Journal

March 21, 2007 by David Macchia

Interview with MetLife’s Garth Bernard: Advocate of Income Annuities Pulls No Punches About Industry’s Need to Step-Up and Wear the Mantle

Garth Bernard, FSA, MAAA, is Vice President in the Retirement Strategies Group at MetLife. He is a staunch and articulate advocate of immediate annuities and he holds strong views on why these products have not been used more extensively.

Macchia: Garth, although immediate annuities provide income-generation which the consumer cannot outlive, they still represent only a small percentage of overall annuity sales. Why is this so?

Bernard: I think we first have to beak it down into what are the things that advisors have pre-conceived notions about, and what are the things that consumers may have misconceptions about. I think the issue really comes down to the advisor having preconceived notions about income annuities. Because, when you look at the consumer’s actions you see that the consumer follows the advice of someone that they trust. So, if that trusted advisor does not recommend an income annuity, or, in fact, suggests that an income annuity not be used, then obviously the consumer is going to walk away with a similar perception.

So I suggest that change really starts with educating the advisor on dealing with some of these preconceptions. Some of those would include- in fact, the first one is always lack of liquidity. But, to me, that is a notion that is based in the accumulation paradigm because the real question is, what is more critical when you get to the distribution phase? Is it control of assets? Or, is it reliability of income? The answer is to not jump to an obvious conclusion. Let me put it in perspective. Here stands Garth who is now 85 years old. He’s run out of assets so he only has Social Security to rely upon now. But, guess what? He started off with a million dollars and he was in control of his assets the whole time! Wouldn’t that be ironic?

This is exactly the issue advisors face when they project the accumulation paradigm into the distribution phase and maintain their focus on this need to control assets. The other thing that’s at play, to be frank about it, is compensation. In fact, you and I know that advisors refer to annuitization as “annuicide.” But when you move into the distribution it’s different. Let’s forget about annuitization, let’s look at the reality. If advisors were getting paid under the basis of assets under management- asset trails- they would already be facing a declining compensation pattern because the client is using those assets under management. The question is how long it would take to decline. Advisors are not looking at a level or increasing amounts of trail income in the distribution phase. So they have to rethink all of the notions that were familiar to them in the accumulation phase and start re-looking at them with a new pair of eyes. And the insurance industry needs to generate new compensation patterns including income trails. When this happens advisors will be much more open to rethinking the value of income annuities. When advisors start converting their asset book over to an income book, as their clients age and transition into retirement, they could get paid on income. And that way, even if the assets disappear, the income doesn’t. In fact, the income is very clear and present.

Macchia: What about advisors who say that, strategically, annuitizing assets when interest rates are relatively low is akin to locking in below market levels of income? Do you give any credence to that objection?

Bernard: Well, they may have a point if you think of this as allocating most of your assets to this one product. In other words, if you were annuitizing 100% of your portfolio, that would be a valid concern. But no one would ever want to put all of their eggs in one basket. Secondly, even when interest rates are low – like today – if advisors actually look at the numbers, they would find that a 65 year old will receive an 8% income stream relative to the deposit. That’s still substantially higher than they could otherwise sustain in a pure investment vehicle – and that’s reliable income.

What do investment advisors typically advise when they use pure investment vehicles? The withdrawal range tends to run from about 3% to as high as 6%. Again, we’re talking about an income annuity even in a low interest rate environment starting at around 8% for age 65. The rate goes up for older ages. So I don’t agree that locking in the income at low rates doesn’t make sense. For a portion of your assets, it could make a lot of sense. If you look at some of the research that has been done, for example by Peng Chen of Ibbotson and Moshe Milevsky, they wrote a landmark research paper which led to what I call Ibbottson’s income allocation model, where they demonstrated that the only way to reach the efficient frontier in the distribution phase, the only way to maximize income for a given investment risk tolerance and legacy requirement is to allocate a portion of your assets to an income annuity.

Macchia: So your point is that the efficacy of income annuities in income distribution planning is already academically proven and beyond reproach.

Bernard: It’s academically proven, and it’s unmatched.

Macchia: So the real issue is that the industry is facing more of a marketing challenge?

Bernard: It’s definitely a marketing challenge and it starts with educating advisors, getting them over their preconceived notions. Income annuities, because they provide unmatched leverage, allow you to do more with less. Therefore, you’re more likely to have assets left over to meet other retirement needs after you’ve taken acre of the income goals. So, including income annuities in the portfolio is likely to provide a better solution for the client in terms of meeting the broad retirement needs.

Macchia: What about what the industry needs to do?

Bernard: I think that the industry simply needs to have the courage to step up to the plate and start telling the income annuity story. Because consumers get it. Think about it. We know that they do due to their reactions to Social Security and employer sponsored DB plans when they feel those programs are threatened: “Don’t cut my Social Security benefits!” When DB plans are frozen or taken away, people feel that their rights have been violated, they feel violated. So that’s how we know that consumers get it. Perhaps it goes beyond having courage – if we don’t, someone else could try to step up to the plate and take the franchise from us. They could try to take the mantle from us.

In fact, we’re not really wearing the mantle and we should be, and if we don’t wear it someone could walk up to us and say, “Give me that! I’ll proudly wear that mantle because it fits!” It’s already started. In my remarks at the recent NAVA Marketing Conference I pointed out that one of the executives at Mellon Bank had written a paper for the CFA Journal that says the investment world should create a mortality pool. Wouldn’t it be a crying shame if the industry, which legally owns the mortality pooling franchise, refused to have the courage to speak about something that only they can deliver and something that consumers need, fails to adequately educate the insurance advisors about them – only to have somebody come along and rip the rug our from under them. This is a strategic issue for the industry: we have the franchise now – what if it is decided that we shouldn’t have it exclusively?

Macchia: One of the places where I have seen SPIAs become very useful is in combination with other retirement strategies; perhaps in a laddered asset strategy, or combined with a variable annuity, or in a systematic withdrawal portfolio. And that one of the intellectual arguments for combining in this way is that you’re taking a portion of the client’s assets and turning it into absolutely guaranteed retirement income which may allow the client to put an even higher percentage of the remaining assets into more aggressive investments, which over the long term may provide more overall income. Do you subscribe to that?

Bernard: I fully subscribe to the effectiveness of packaging for positioning income annuities in the retirement income solution. In fact, we were talking about some of the more common objections to income annuities. One of the biggest areas of misperception is the area of context. If you go down the path of a product solution, that’s where you end up in knots. The most effective context in which income annuities should be used is in the context of maximizing income and protecting income with a finite set of resources. You cannot solve this retirement problem with a single product. That’s where the packaging notion comes from – that income annuities are most powerful when used in combination with other vehicles including pure investments and deferred annuities. It’s not about a single product, or about having all your money in pure investments, or all of your money in a variable annuity, or all of your money in an income annuity. It’s a combination of those things. That the income annuity should be a part of the overall strategy is not in question. The only question is how much.

Macchia: If the percentage of the total assets allocated to the immediate annuity is so critical to determine, how will advisors be provided the tools they need to assess that?

Bernard: That’s one of the things as insurance companies think about how they address this and step up to the plate, we have to build those tools. It is possible to build those tools, and it is relatively easy to build those tools. The reason that it hasn’t been done to this point is that people haven’t focused on it. I’ll giver you an example. In the accumulation phase, one of the critical questions is how much of your assets should you allocate to stocks and bonds? Just about every provider offers asset allocation models to address this question. They’re ubiquitous.

To do it, you first have to define the problem, understand it, focus on it and build the tool to solve it. The same thing applies here. We can’t just ask the question. We have to help the advisors by providing them the tools, the firepower that provides the answers to those kinds of questions.

Macchia: So is it fair to say that unless and until the industry steps up to the plate, as you describe it, and provides not only those analytical tools but also the communications and marketing tools that advisors truly need, that SPIAs probably are not going be very successful?

Bernard: That’s absolutely correct. That would be true of any product that could potentially assist in financial solutions. Until someone steps up, puts a spotlight on it and delivers what’s necessary- not just the products but the analytical support tools and the communications support tools including education- those products will not be used and recommended in solutions. Advisors won’t know how to do it, or would not be able to do it easily.

Macchia: Is it fair to say that this is an opportune time for one of more life insurance companies to step up and show leadership in this area?

Bernard: It’s high time that they showed not only leadership but courage.

Macchia: Isn’t it true that when the industry introduces products and, from the very first day, doesn’t provide advisors and consumers the correct context in which to view them, namely a real accurate explanation of what the products’ true value is, that we find ourselves in a situation like we have today; some products are under utilized, some products are over utilized, and some products are mis-utilized?

Bernard: Yes, I agree with that. The process of selling….. there may be an expedient method. You always speak to today’s issue at hand. You talk to the consumer about that specific issue, you position the product around the issue and then you deliver that product. But you may not fully articulate to them all of the power of the product and how it can be helpful or appropriately utilized beyond the current stated need. So it really comes down to being able to tell more than just the transactionally-focused story rather than the most expedient way to make the sale. It takes time and it takes effort to tell a bigger story. But that’s just what’s needed for retirement solutions. So it behooves us to find ways to help the advisor tell the entire story, without jeopardizing the ability to close the sale on the immediate need. We have to find ways to tell more powerful, more articulate, more complete stories around the solutions that we can provide.

For example we almost never tell the complete story about deferred annuities. Deferred means later. Annuity means income. But we continue to primarily talk about the accumulation aspect of deferred annuities.

Macchia: Is it fair to say that the insurance industry in comparison, say, to the investment industry has done a poorer job of communicating its inherent value to both advisors and consumers?

Bernard: That’s a tough one. Here’s my take. The investment industry sells “first order” financial instruments and the insurance industry sells risk management financial instruments, or “second order” financial instruments which, almost by definition are more complicated. So, it’s almost as if the investment industry has an advantage in that they have a simpler concept to explain.

Here’s the simple example. The investment industry has to explain “a stock.” The insurance industry has to explain what is analogous to “an option on a stock.” “Stock options” are inherently more complex than “stocks.” This makes it even more critical that the insurance industry find ways to communicate more effectively. We face a bigger challenge and thus need more communication firepower to meet it. In other words, it is more important that the insurance industry be better communicators.

Macchia: How would you like to end this interview?

Bernard: When advisors rethink income annuities and annuitization in the new light, they may come to this realization: “why did we not see this? … it was in front of us the whole time!”

The views and opinions expressed by Mr. Bernard are his own and not those of MetLife Financial or any other entity of individual.

March 21, 2007 by David Macchia

A Reader Identifies The Un-Level Playing Field in Fixed Annuity Suitability Assessment

A reader who wishes to remain anonymous has written to me in response to my March 9 post referencing ING’s announcement that it will perform suitability review for fixed annuity sales in all states. This individual is highly experienced in compliance and regulatory matters and is presently employed by a life insurance company that offers fixed annuities, exclusively. His perspective is revealing. He identifies complexities and challenges- effectively, an un-level playing field- facing fixed-only annuity providers in contrast with other providers that offer both fixed and variable annuity products:

Hi David,

I’ve been enjoying your blog, and I wish you continued success with it. The following comments are personal, and not reflective of any opinion held by my current employer.

I noted with interest your endorsement of ING’s Suitability Profile, and wanted to offer you a couple thoughts about the situation that you might want to consider in future posts on the topic.

Being a variable provider, ING has a staff of NASD-certified Registered Principals who have passed the Series 26 exam and a background check. These people have an independently granted professional qualification to assess suitability. ING is leveraging their NASD membership and their staff of NASD Registered Principals already responsible for variable product suitability into the fixed side of their business. I’m sure this costs money both in terms of additional staff and foregone sales (both rejected sales and sales that are diverted to other carriers that won’t apply the suitability review) but ING has decided that those costs are more bearable than the cost of being associated with abusive sales tactics, unsuitable sales to seniors, etc, and that they may gain some sales through reputable agents who want to show off that their fixed annuity carrier does a suitability review.

I’m jealous, but to be fair, fixed-only carriers face a far greater challenge than fixed-variable carriers in implementing fixed product suitability.

My current employer isn’t a member of the NASD, because we don’t sell variable products (the NASD wouldn’t grant us membership even if we asked). Therefore, we can’t have staff who are Registered Principals. We have some staff that formerly were Registered Principals, but they aren’t anymore because they no longer work for a NASD member firm – they work for a fixed only carrier. So even if we created our own internal cadre of suitability reviewers, their qualifications to do suitability examination of proposed transactions wouldn’t come with any independent seal of approval. We might develop a consistent approach to suitability review and base it on the NASD standard, but it would be vulnerable to charges of excessive liberalism or excessive conservatism, because it won’t simply be an industry-wide standard laid down by a self regulatory organization that we’re a member of.
The insurance industry has IMSA, but membership isn’t mandated like NASD membership for securities firms. In addition, IMSA doesn’t offer to qualify/register individuals.

I think that suitability in the variable product marketplace has been improved (but not perfected) by the NASD Registered Principal mandate, but fixed-only carriers face more than just a cost/benefit analysis of staff expenses and sales impact – they also face a legitimacy challenge that by its very nature can’t be solved by the carrier alone.

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March 20, 2007 by David Macchia

New Series of Posts to Highlight Industry Leaders & Innovators

Starting tomorrow, look for the first in a continuing series of interviews featuring financial services industry innovators. My goal is to engage these individuals in a candid discussion about what they perceive to be the next-generation of products and solutions emanating from their respective industries, as well as the present and future challenges that may negatively impact such future offerings. I hope that those interviewed will provide answers to my questions that stimulate further exploration and dialogue on a variety of topics that readers will find interesting. Participants will cover a wide spectrum of industries and silos including insurance, investment companies, research, the industry press, and distribution. From time to time I will also seek the perspective of regulators. Please check-in tomorrow!

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March 19, 2007 by David Macchia

“Agents” need new client acquisition strategies

I’d like to “move on” but the implications arising out of the March 7 complaints issued by Massachusetts Secretary of State, William Galvin, against two annuity producers won’t let me. Give me rest! In the near future we’re likely to see some remarkable transformations in how annuity producers present themselves (and their businesses) to prospects.

In recent days I’ve spoken to a number of senior executives of life insurance companies about these complaints and what they imply for the future of “agent” marketing. I place the word agent in quotations because most agents long ago stopped using that word. They abandoned the agent identity in favor of taking on new prospect-facing identities such as Medicaid Expert, Estate Tax Reduction Specialist, Senior Advisor, Financial Planner, and Safe Money Specialist, to name just a few.

To most producers, agent is a quaint term from the past or simply a legal term to describe their relationships with one or more insurance companies. It has no relevance to today’s world. Or, at least it didn’t until March 7, 2007.

One of the criticisms leveled against the two Massachusetts agents was that they effectively disguised their true identities- and true motivations- by falsely branding themselves as something other than annuity agents. The many producers who have embraced marketing strategies similar to those used by the subjects of Galvin’s complaints have been left to worry, “Am I next?”

Yet, arguably there is no protection by abandoning currently popular marketing strategies in favor of redefining the agent’s image to, well, agent. The reason is that in the normal conduct of an annuity producer’s work, he or she also runs the risk of being cited for acting as an unregistered investment advisor.

The rules of the game are changing and no one yet knows their final form. One thing is certain, if currently popular producer marketing strategies are eliminated, annuity agents will need new client acquisition strategies as they continue an uphill fight to market their products in a climate that is both interest rate challenging and a regulatory minefield.

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March 16, 2007 by David Macchia

Financial Services’ Carbon Emissions

Regular readers of my articles know that I have sought to focus financial services industry leaders on the importance of using Internet based communications strategies to help financial advisors both better interact with and meet the expectations of web-savvy consumers. The goal is to realize the positive impact that will result through the combination of compliant content (story-telling) and the ability to deliver it at nearly zero cost to a huge audience of consumers.

With that in mind I metion today’s excellent column from one of my favorite writers, the New York Times’ Thomas L. Friedman. If you ever wanted to learn about an example of how an Internet communications strategy can impact a major business, this is it.

Friedman writes about two grass-roots environmental groups, Environmental Defense and the Natural Resources Defense Council (NDRC), which were able to transform the $45 Billion acquisition (the biggest leveraged buyout ever) of the giant, Texas-based power company, TXU, by buyout firms Kohlberg Kravis Roberts (KKR) and Texas Pacific Group.

As Friedman relates the story it began last year when TXU announced that it would build 11 coal-fired power plants. These plants would have raisedCO2 levels causing concern among environmentalists.

When the plans for the new power plants were announced, the president of a local environmental group, Fred Krupp, wrote to TXU’s Chairman, John Wilder, asking for a meeting to discuss TXU’s plans but was brushed aside. Friedman cites this refusal to meet as an example of, “Talk about not knowing what world you’re living in.”

After being denied the meeting the environmentalists turned to the Internet and created the web site www.Stoptxu.com. This low budget, grass-roots Internet strategy created a “national constituency” opposed to the new power plants.

In February of this year KKR and Texas Pacific joined forces to purchase TXU for $45 Billion. However, the buyout firms did not wish to purchase a company in conflict with environmentalists. As a result KKR and Texas Pacific began negotiating with the environmental groups. As Mr. Krupp describes it, “… so they came to us and said we only want to go forward if you and NRDC will praise what we are trying to do here.”

This led to negotiations over making the deal more “climate-friendly.” After 10 days of negotiations it was agreed that the number of new plants to be built would be reduced to 3. In addition TXU committed to invest $400 Million into energy efficient programs as well as agreeing to double its purchases of wind power.

Mr. Krupp describes why this result was possible by saying, “Going online we shifted this from a local debate over generating electricity to a national debate over capping and reducing carbon emissions. The reputations of companies are going to be less determined by the quality of their P.R. people and more but their actual actions- and that empowers more of an honest debate on the merits.”

The Internet’s unprecedented ability to “connect” people is having and will continue to have a profound impact on all aspects of life, globally. One aspect of life is money- meaning investments, insurance, retirement and all that these areas imply. I’ve often cited the slow pace of financial services to adopt contemporary consumer-facing communications strategies as one of the most serious threats to its future success. There’s a lesson in Friedman’s article about how something that would have been impossible if not unthinkable just a few years ago is now entirely achievable. The ability for the financial services industry to “achieve” in the future will be based to a great extent on its uncertain capacity to meld the communications of its value and its distribution into the Internet age.

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March 14, 2007 by David Macchia

Financial Services Needs a “Compliant YouTube”

Viacom today sued YouTube and its owner, Google, for $1,000,000,000 over copyright infringement. In the complaint YouTube and Google are accused of “massive intentional copyright infringement.” With YouTube streaming more than three-billion videos each month, “massive” seems an apt description. I guess YouTube doesn’t fit Viacom’s definition of “compliant.”

I think about this big-bucks lawsuit in the context of the financial services industry’s need to transition its own storytelling to video and web streaming. This is essential because the gap between the web experiences the industry now delivers and what consumers are receiving from other large industries is widening by the day. It’s as if financial services is stuck ten years in the past. That must change, and quickly.

But igniting that change isn’t as easy for financial services as it is, say, for automobile manufacturers, real estate or health care- other large industries which help their intermediaries by offering consumers engaging and entertaining video-based browser experiences.

Because financial services faces unique compliance and distribution complexities, end-user controlled YouTube can’t be the solution. What’s really needed is a YouTube-like capacity that is specifically designed for financial services.

Wealth2k recognized this particular need a couple of years ago and began the development of a web-based communications network capable of managing the varying business rules and compliance requirements of disparate broker-dealers, banks, investment companies and insurers. The result is the Traject™ Network.

Traject makes it possible to quickly and easily “digitize” and “video-ize” the financial services marketing effort while maintaining the essential role of financial advisors. This is accomplished by Traject’s ability to dynamically create vast networks of compliant microsites personalized to each financial advisor. The microsites stream compliant video presentations on products, solutions or services. The videos are compliant by definition and explain products in a needs-based context that gives consumers a thorough and balanced understanding of their value. Who can argue against the importance of this?

Traject manages broker-dealer disclosure requirements assuring that videos or other consumer-facing marketing materials are always showing the appropriate disclosure for each financial advisor. In addition, compliance officers are able to enjoy real-time management and control of reporting, content syndication, advisor accounts, microsites and print collateral.

You may learn more about this by watching the video on Traject at http://www.wealth2k.com/traject

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March 14, 2007 by David Macchia

SunLife Financial to Introduce Streaming Video to Improve Sales Practices and Help its Agents Become More Productive

The streaming video phenomenon that has millions of Americans glued to their web browsers will soon make its debut in a new venue: annuities distributed through independent agents. SunLife Financial (SLF) is getting ready to launch individually personalized microsites for its agents. These microsites will promote Sun Life’s new fixed indexed annuity- SunDex Advantage- which is designed to elevate the capacity of fixed annuities to deliver lifetime guaranteed income without requiring annuitization.

The microsites that will be offered to SLF agents will be capable of streaming five separate Flash movies designed to convey the product’s applicability and features to the vast audience of web-savvy consumers. One of the videos is a 30 minute, needs-based presentation that explores the full gamut of retirement-related risks Americans face as well as how the new annuity can be used to help manage these risks. IN addition there is an eight-minute video that focuses more on the product.

The three additional video are mini-case-studies which illustrate examples of how the product can be utilized by people whose income needs vary. These case study videos are approximately five minutes in length. SLF views the introduction of the agent microsites as critically important in helping its agents tell the SunDex Advantage story in a manner that is both consistent and compliant as well as in a format that consumers increasingly value.

All financial services companies should, in my judgment, focus on SLF’s strategy because it provides a model for how product explanations can be made entirely consistent across large channels of distribution. This is no small achievement! On of the biggest challenges annuity product providers traditionally are concerned about is the inconsistent manner in which agents describe products. By utilizing video presentations as an integral part of the sales process, a way has finally emerged to ensure that realistic product performance potential, product costs, and product features are explained in a fair, balanced and consistent manner. This is not only a positive development for consumers and carriers but also for the agents themselves.

While wanting helping agents to be consistently compliant is one thing, helping them reach more prospects and close more sales is another. The microsites also fill this latter goal. The reason is that the ability to stream video to prospects’ web browsers gives the agent a powerful new prospecting tool. Talk about a compliant, convenient, low-impact and non-threatening approach to a prospect! Not only is it easier for the agent to initially engage the prospect, the microsite experience is a non-threatening opportunity to self-discover the product’s benefits without the presence of sales pressure. This empowers prospects as never before. That’s healthy.

Ironically, although the microsite strategy adds so much value to the sales and educational process it also saves the agent money. Compared to other prospecting and sales strategies- i.e. expensive sales presentations systems (which may or may not be compliant) – the delivery of the video through the microsite costs the agent nothing. And in comparison to traditional communications tools such as a brochure, the video delivers an impact exponentially greater.

It’s hard to conclude anything other than Sun Life’s agents are soon to experience a great big boost in their ability to compliantly prospect for and explain the new SunDex Advantage annuity. Kudos to SLF!

Full disclosure: Wealth2k^®developed the SunDex Advantage movies for SLF and the microsites which will be hosted and managed on Wealth2k’s web-based Traject™ communications network

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March 13, 2007 by David Macchia

Underproductivity Among Agents is the Cancer in Independent Agency Distribution

Since the issuance of the NASD’s Notice to Members 05-50 in August 2005, the indexed annuity industry has been attempting to manage through a shifting product distribution paradigm. For example, broker-dealers now control access to indexed annuity products their registered reps are able to sell.

05-50 by itself presented significant challenges for annuity providers. All of a sudden carriers were forced to consider the requirements of broker-dealers in terms of allowable products, training and distribution. Some carriers were able to bridge with relative ease the very real cross-culture differences between broker-dealers and traditional distributors. The carriers in the best position to achieve this were those which had pre-existing relationships with broker-dealers as a result of their offering variable annuity products. Arguably, these carriers had a big head start in terms of their familiarity both with broker-dealer distribution and compliance standards

Carriers that are successful distributing their traditional fixed and, or, fixed indexed annuity products through independent agents typically distribute through an independent wholesaler (IMO) model. In recent years the competition among carriers to gain distribution opportunities through IMOs has been fierce. To make themselves appear more desirable with the goal of gaining shelf space in IMOs, fixed annuity carriers often ratcheted-up commissions on their annuity products.

For some carriers that are reliant upon IMOs to distribute their products, 05-50 caused a relatively higher degree of disruption. Some (Allianz and American Equity, for example) have seen significant downturns in production. To a large degree these production declines have been linked to broker-dealers not approving certain indexed annuities which have historically been sales leaders.

Carriers which have no pre-existing relationships with broker-dealers must adopt a workable strategy to appeal to the member firms or run the risk of seeing their production continue to decline. “Workable strategy” implies a comprehensive effort that incorporates the design of new products which meet broker-dealer guidelines, working hard to build relationships with broker-dealer compliance and sales executives, crafting an effective product distribution strategy and investing in compliant (NASD-reviewed) sales and marketing tools that provide consumers a balanced understanding of the carriers’ annuity products. This may sound like a significant challenge, and it is. But for a carriers that rely upon agents who are also registered with broker-dealers there is little choice but to prepare to meet it. And quickly.

Here’s why fixed annuity carriers really have no choice except to appeal to broker-dealers: in some IMOs, as much as 80% of the producer ranks are made up of registered representatives. Further, in many IMOs more than 50% of all indexed annuity production has been produced by registered representatives. This is too large a slice of the production pie to ignore.

Since the publication of 05-50 I’ve felt that some insurance industry executives have been in denial about it and slow in facing up to what it means for the industry. The danger in this mentality is that their franchises could substantially disappear right from under their noses. Were that to happen to a few- or more than a few- vast amounts of shareholder value would be wiped away.

So, then, if fixed annuity carriers must re-tool for a production paradigm where broker-dealers play a major role, what will the effect of this be on both registered and non-registered agents? This may be the most significant question of all. Why? Because “re-tooling” for a broker-dealer centric distribution paradigm means improving indexed annuity products designs which will also force down commissions on newer indexed annuity products.

One may be tempted to think that the indexed annuity business will bifurcate; one product set for broker-dealers and another product set for non-registered agents. Yet, surely in today’s compliance environment such a strategy won’t stand-up to scrutiny. The inescapable reality is that commissions are even now being reduced and the trend to lower them is all but certain to continue.

How then will both registered and non-registered producers who have relied upon the relatively high commission payouts on popular indexed annuities make the transition to a selling environment in which their average commissions may be reduced significantly? This is much more than an academic question; it’s the practical question which must be answered correctly in order to avoid a significant loss of experienced producers and their production.

In recent years productivity among independent agent producers has lagged resulting in a variety of problems. In upcoming posts I’ll have much more on this topic with the hope that fixed annuity industry leaders will be motivated to address the agent productivity issue successfully.

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March 12, 2007 by David Macchia

For Most Boomers: No (or Negative) Inheritances

Today’s online Baltimore Sun has an excellent and insightful article by reporter Linell Smith. The articles busts some commonly held myths and fantasies about Boomers including about the immense wealth Boomers are in line to receive- what Smith describes as the “Great Boomer Inheritance.” The article points out that it’s just not true.

Smith cites a 2006 AARP study which found that most Boomers won’t receive any inheritance at all, and if they do it’s unlikely to make a “significant contribution” to their retirement savings. Alicia Munnell, who heads the Center for Retirement Research at Boston College, is quoted as saying that, “Wealth in the economy is extremely skewed: a fraction of the top one percent of the population has all the wealth. Bequests are even more skewed.”

Munnell also goes on to say, “What people expect the typical boomer to inherit is $20,000,” she says. “That’s not a life-changing number. And because it’s the middle number, half will inherit less than that. Most wealth is held by the very, very rich. Even if you have wealth at 65, you will probably use up a lot of it over the course of your retirement and your final estate will not be that big.”

The article delves deeper into other aspects of Boomer inheritances including the phenomenon of “negative inheritances” which arise when Boomer children become financially responsible for their parents’ health care costs, for instance. Visit http://www.baltimoresun.com/features/custom/modernlife/bal-ml.boomer11mar11,0,7387524.story to read the article in its entirety.

I mention this article in the context of my own efforts to get financial services companies to focus on meaningful, candid communications with customers when it comes to retirement. See the March 9 blog entry for more.

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March 11, 2007 by David Macchia

Variable Annuities: Where’s the perceived value? In the gap!

In his award winning book, United States, Gore Vidal wrote, “Once a man’s image, good or ill, is set in the public’s mind, he can contradict himself every day and still be noted for consistency.”

This quote reminds me of today’s generally negative public perception of variable annuities and how difficult it has been to alter it. The articles and commentary driving this continue to grow like compound interest. With the exception of occasional positive notices given to immediate annuities, deferred annuities are almost universally condemned as “bad investments.”For both fixed and variable annuities, public perception resides in the gap between the image of annuities set in the public’s mind and the actual present state of the annuity industry. This is unfortunate because variable annuity contract design has continued to evidence substantial improvement. The result of this is that annuities have taken on increased relevance and utility. New guaranteed income riders that build upon traditional features offer new advantages to retirees.

Critics of annuities, of course, still hammer away at what they perceive as high costs. Yet, York University Professor, Moshe Milevsky, writing in the January 2007 issue of Research, states that insurers are likely not charging enough for the increased economic value they are providing through these contractual guarantees. Surrender charge periods on some contract designs have been reduced. Still others have reduced investment fees and expenses. Some have limited basic expenses (and commissions) to not more than those of A-share mutual funds.

Jackson-National Life recently issued a variable annuity contract under the Curian Capital brand (I was so intrigued by this variable annuity- Curiangard- and the improvements it offers in terms of expense reductions and investment options- ETFs, target date funds- that I personally endorsed it. Visit http://www.wealth2k.com/curiangard/ to view the video.

“What we have here is failure to communicate!”

Actor Strother Martin’s famously-delivered line from the movie Cool Hand Luke supplies the answer to the question, “Why are variable annuities generally regarded negatively in the press and among many financial advisors?” At the recent NAVA Marketing Conference in Tucson, NAVA President & CEO, Mark Mackey, opened the gathering with a very eloquent and candid review of the current state of the variable annuity business. Mackey pulled no punches; he was unambiguous in his exploration of areas where improvements must emerge including in the realm of public perceptions. I came away from the NAVA conference with the conviction that the variable annuity industry suffers mightily from the disease of ineffective communications. The product’s logical and accurate positioning vis-à-vis other investments is not well understood, it’s true value proposition is underappreciated, and its resulting level of new sales can be described as potential yet to be realized.

The keynote address on the opening morning of the conference was made by MetLife’s, Joe Jordan, who delivered an enormously powerful presentation. Jordan is one of those rare individuals with the ability to both elevate and transform beliefs- including the prevailing current wisdom among people within the annuity industry. In his presentation Jordan pointed to reasons why variable annuities are so often criticized. He described historical and ill-advised efforts to position variable annuities alongside other investment alternatives such as mutual funds. This ill-conceived selling strategy ignited expected attacks on the basis of both income tax treatment and expenses.

Interestingly, Jordan incorporated about eight video clips into his presentation. The footage very poignantly conveyed that insurers’ products have the potential to touch peoples’ lives in special ways. Not only was the multimedia content exceptionally compelling and convincing, it drove home to audience members how effective video storytelling can be when applied to the financial issues and challenges customers experience.In this regard Jordan’s presentation became a model for what should be standard operating practice in helping customers better understand complex financial subjects.

We live in a digital-centric society in which the preferred manner for learning isn’t reading as much as it is watching. This is a fact that financial services companies – including variable annuity providers- must recognize and prepare to deal with. I took from Jordan’s remarks that he believes (and I agree) that annuities incorporate benefits other investments don’t offer, and that they should be both positioned and appreciated for their differences rather than their similarities. Incorrect comparisons and poor product positioning of the variable annuity’s inherent benefits serve no good purpose and invite criticism. The variable annuity is really an insurance vehicle capable of helping to manage important retirement-related risks- like not running out of income when you’re old! When the product’s complete and accurate value proposition- along with its costs- is eventually conveyed correctly, an appropriate number of advisors will embrace the product and its true sales potential will finally be realized.

After his presentation I told Jordan that too few people in the annuity industry are capable of delivering a conceptually-driven, needs-based presentation on variable annuities with so much power and conviction as he. As a result, not much changes over time. I also told Jordan that if he had the means to somehow deliver his message on only one occasion to, say, 5 million Americans, the variable annuity industry would be forever changed… for the better. Jordan doesn’t run from the identity of “insurance”, he extols it, proudly.

The variable annuity industry needs to marshal its resources behind a massive effort to revolutionize its consumer-facing messaging. Kill the jargon, rider initials, complexities and confusion. Substitute for those conceptual, value-based messages that speak to the real financial risks that people face. To boost variable annuity market share, there’s nothing that the industry’s advisors need more than effective assistance in explaining the product properly. This change cannot occur until technology is used to deliver engaging and compliant content to the vast Boomer (and older) audience of consumers who really need the benefits annuities provide.

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