Journal

“A fiduciary duty is the highest standard of care imposed at either equity or law. A fiduciary is expected to be extremely loyal to the person (the principal) to whom they owe the duty. They must not put their personal interests before the duty, and must not profit from their position as a fiduciary, unless the principal consents. The fiduciary relationship is highlighted by good faith, loyalty and trust.”

“When a fiduciary duty is imposed, equity requires a stricter standard of behavior. It is said the fiduciary has a duty not to be in a situation where personal interests and fiduciary duty conflict, a duty not to be in a situation where their fiduciary duty conflicts with another fiduciary duty, and a duty not to profit from their fiduciary position without express knowledge and consent. A fiduciary cannot have a conflict of interest.”

Just when I feel that I’ve seen everything, along comes something that surprises even this jaded soul. This development, however, strikes me as one with potentially disastrous consequences for unsuspecting fixed annuity producers whose desire for a way out of their current business turmoil may prove to be the first step in a career-ending, bad decision. Is the “Wild, Wild West” of annuity-land now setting its sights on the rarefied world of Registered Investment Advisors?

A few days ago I received a spam email from an organization called Registered Independent Advisors. As I read this email it struck me as quite clearly designed to exploit the present high levels of anxiety and frustration among annuity agents. If you are a regular reader of this blog you know that I have written at length about annuity agents who are been battling a generally hostile marketing environment as well as the intensified scrutiny of securities regulators.

Many who are also registered representatives have seen their broker-dealers intercede in their equity indexed annuity sales and marketing activities with the result that certain of the products most favored by some producers have been deemed by their broker-dealers’ guidelines to be unsuitable.

While the message from Registered Independent Advisors was both coy and somewhat different that so many other creative solicitations I’ve read since 05-50, it was also quite similar. In fact, the message’s first bulleted question states, Do you write over $1,000,000 in EIA premium regularly?” It then goes on to ask, “Are you concerned about the SEC’s Free Lunch seminar sweeps?” And, “Are you unhappy with BD restrictions and haircuts on EIA business?” These are classically Independent Marketing Organization (IMO) themes.

The email message also goes on to state that “we”, meaning Registered Independent Advisors, is not a “marketing organization” but instead is seeking to provide “a real business strategy for 2007 and beyond.”

I’m not sure what “real” is meant to imply. The relevant question is, in my judgment, will taking on the fiduciary obligations of a Registered Investment Advisor prove to be a viable strategy for annuity agents already dealing with a level of complexities they never expected?

An effort to entice both non-registered annuity agents as well as registered reps into the world of Registered Investment Advisory- and all that that implies- strikes me as a topic worthy of exploration. I’ll have much more on this in the days ahead.

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

In Part Three of this series I will suggest specific actions to repair both the current hostile regulatory climate and the challenging marketing environment which together pose a significant threat to the future success of the fixed annuity industry. Readers should know that my day-to-day work is wound around developing solutions to such problems. Click here for Part Two, and here for Part One of this series.

Reduce Complexity, Set Standards and Create an SRO

Because it severely limits comfort and confidence among annuity buyers, not to mention an accurate understanding of an annuity product’s realistic performance capability, it’s time to end the ever-expanding complexity in fixed annuity product design.

Complexity for complexity’s sake can easily cross the line into the territory of gimmickry in product design. It’s happened far too often in an industry which is by its very nature more difficult for people to comprehend. Gimmicky products are unlikely to possess any inherent performance advantage over simpler products. In fact, they may often times signal poorer results for consumers. The industry should consider the adopton of standards which would eliminate products that are overly complex and opaque.

I’ll cite the example from a few years ago of an indexed annuity with an S&P 500 participation rate of 125%. What was the management of that company thinking? The kindest analysis would hold that the provider introduced without malicious intent a product that was inherently misleading to both its sellers and purchasers. At worst, unleashing such a product on a naïve agent population that solicits business among a largely trusting customer base comes uncomfortably close to criminal behavior.

Is the urgency to attract new premiums so desperate and otherwise so nearly impossible to achieve that a company would have to hoodwink all involved? Did the senior management of this company genuinely believe that some of its agents wouldn’t say to prospective purchasers, “This product will provide you with 125% of the S&P 500 without the risk of investing?”

Yet when you looked under the covers of this product it was easy to show that its inherent design would likely produce interest earnings that were inferior to other simpler products which may have offered, say, a 60% participation rate. Such is a real-world example of the tendency of some life insurers to exploit both their agents and contract holders through the design of products that shouldn’t be allowed to see the light of day. When it acts this way the industry shoots itself in the foot. I’ve often said that this happens about every three minutes.

When running for President in 1980, Michael Dukakis famously said, “A fish rots from the head.” Let me paraphrase Mr. Dukakis and say that the fixed annuity industry rots from not having a head. After 30 years of observing annuity product providers, I believe that what’s needed to place the industry on a solid footing for robust growth is something akin to an NASD-type SRO (self-regulatory organization). Now I know many in the industry will bristle at the reference to the NASD. But just look at the numbers.

Consider the growth of the securities industry in comparison to the life insurance industry since the time I entered financial services in 1977. When I joined the business, life insurance companies “owned” America’s pension assets. They lost that business to mutual fund complexes that were regulated differently.

I believe that there are too many regulators of life insurance companies, and I believe that a single strong SRO would make for a better result than we have at present. Think about the fact that the extraordinarily misleading indexed annuity product I mentioned above (and dozens of other products I didn’t mention) was reviewed by multiple state insurance regulators and approved for sale in almost all 50 states!

Transform the Consumer Education and Communications Process: Make it Enjoyable and Modern, and Compliant.

While I call on life insurers to reduce the complexity in annuity products, it’s also true that the very nature of “insurance” products presumes a greater level of complexity than, say, many investment products. This is not a bad thing. But it places a special burden on providers to wrap their products in communications tools which convey balanced explanations of the products being marketed to purchasers who are generally 60 years of age or older. I have to give a lot of credit to some carriers who understood this beginning several years ago and acted to enhance both consumer and producer education. They have enjoyed nothing but good results as a result.

I had the privilege of being at the forefront of a movement to create fair and balanced educational presentations using rich motion graphics burned to CD ROMs. Providers such as ING, Jackson-National, Sun Life Financial, and Aviva packaged their new annuity products with engaging educational presentations. They not only increased sales, they also helped their agents understand how to present their products in a superior (compliant) manner. This lowered market conduct-related liability risk for these carriers as they were able to drive, for the first time, consistency in product explanation over large networks of producers.

I believe we’ve come to a point in time where no purchaser of an annuity product should be allowed to purchase it unless he or she has viewed an objective educational presentation designed to explain both the advantages and disadvantages of the product. The reasons for requiring this given today’s regulatory environment extends beyond common sense; they reach a level of urgency in protecting shareholder value.

Multiple points of value accrue to all participants in doing just as I’m suggesting:

• Consumers gain clarity, confidence, and true understanding of the product they are purchasing; the format is easy to understand, not off-putting legalese.

• Agents’ long-term career interests are well served by the development of closer and more meaningful relationships with their clients. A fuller, needs-based relationship will take root resulting in consistency and satisfied clients.

• Product providers benefit by establishing perfect consistency over the explanation of their inherently more complex products. They benefit by lowering financial liability and by having distributors who become better able to up-sell and cross-sell their other product offerings.

With the widespread adoption of broadband connectivity, it’s now possible to abandon the CD-ROM format in favor of web delivery of the educational presentations. Sun Life Financial has done just this recently through their creation of distributor-personalized microsites capable of delivering streaming video educational presentations on its new fixed annuity product. Whose interests are not well-served by this development? And it’s even less costly than duplicating CDs.

In the next installment I will address a key issue: the self-defeating, growth-limiting attitudes held by many defenders of the annuity industry status quo.

In part one I wrote about the authentic risk to the fixed annuity industry that it may fail to realize its full potential in Boomer retirement security. This would, in my judgment, constitute a tragic result for an industry which, due to its product set and its capacity to assume longevity risk, ought to be well positioned for success as millions of retirees and their $trillions in retirement assets transition to the income-generation stage.

Among the most important goals I have staked in introducing this blog is to galvanize industry leaders- both in the agent ranks and among insurance company leaders- to the urgency of caring for the patient before he expires. The fixed annuity industry ought to be a perceived as a vital and necessary institution, one with products that 78 million Americans seek out as they plan for their future retirement security.

Today’s Challenges Reflected in a 20-Year Old Mirror

In late 1987 I was asked to consult on a project with the Wall Street Firm PaineWebber (now UBS) that involved a sort of “reprogramming” of attitudes among stockbrokers. The goal was to alter the stockbrokers’ negative perceptions of life insurance products. I was offered this project due to my development of a hugely successful life insurance marketing program that had been introduced by E.F. Hutton Life Insurance Company in 1987, but was later expanded by that company’s successor, First Capital Life.

That life insurance marketing program, “The Alternative Plan”, highlighted the ability of universal life insurance to provide tax-free income (via policy loans) to policy owners. The attractiveness of utilizing life insurance to provide supplemental retirement income was greatly enhanced following the elimination of income tax deductions on many IRAs (Tax Reform Act of 1986). With “The Alternative Plan” I was able to demonstrate that the universal life policy became an arguably superior choice when compared to a non-deductible IRA – no tax forms, income-tax free access to cash value, and life insurance.

The PaineWebber project began with the identification of ten groups, each comprised of ten stockbrokers – one-hundred stockbrokers in all – that would participate in my 2½ day training seminars. These training meetings were held regionally over a three month period. What’s interesting to me as I remember working with these brokers is the fact that although they were selected for participation in the program because they had shown some degree of willingness to accept life insurance, they were still intensely and universally negative to the idea of being perceived by their prospects and clients as “life insurance agents.” In fact, their history of selling fixed annuities was their only historical involvement with insurance. I had my work cut out for me in breaking through their negative, pre-conceived views.

The training program was focused on the utilization of life insurance as a way to boost retirement security through the creation of income tax-free cash flow. The expression of this utilization that serves as the heart and soul of the training was a 45-minute seminar presentation that placed the value of the life insurance policy in a needs-based context. The most important goal with this training was for me to teach each of the one-hundred stockbrokers to deliver this presentation effectively.

For context, let me point out that this was in the period before the advent of PowerPoint and LCD projectors. The seminar presentation consisted of one individual – me – standing next to a flip chart holding only a Magic Marker. For 45 minutes I would speak and write down facts and figures on the flip chart. The verbal presentation was passionately delivered, highly conceptual, and decidedly emotional; i.e. after a section addressing the importance of saving money, “I just read a survey that said that EIGHT of the TEN LARGEST CORPORATIONS in the WORLD are Japanese! Why? The Japanese SAVE MONEY! WE DON’T. The Japanese save more than 12% of their incomes each year, the Germans, more than 8%. We Americans barely save 4%!” (This all sounds rather quaint in the context of the subsequent meltdown of the Japanese economy and the dramatic further eroding in the U.S. personal savings rate!)

My goal – and also my own measure of success in the PaineWebber engagement – was enabling all one-hundred stockbrokers to personally deliver the 45-minute presentation. I came darn close. More than 90% succeeded. And their life insurance (and annuity) production skyrocketed. In the process, these stockbrokers came to see life insurance differently; not as something to shun by definition, but rather as something to be appreciated for its special abilities and unique application in personal finance.

Importantly, there was no agenda in my training to diminish the importance of life insurance policy’s death benefit, nor was there any attempt to sidestep the acquisition process. Accordingly, I trained the stockbrokers on the unmatched financial leverage life insurance provides as well as the underwriting process and how to properly complete the life insurance application.

The Beginning of a Decades-Long Shift

In the period beginning roughly in 1980, most life insurance companies began to focus more intently on product manufacturing at the expense of recruiting, training, and managing life insurance agents. In Part One of this series I explained how the introduction of the personal computer ignited this shift.

One of the things that life insurers had traditionally taught, but by the early 1980s were abandoning, was the building among its sales people of the prideful belief in the worthiness of being perceived as a life insurance agent. It’s no accident that the movement toward marketing identities which camouflaged the producer’s agenda to sell life insurance and annuities took root during this period. Most life insurance agents at the time would have been able to describe to you how much they envied the far more attractive public perceptions of stockbrokers and “planners.”

As a result many insurance and annuity agents sought to co-adopt alternative, public-facing identities that projected a variety of specialties, i.e. “financial planning,” “tax avoidance,” “Medicaid planning,” estate tax reduction,” “safe money specialist,” “senior advisor,” etc. The movement among insurance and annuity producers to acquire newer and ever more timely and specialized marketing identities continues to this day. But now it’s collided with a regulatory and compliance paradigm that didn’t exist 20, 10, 5 or even just one year ago. Consequently the notion of hiding from the consumer a true agenda to sell life insurance or annuity products no longer “fits.”

Producers who continue on this track run the risk of regulatory sanctions and unwelcome adverse publicity. And depending upon how any one of thousands of consumer complaints that a regulator may choose to highlight is adjudicated at the carrier level, they too run the risk of unwelcome negative publicity.

Past is Prologue

In spite of the success of my training at PaineWebber and the subsequent production increase of my students, I reached only a tiny segment of the firm’s total stockbroker base. After my run ended some PaineWebber executives felt that it would be smart to engage thousands more stockbrokers on life insurance sales. They created a universal life policy they called “PaineWebber Provider.” It was limited to a $2,000 premium – just like an IRA – and it had no requirement to take a medical exam.
To the client, and to most brokers, the PaineWebber Provider looked like a “tax-free IRA.”

Unfortunately, most stockbrokers didn’t have a complete understanding of what they were selling and some of the brokers selling the PaineWebber Provider failed to mention that it was, in fact, a life insurance policy. This resulted in a class action lawsuit brought against PaineWebber.

PaineWebber paid a price in terms of defending a lawsuit for wrapping life insurance in an identity which at least partially camouflaged the product its stockbrokers were selling. This was 20 years ago. We haven’t learned.

The bottom line is that it’s all changing – and more quickly than many may realize. This is not the time to look back on “safe” strategies that in the past may have proven to be reliable. Life insurance companies and their agents must clearly communicate their agendas while explaining their value in a manner that is consumer-friendly, balanced and very, very clear.

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

So I want you to get up now. I want all of you to get up out of your chairs. I want you to get up right now and go to the window. Open it, and stick your head out, and yell, ‘I’m as mad as hell, and I’m not going to take this anymore!’ I want you to get up right now, sit up, go to your windows, open them and stick your head out and yell – ‘I’m as mad as hell and I’m not going to take this anymore!’ Things have got to change.

But first, you’ve gotta get mad!…You’ve got to say, ‘I’m as mad as hell, and I’m not going to take this anymore!’ Then we’ll figure out what to do about the depression and the inflation and the oil crisis. But first get up out of your chairs, open the window, stick your head out, and yell, and say it: ‘I’m as mad as hell, and I’m not going to take this anymore! News anchor Howard Beale in the 1976 film, Network

This is it. I’ve reached my Howard Beal moment. Maybe it’s because I live in Massachusetts, or perhaps it’s just the years of accumulated frustration that has taken me to the breaking point. But the complaints issued last month by Massachusetts Secretary of State, William Galvin, against two Massachusetts annuity producers were the straw that broke this camel’s back.

It’s time for someone to publicly step-up and do what no one else in the annuity business seems to want to do: address the disease causing the problems in the industry rather than the symptoms. I’ve been waiting for the carrier Presidents and association leaders to do just this, but they’ve fiddled so long and so ineffectively that Rome is now very nearly burnt beyond recognition. With apologies to the countless agents I’ve worked with over these many years, as well as to my numerous friends (and customers) in senior executive positions- all great people, no one is exempt from responsibility here.

So this, then, is the first in a multi-part series in which I will seek to unlock the reasons why the annuity business finds itself in its present messy state. My sole motivation is to protect and expand an industry that has been very good to me, has given me an opportunity to succeed, and has allowed me to be more financially successful than anyone would have had the right to expect.

Unique Perspective

When it comes to commenting on the annuity industry, I have something of a non-traditional if not unique perspective that may make me uniquely qualified to take on this mission; I’ve been a successful agent, an agent recruiter, an agent trainer and a principal of two successful independent marketing organizations that distributed fixed annuity products through independent agents.

For more than 20 years I’ve also been a consultant to life insurance companies and broker-dealers, and I’ve worked closely with many -level executives to help define solutions that meet sales, marketing and distribution challenges. Although my time is now solely spent as a consultant concentrating on technology, new media, retirement income and compliance, it was until only recently that I kept a leg in each pond.

First, please understand that the annuity business today is locked-into two, mutually destructive vicious cycles which, unless arrested, will spell the failure of the business as we know it. One vicious cycle concerns the constant pressure agents feel to run away from any identity that overtly conveys their actual intent to sell annuities. The other vicious cycle concerns product manufacturing activities that serve to erode already poor agent productivity.

To be clear, “failure’ of the annuity business in this context doesn’t mean going the way of the dinosaurs but rather something that is to me even worse: a failure to live up to its business potential at a critical time resulting in marginalization by competing industries which usurp it’s value and standing.

Am I being an alarmist? Yes, certainly. I’m I overstating the danger? Hardly. In some jurisdictions it’s now arguably illegal for annuity producers to carry on in their daily work. Senior citizens- for whom I was taught some 30 years ago were perfectly suited for annuities- have today become a “protected class” of buyers; protected from “High Commission Annuities.”, that is. It’s not just Massachusetts, of course. It’s also Washington, Missouri and Minnesota, to name just a few. It’s thousands of negative press reports concerning annuity products and sales practices. It’s Parade Magazine telling its readers to, “Avoid a Costly Mistake.”

I’ve known- and recruited- thousands of insurance and annuity producers. In the early part of my career I built multiple successful distribution organizations. In large measure my success in attracting agents was do to an excellent ability to both evaluate producers’ talents and motivate them to adopt my vision of greater professional and financial success.

As a consultant, I’ve also worked closely with dozens of life insurance companies. Under consulting arrangements which have spanned as long as 12 years, I’ve worked with senior executives including company presidents, chief actuaries, product actuaries, CMOs, CFOs, RDs and countless mid-level executives. I’ve participated in hundreds of meetings addressing topics such as product development, marketing strategy and distribution strategy. I’ve helped define high-level strategy for new, targeted markets, distribution acquisition, value proposition enhancement and product development.

These experiences have allowed me to see both sides of an equation which equals today’s unfortunate annuity market upheaval.

Honesty & Honor on Both Sides

There is simply no doubt that the vast majority of producers as well as the vast majority of life insurance company executives are honest, honorable and decent people. That said, I can tell you that there is little in the way of meaningful communications between the two groups. Each group privately disparages the other. Each holds a fundamental mistrust of the other. Each feels that its own inherent competencies are the most difficult to achieve, and the most valuable.

Yet, there is a fundamental imbalance that is at all times is operative. The carrier is the “dealer.” It holds all the cards. It has all of the financial muscle, product-creation abilities and pricing power.

The agent/distributor is the “player”, reliant upon the carrier for product, compensation, appointment, opportunity.

For all its strengths, the carrier is vulnerable, even potentially non-viable without ongoing distribution. It works hard to conceal the vividness of this naked truth from its producers. The producer consistently undervalues his or her value, and would be surprised to learn how desperately it is prized inside the “Home Office.”

The relationship- and relationship dynamics- described above have developed, coincidentally, over the period since I entered financial services through the insurance door in 1977. As a rookie insurance agent I was unaware that technology was about to unleash a paradigm shift that would have career-long and dramatic implications for me and everyone else.

Unleashing the PC in the Rate Book Era

My career began in the last stages of the Rate Book era. No PC to help illustrate and explain product vales or contract provisions. My Rate Book contained annuity (annuitization) rates and costs per $1,000 of life insurance for all ages, as well as historical dividend payout information for in-force life insurance policies.

Because today’s computer-generated sales tools didn’t even exist, my ability to sell something was conditional upon my capacity to be persuasive and conceptual. To engender emotional responses that tug at feelings of loss, guilt, greed and fear. That’s why my employer, MONY, provided training programs designed to develop my sales skills. I was taught to sell in a certain manner; say certain words, probe for certain reactions and answer certain objections. I didn’t realize it at the time but I was being taught to sell in a needs-based, conceptual manner.

Back when I was selling life insurance using only a rate book and my powers of persuasiveness, the industry was in a state I would describe as “Black Box.” It was shrouded in mystery, there was little or no ability to compare prices, replacing an existing policy for a new one was considered an unethical act, and most agents- some 80%- worked for a single life insurance company employer, sold that company’s products, exclusively, and told their prospects that their company was the “best” company to buy from. I certainly did.

The introduction of the PC spawned the ability of data collection allowing easy access to comparative pricing which itself ignited a monumental shift. All of a sudden agents who had exclusively sold one company’s products realized that there was a big, undiscovered, and potentially lucrative world out there. An entirely new (or at least new to the vast majority of agents) business model began to emerge: Rather than representing one company’s products to consumers, I represent consumers and choose only the best products from among all companies. Adopting of this new business model, of course, required resigning from the primary company in order to work as a “broker.”

At the same time that this distribution shift was unfolding, computerization enabled a concomitant paradigm shift in product design. 1979-1980 saw the introduction of interest sensitive, universal life insurance. All of a sudden a product emerged (in a high interest rate environment, no less) that made traditional life insurance seem very expensive if not archaic. The introduction of universal life products with double-digit crediting rates sparked a massive replacement of traditional policies not to mention a range war between old-line mutual insurance companies and up-start stock life insurance companies.

Both of these technologically-driven phenomena led to another paradigm shift; life companies began to abandon traditional development of insurance sales people in favor of concentrating exclusively on the manufacture of new products. The great splitting-away of distribution from product manufacturer thus began.

I was there and I can tell you that there was nothing nefarious about both agents and companies making these changes. Both groups saw it in their best interest in light of the challenges they were facing. But it’s also true that neither group was quite ready for what was ahead of them. And what was ahead of them would constitute the greatest challenge the industry has faced in at least 30 years.

Let’s fast-forward those 30 years. There’s been a complete reversal among agents in the way that they work. Today, the 80% that previously were bond to a single company are free and independent. Most carriers compete aggressively for independent distribution; very few carriers recruit and develop agents any more.

In a sense, the carriers lost their soul when they lost their agents. The agents were a counter weight, an alternative point of view, a sounding board to the real, street-level dynamics. Independent agents were different by definition, unable to be embraced as closely. After all, tomorrow they might be talking to my chief competitor.

When carriers adopted the manufacturer model exclusively, they effectively set agents adrift to fend for themselves in terms of training, marketing, imaging, prospecting, coaching and mentoring. Were agents prepared to take on these responsibilities? They were most certainly not, in my judgment.

In the next installment I’ll describe how a direct correlation can be drawn between the carriers’ earlier decision to abandon agent development to today’s market conduct and public image challenges.

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