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