a way to deliver that faster, easier and better. I think if you do that then we’ll gather more sales than we currently do.

Macchia – Going back to themes that emerge from the blog, one of them that I hear consistently Harry, is that a product sale designed to satisfy the long term retirement need is not likely to be what’s successful in the future, but rather positioning products in a larger context of a true solution designed to deliver long term inflation adjusted income. Do you see that as likely, or do you believe strongly that the product itself can be the answer?

Stout – That’s interesting. That’s a very, very good question, David. I don’t know if the product itself…I mean, I think that if you look at…if we were to have a conversation today about retirement risk management or what’s called longevity risk management and helping consumers be able to get their income needs met over a long period of time, I think that the advisors that are out there and the companies that manufacture products are probably going to have to become much more aware of all the needs that this growing and aging population has. Along with that goes design their delivery and their products to meet those needs.

An example would be the real significant need for funding healthcare as we age. The products may change to have more of an element that addresses that need. That’s just one example of a number that could be here. So, what I’m saying to you is that in the end I think that it’s a combination of product delivery and a really significant thinking about all of those aspects of retirement risk management.

Macchia – Harry, you’re heading-up a strategically important and very large business at ING. I know how seriously you take that role. If there’s anything that worries you that would tend to make you lose a little sleep at night about things that could happen, about things that could go wrong, what are the things that would worry you?

Stout – I think that I look across the landscape today and there’s significant protections built into our industry for solvency and for the pricing and delivery of products. So, I feel pretty comfortable about where we stand and I think that on a go forward basis the name of the game is going to be risk management on the part of companies.

The only thing, I guess, that would worry me is if we get aggressive players who don’t properly risk manage the guarantees that they are offering that could cause a hiccup for our industry, and I don’t think anyone wants that. I think that for all of us the time and energy that we put into properly managing the risks associated with the products we sell is the name of the game going forward. We need to be phenomenally responsive to the needs of the market while at the same time making sure that we can manage and diversify the risks that we’re taking on.

Macchia – Back to Moshe Milevsky, he was a critic of variable annuities for a long period of time, owing to the fact that he thought that they were excessively costly. But with the emergence of living benefits Moshe took a good hard look at the variable annuity again and came up with a very different conclusion that you may be aware of. And that’s arguably that insurers are providing consumers potentially too much economic value relative to what they are charging for guaranteed withdrawal riders. I wonder what you think about that.

Stout – I’ve seen his comments. I’m aware of them. Again it gets back to the overall premise that I’ve commented on throughout our conversation today. That is you’re offering a guarantee in the marketplace. You ought to be sure that you’re going to be there to honor that economic guarantee when the time comes.

I think that the discipline that you approach the risk management issue with and the thoughtfulness of how you present your guarantee is key. I think that we do offer significant benefits to the consumer and I think that we are able to do that based on our size and our ability to manage and diversify risk. So, I think we’re doing a very good job of doing it now.

Macchia – I’d like to make a transition to some questions that are more personal in nature if you don’t mind. The first one is kind of like the power of God being conveyed to you. If I could give you a magic wand, Harry, and by sweeping this magic wand you could convey any two changes you wish, anything at all, in the world of financial services. What two things would you change?

Stout – In terms of what I would change, I think that the first would be that individual consumers had a greater awareness of the risk that they are taking on at retirement and the risk associated with providing themselves with a level of income that they can’t outlive.

If there was somehow the ability to do a mass education effort with consumers to get them to truly see the need that they have, I think that would revolutionize what we do because I think that we’d have a much larger market for the products and services we sell.

I also think that…….I think the second item is that we’ve got to find a way to streamline the regulatory process such that we are able to meet the needs of the consumers that we’re selling to. We need to have the requisite sales practices and disclosures in a much more compact, cost effective way.

An example would be the prospectus that we offer with our variable annuity products. There have to be more and more meaningful and effective ways of disclosing and communicating in our products other than just exposing the consumer to significant amounts of paper.

Macchia – Alright, let me ask the next personal question: if you were not the President of ING USA’s annuity business, and you could instead have any job in any other industry, what would you choose to do?

Stout – I think what I would choose to do is to do a national call in radio program on financial issues.

Macchia – So you would be the host answering questions?

Stout – Yes.

Macchia – Interesting. What about that do you find attractive?

Stout – It’s always something that I’ve wanted to do.

Macchia – Were you an actor in high school, or…?

Stout – No, no, not at all. I grew up in the Philadelphia area and one of my role models growing up was a gentleman that worked for the CBS television affiliate. His name was John Facenda. You may be familiar with John Facenda. He worked for NFL Films for years. He was known as “the voice of God.” I think that he stirred in me an interest in media, and in particular I think that the radio waves did very well for me. I think I would enjoy doing that.

Macchia – You are well spoken and poised, and I can envision you on television or video. Have you ever thought of doing any video presentations?

Stout – Actually I’ve done a little bit of work there, but I think personally I’d feel more comfortable behind the mic.

Macchia – Okay. Last question. I’d like you to imagine your own retirement in its most conceivably ideal form. What will you be doing and where will you be?

Stout – I think the ideal retirement for me is to have the ability to control my time, to do those things that I find most meaningful, be that volunteer work, be it travelling, be it time with my family.

I think the control over my time and my ability to do what I want to do is what I’m striving for in my own retirement. I love to travel, I love to spend time with public causes that I care about, and I love my children. I think that just the ability to do what I want, when I want to do it, that freedom to me is the most important thing. Because ultimately, I think, as we age I think we find more and more of that control over our time is the greatest luxury.

Macchia – Sounds like a pretty nice vision to me.

Stout – Thank you.

Macchia – I want to thank you because this has been most enjoyable and enlightening. Is there anything, Harry that I haven’t covered that you would like to get out in the interview?

Stout – No David, I think I’m fine.

Macchia – Thanks a million.

Stout – Okay great. Thank you very much, David. Take care.

Disclosure notice provided by ING:

You should consider the investment objectives, risks and charges, and expenses of the variable annuity and its underlying investment options carefully before investing. The prospectuses for the variable annuity and underlying investment options contain this and other information. You may obtain free prospectuses by calling your financial professional or 800-366-0066. Please read the prospectuses carefully before investing.

Annuities are issued by ING USA Annuity and Life Insurance Company (Des Moines, IA). Variable annuities are distributed by Directed Services LLC (Westchester, PA), member NASD. Both are members of the ING family of companies.

All guarantees are based on the financial strength and claims paying ability of the issuing insurance company, who is solely responsible for all obligations under its policies. Variable insurance products are subject to investment risk, are not guaranteed and will fluctuate in value. In addition, there is no guarantee that any variable investment option will meet its stated objective.

©Copyright 2007 David A. Macchia. All rights reserved.