Interview with Forethought Financial Group’s Art Pickering: Radically Innovative Indexed Annuity Product Gains Rapid Acceptance
Arthur Pickering, CLU is Senior Vice President for Distribution at Forethought Financial Group. He is responsible for annuity and life insurance distribution through banks, broker-dealers and IMOs. Forethought is currently making a splash in the indexed annuity marketplace due to its just released 3-year indexed annuity product which offers three index strategies, a money back guarantee and no moving parts.
In this interview I wanted to explore with Pickering what priorities Forethought’s management had in mind when they introduced this product, what their long-term goals are for it, and how the new annuity has been initially received. As you’ll learn, the product has gained virtually unqualified acceptance. Forethought’s actions should send a strong message to other indexed annuity providers, in my judgment. It will be interesting to see if competitors introduce their own short-duration annuities in response.
Macchia: Since the issuance of NASD’s NTM 05-50, I’ve written about what I see as an inevitable and healthy trend toward new indexed annuity contract designs with greater transparency and shorter surrender penalty periods. Forethought has pushed the envelope even more quickly than I had envisioned. What’s the thinking behind doing this?
Pickering: I’d like to give you a short answer to that but there really isn’t one. If you look at the owners of Forethought you will see people like Mike Poulos, Bob Devlin and John Graf, all formerly AIG executives, people who brought Western National and AIG American General essentially out of nowhere to ultimately $20 Billion of bank annuity business. These executives were all advocates of what they call transparent products, products that you would be happy to sell to you mother. That was their background. About a year ago when they asked me to help move the company into the IMO channel we talked at length- for months- about product. We became gun shy of all of the litigation and suitability problems that are unfolding currently. So we made a conscience decision that we did not have to go down the long surrender charge road that we, frankly, didn’t need to do that much new business at the cost of offering products we weren’t comfortable with. Our decision was to focus on short-duration, transparent, consumer-friendly products.
If you look at Forethought ads you see “client friendly, compliance friendly”, and the “lock-box” concept; everything locked-in for three years. So, that’s the background, and that’s what we really think that people want. Unfortunately, in terms of new sales, that may mean a small niche in the IMO market at least for a while. Having said all that, we’ve had a tremendous amount of interest from banks, in fact we have a state banking association in today. We have broker-dealers calling us, and I’m convinced that there is an even bigger market for this 3-year product than I originally thought.
Macchia: Last fall I predicted that in the next five years the indexed annuity market would grow to $100 Billion in annual sales driven by demographics- Boomers retiring- and the importance of placing downside guarantees under retirement assets during what has been termed the “Transition Management” phase. This projected growth assumes the emergence of new, consumer-oriented indexed annuity contracts. Forethought has designed a product that lends itself to capitalizing on this opportunity. Was that fortuitous, or strategic?
Pickering: No, that’s the way we were thinking. We have significant growth plans but only on our terms in the sense that the leaders of our company want to be able to say that we only sell consumer-oriented products.
Macchia: Does Forethought have the capacity to sell very large amounts of the type of consumer-oriented annuities it favors?
Pickering Yes. Absolutely.
Macchia: How do you position a three-year indexed contract in the IMO’s mind, and how do you suggest that IMO position the product to its producers?
Pickering: Simply that you don’t have a 3year product now, and most of your agents aren’t batting one-thousand when they go out there to sell their longer surrender charge, higher compensation products. So rather than walk away, what not sell a quality, 3-year product. To some extent I also sell the IMOs on the opportunity to recruit agents to a new indexed company that has virtually no agents. That is very refreshing to them, not to be competing with Allianz with 180,000 agents, or the INGs and Old Mutuals with all of their agents.
Now, in the bank and broker-dealer channels it’s different. They think the 3% total compensation is fine. It’d more challenging with the IMOs that are accustomed to products paying 8% to agents.
Macchia: When you talk with banks and B-Ds, how do they view the utilization of the 3-year product by their advisors?
Pickering: I don’t think they know yet, to be honest with you. If you had asked me six months ago, I’d have said that they view it as a product for their traditional registered reps who had been selling indexed annuities. Now, I see it more being used by financial planners and reps who are accustomed to receiving 25 to 50 basis points on account values. 2% every three years equates to that or better.
Macchia: What happens after three years?
Pickering: At the end of three years the 6, 6, 5 surrender charge has expired. The producer can do with it whatever he thinks best. He can do an internal 1035 to us, if there’s something at Forethought that’s appropriate, or he can 1035 it somewhere else. They’re free to go. So for the planner used to basis points on assets, the 3-year product fits very well.
Macchia: Historically, a significant portion of indexed annuity premium has been written by broker-dealer reps as an outside business activity. We can’t know exactly how much but let’s stipulate that the share is, say, 60%. As broker-dealers take greater and greater control of their registered reps’ annuity sales activities, and as they push them to more consumer-oriented products, I would guess that that bodes well for Forethought. Would you agree?
Pickering: Yes, that’s exactly what we’re thinking.
Macchia: In general. What’s been the initial reaction to the 3-year product?
Pickering: In general, it’s been incredible. I have had a bit of push-back from a couple of big broker-dealers over our A- rating, but they have said come on in and explain to us why we need to be OK with this. There has never been a single negative about the product, just the opposite. Having said that, in the IMO market we sometimes hear complaints about the compensation. But, again, the response to the product has been overwhelming.
©Copyright 2007 David A. Macchia. All rights reserved.