David Macchia

Interview with Francois Gadenne: The Executive Director of the Retirement Income Industry Association Talks About How RIIA Emerged, the Future of Retirement Income, and RIIA’s Role in Helping to Define It.

fg1In this interview with Retirement Income Industry Association (RIIA) Founding Chairman, Francois Gadenne, I explore a variety of issues including the status of present and future income-generation solutions, key questions for the industry that are being asked by RIIA, and changes occurring which may cause transformation and disruption within financial services. Readers should know that I am hardly a disinterested party when it comes to this not-for-profit association; I serve it as both a Board member and Chair of the organization’s Communications Committee.

Macchia: You were born and raised in France, and you’ve enjoyed great success since settling in the U.S. and becoming a U.S. Citizen. Talk about what brought you to this country, and share your experiences up until the time you began to work on the formation of RIIA.

Gadenne: I left France because I was a born entrepreneur and I was living in a culture that favors central planning and government control. My primary source of comparative advantage and specialization was not highly valued. Once I understood it clearly, in graduate business school in Paris, there was only one thing to do, I had to leave. From this point forward, the path was straightforward. I earned an MBA at the Kellogg School, and then became engaged in business strategy consulting at Braxton where I focused on the financial industry. I pursued my interested in Artificial Intelligence by joining a start-up involved in the development of expert systems for the financial industry. After that start-up failed, I joined the Artificial Intelligence Section of Arthur D. Little to lead a team building a weather forecasting system for NASA in the aftermath of the Challenger disaster.

Then I was hired by the Bank of Boston (BKB) to build expert systems. I grew-up on the IT side of the Bank to become a resident entrepreneur, managing increasingly complex and mission-critical projects including the launch the 1784 mutual funds family. I transitioned to the business side of the Bank when I joined The Private Bank. My mission was to develop and to run a technology-focused investment advisory business model for the core customers of the Private Bank.

At this point, in the early-90s, it became clear to me that such business models could be leveraged over became the Internet. This is when Ben Williams and I founded Rational Investors. Our mission was to provide mass-customized investment advice over the Internet in DC Plans. In 1999, we sold the company to Standard & Poors’. I became the general manager of S&P’s Retirement Services Division, we made the earn-out in two years and then I retired for 59 days. That’s when my wife, Lucie, told me across the kitchen table, “I married you for life, not for lunch. Go do another one.” That was the birth of Retirement Engineering.

At this point, both March 2000 and 9-11 where part of our history and consciousness. To start Retirement Engineering, Ben Williams and I interviewed about 100 former advisors, clients and prospects to ask the following question: “What is an important problem to solve in the retirement business?”

We heard many things and chose to retain two key ideas:

“Don’t do Process (like Rational Investors) do Products”.

“if you do Products, don’t do Inputs, do Outcomes”.

Retirement Engineering (REI) is a Research & Development Holding Company developing new forms of product packaging (Future-Income Denomination™, DBinDC®, etc.), new retirement income structures and products (GRInS®, LIncS™, MSI™, etc.) and new financial planning methodologies and benchmarks (IncomeAtRisk™, etc.). Our work is very low-key and under mutual non-disclosure agreements. We do not discuss our work nor do we talk about our clients. (Click here to see a high-level view of services offered by REI).

Along the way, an old friend and advisor, Professor Zvi Bodie of Boston University, offered me the opportunity to teach his class, so now I’m a lecturer at B.U. The nice thing about teaching is that it challenges you to see the limit of your thinking so that it can become more direct and more clear.

Macchia: Let me ask you about the formation of RIIA. I recall that it was only in February of 2006 when RIIA formally came into being.

Gadenne: The Retirement Income Industry Association (RIIA) emerged from persistent requests and comments made by REI’s clients, prospects and lawyers, including Al Turco who is RIIA’s co-founder. “Retirement income cuts across the business silos, but we can’t achieve the right level of conversations within our existing associations and business structures because they are product, process or silo focused. We need a new association to address retirement income issues and questions across the traditional product, process and business silos.”

The notion of RIIA goes back to discussions held in 2003 starting with Al Turco. In 2005, something clicked in place. I had been working on a retirement income conference built around the idea that existing conferences were too silo-specific. It was becoming clear that the retirement income discussion was not taking place to our clients and to our prospects’ satisfaction. There was an emerging need to have a new type of retirement income conference. This led to a conference that I chaired in June 2005 organized by IIR and held in Boston.

The conference was more successful than we had expected and, as a result, led to the IIR’s and RIIA’s very successful Managing Retirement Income (MRI) conferences in Feb. 2006 and Feb. 2007. Along the way RIIA was formally constituted and the 2006 & 2007 MRI conferences doubled up as RIIA’s Annual Meeting.

Macchia: RIIA had a fulfilling first year. Talk about the progress you’ve seen.

Gadenne: The first challenge was to make RIIA real. We accomplished this in less than a year. The second challenge is to make it permanent. This is accomplished by reaching critical mass in several areas: Membership, demonstrable value-added and relevance, and Budgets. Once it’s permanent, then you have to make sure that it thrives.
It was very rewarding to see that RIIA became real in less than one year. It just blossomed on us. Companies started to join rapidly. Since RIIA is a volunteer organization, where the work is performed by the members and for the members, we reached a critical mass in all areas and we reached it faster than planned.
Macchia: Why did so many prestigious organizations so quickly gravitate to RIIA?

Gadenne: This is a typical case of being lucky at the right time. RIIA is doing the right thing at the right time and at the right place. There was a need, and RIIA’s goals and structure fill that need well.

The membership realizes that it’s a volunteer organization, not an organization where a bureaucratic administration seeks to impose its preconceived, or politically correct, notions upon the membership. As a result, different types of deliverables emerge, different types of activities happen. Initial ideas quickly turn into committees, turn into specific projects with goals, turn into valuable deliverables. Members are involved and the rapid results motivate them to stay involved.

In the first few months, the Education Committee delivered the first training course for RIIA’s Retirement Income Expert certification, The Research Committee delivered the first quarterly research deliverable, the Communications Committee delivered the website ( www.riia-usa.org ), etc. It all moves very quickly.

Macchia: Talk about the types of members RIIA attracts.

Gadenne: In typical RIIA fashion, membership categories are developed by the members as new challenges and opportunities appear. RIIA has several membership categories.

RIIA began with about 30 Founding Members sorted into two categories; Regular Members, organizations that are building retirement income businesses, and Associate Members, organizations that provide third-party services to Regular Members. These are RIIA’s full memberships with all benefits and obligations.

As the Regular and Associate memberships grew, discussions started and deliverables followed rapidly other types of industry players asked if they could get involved: Plan sponsors, financial advisors, academics, silo-focused associations, etc.
In response to this demand, RIIA created new membership categories to accommodate their needs as well as their funding abilities. This created a second set of membership categories with lower cost and matching benefit levels. You can see the details on RIIA’s website.

Some leading Plan sponsors asked join RIIA’s discussions and activities. RIIA created a Plan Sponsor membership category. Leading financial advisors, who often times have expressed frustration that their companies are not moving fast enough, asked if they could join RIIA to be where the action is. RIIA created a Financial Advisor membership category.

We have a number of leading academics who have become very interested in RIIA’s activities, people like Moshe Milevsky, Meir Statman, Zvi Bodie and Shlomo Benartzi, so RIIA created a membership category called Special Advisors to the Board.
Then we heard from leading product and processfocused associations who wanted to leverage their specific mission with RIIA’s extensive membership and activities. RIIA created an Affiliated Association membership category.

This process is on-going. RII is currently considering an Honorary Membership category as some members have changed jobs to move to more distant industries and seek to retain a relationship with RIIA. The membership level increases daily, you can see the latest membership information on the RIIA website.

Macchia: In terms of RIIA being a different sort of organizations, focusing exclusively on retirement income, cutting across industries and silos, positioning itself as the preeminent thought leadership vehicle, attracting all manner if large companies and innovators, attracting the leading lights of academia, it’s a very interesting combination that has resulted. I’d like you to explain who gets helped by this, and who, if anyone, gets hurt?

Gadenne: It is too early to have winners and losers. RIIA exists because something new is being created. RIIA is about building and growing the pie, not sharing the spoils of a zero-sum game. This may change when growth slows but there is a long way to go before we get there.

Another reason is that RIIA is not about making statements that might cut the pie into winners and losers. Rather, RIIA is about asking questions. It is about asking the right questions so that members do not end-up making decisions that result in dead-ends.
The reason why it works is that we don’t show-up saying, “Please kneel, I’m going to tell you how it is or isn’t.” It’s quite the contrary. Things are different, things change, it’s pretty messy out there and we’re having a hard time figuring out what’s what. Why don’t we get together and figure out what are the right questions to ask. This is RIIA’s function, and why its thought-leadership is so evident.

RIIA is a place where we can all ask questions and not run the risk of being ridiculed, railroaded out of town, or ostracized. RIIA is a place where people from very different backgrounds can come together to talk as opposed to a place where there is a stated dogma, and if you don’t fit into the dogma you’re out. So everybody wins, there are no losers because the purpose is growing the pie, not promoting a specific way of slicing a fixed pie. Exactly how that pie will grow, and in what directions, well, that’s exactly what the effort to define the right questions is all about.

Macchia: I’d like to ask you about something that I’ve heard and that I feel needs to be addressed directly. This has to do with a view of some who feel that because RIIA was moved to reality by an entrepreneur, and because you are still an entrepreneur, at least part time, that somehow RIIA lacks the level of legitimacy that another organization might have. Now as a Board member I know that this is not valid criticism, because I know how lily pure RIIA’s operations are conducted. But I’m interested in your view of this issue?

Gadenne: The first thing I’d say to those who have concerns about RIIA’s direction, please give us specifics that can help us become better. Become a member, participate in our meetings, join a committee and see for yourself how we operate, experience our transparency. Read our bylaws, talk to our members and judge from RIIA’s facts not just from your own fears.

For instance, the wording of the question that you asked does not seem to originate entirely from RIIA’s specific facts. RIIA has two co-founders: An entrepreneur and a lawyer. From the very first day, Al and I have worked to give RIIA the right organizational DNA with proper By-Laws, a Code of Conduct, having the Board and the Directors become members of the National Association of Corporate Directors (NACD) to ensure a level of Board professionalism not often seen outside of large corporations, etc.

In most circumstances, change engenders fear and insecurity among individuals and organizations. After all, RIIA is focused on a high-stakes marketplace, we’ve had tremendous growth, we’ve attracted many major corporate members and we’ve innovated. That’s may be viewed as disruptive to some. I believe that such concerns will be best addressed and transcended into value if these individuals or organizations join RIIA. RIIA’s membership structure, including the Affiliated Association membership, is designed to create leverage and value-added opportunities for all.

Macchia: What changes and enhancements do you see coming from RIIA over the next 2-3 years?
Gadenne: Just last week RIIA signed a contract with IIR that will split the original conference into its two components. In the past our conferences functioned as an industry conference- Managing Retirement Income- and also functioned as RIIA’s annual meeting. Going forward, we will continue to hold the Managing Retirement Income conference in February, albeit in a warm weather locale, and we will also offer a Fall Annual Meeting including an Awards Dinner. We will give awards in a number of categories, including advertising, with well-regarded, independent experts lined-up to judge in the various categories.
This fall we will also hold our first Annual Retirement Income Communication Conference to help focus our members on this very important issue.

Macchia: Regarding associations which inherently advocate for a particular product, in what way may such organizations be handicapped in terms of helping the larger industry craft the solutions and processes that will be necessary to fully meet the demand of the Boomers’ retirement security needs?

Gadenne: The have constraints and rigidities in the form of a very specific mission and view in support of a very specific product. When you have a hammer you tend to see all of the screws around you as things that need to be hammered. As the landscape changes and the shift from accumulation to transition to distribution unfolds, it becomes clearer that many of these products provide part of the solution but not all of the solution. The need for cooperation across silos increases. As the shift progresses, the part of the market best answered by specific products may grow, or it may shrink. The developments that may address the market change in a larger and more fulfilling way, in a way that creates dominant market share and stronger companies- may best come from reaching across silos. Join RIIA.

Macchia: I want to ask you about the issue of training for financial advisors. It’s become conventional wisdom that financial advisors long ago acquired the level of knowledge necessary to properly accumulate retirement assets. The second part of that conventional wisdom is that the vast majority of those same advisors have yet to acquire the skills, insights and techniques needed to properly place retirement assets into a distribution mode. Do you agree with this? And if you do, what role will RIIA play in changing the advisor education landscape?

Gadenne: Let me field that in terms of one of the key questions RIIA is exploring: Is the body of knowledge for accumulating assets in a suitable and compliant way different from the body of knowledge necessary to engage in distribution in a suitable and compliant way? The answer is, gee, this is worth looking at! It may be that the body of knowledge that FAs currently have to provide suitable and compliant accumulation is adequate to also have them provide suitable and compliant distribution advice. Then again, maybe it’s not, and that’s the subject of a lot of ongoing discussion and development. I would not place the blame on FAs for having insufficiently trained, it may be that something fundamental has changed here. So, it’s a deeper issue than thinking, well, I’ll take some additional training. That training may not even exist, yet. RIIA is working on it.

Actually, the academic theory (for retirement income) may be in its infancy. This is why we have so many academics associated with RIIA, because those are the issues we’re trying to sort out. This is also why RIIA is creating the Retirement Income Expert training programs and certification, because that’s exactly what it seeks to address- starting from what’s fundamental at the academic level, and how do we reflect that into something that properly trains the FAs.

The other issue is that almost everything we have done in accumulation has come from the institutional world. Modern Portfolio Theory, and pretty much this whole assemblage of financial theory, which is only 50 or 60 years old, is very institutionally-focused and based on clients that have a near infinite investment horizon. We can say to clients with a near infinite investment horizon, that on average, in the long term, blah, blah, blah… it works!

But now when we deal with a retail world, where clients have a finite lifecycle and some hard dates, like a retirement date, well the “on-average” and “over the long term” may not apply nearly as well for some or even for many of the customers. That’s the source of a fundamental shift in the theory as we move from an institutional world with infinite horizon to a retail world with very specific and finite dates. What this may suggest is that the financial world may move from a world where products were sold, and the customer was an investor, to a world where products are bought, and the customer will be more like a consumer.

Macchia: When I look at the current landscape of income distribution solutions I see it breaking down into philosophical-based choices analogous to the various religions we are familiar with. For instance, there’s the distribution religion of systematic withdrawals, or the religion of life time annuitization, or the religion of time-segmented, laddered strategies. And then some of these morphing into combinations, such as lifetime annuitization mated to target date funds. What do you think of this? Do you see the issue this way? And do you think that one of these religions is likely to catapult into a leadership role? Or, will it be solutions that we today can’t imagine which will assume a market leadership position?

Gadenne: All of the above. I mean, all of these things that you mention are adaptations to the changes we discussed earlier, given what we know and what we have on hand right now. For instance, this makes me think of the first Dreadnaught, which was the first ship with steel armor and with turret guns that was put together by the Brits. For the first time, a ship had guns that could blow-up other ships at distances that could be measured in many miles. Yet, for a long time, these ships still had a ram on their bow.. So, when the transition occurred in naval warfare from having a reasonable expectation to be able to ram opposing ships to being able to blow-up opposing ships from great distances, for a long time the ship builders still kept building ships with hulls that were built for ramming.

When you have evolutionary changes you end-up with something like the human appendix. There are design features that don’t really make sense any more yet they’re kept; out of inertia, or irrelevance, or tradition. I look at all these distribution solutions and I say, fine, these are all very interesting adaptations given what we know and the specific needs and market they serve. But my sense is that there are so many open questions that I would not rule out the appearance and the development of additional products, processes, and methodologies that may fill other needs and other markets. The key question becomes: What are the larger, growing and profitable needs and markets?

Going forward we may have all kinds of solutions that meet a specific market, and satisfy a specific need. When we transitioned from horse and buggy to cars, I’m sure there were buggy whip manufacturers for a good long time. If you live in Pennsylvania there’s still a good market for them. Still, most of us prefer to drive a car.

Macchia: You still have the wonderful French gift for analogy.

Gadenne: Ha!

I answer an FA’s Question about The Income for Life Model® vs. The Grangaard Strategy

Recently a financial advisor asked me to compare Wealth2k’s The Income for Life Model® program with another popular income distribution program called The Grangaard Strategy, developed by Paul Grangaard, CPA. This inquiry surfaced because of advertising which characterizes The Grangaard Strategy as, “The 6.6% Retirement Income Solution™”, and states, “Expert Explains How to Increase Retirement Income over 50%.”

Firstly, I commend Mr. Grangaard for his work and continuing efforts to focus advisors and investors on the importance of adopting a well-conceived strategy to generate long-term, inflation adjusted retirement income. That said, I can and will address some of the contrasts I see between The Income for Life Model and The Grangaard Strategy, and where I see The Income for Life Model having both structural and competitive advantages. Visit Phil Lubinski’s website to watch a movie on The Income for Life Model.

I’m a great believer in the notion that a diverse group of income distribution strategies are emerging, that more will emerge in the future, and that each will have its adherents largely decided along long philosophical beliefs analogous to the diversity we know with religions. Financial advisors will eventually migrate to one of these “distribution religions.” For instance some may select the religion of systematic withdrawal programs, or the religion of lifetime annuitization, or the religion of laddered strategies. Some of these strategies will cross-pollinate i.e. lifetime annuitization mated to target date funds. Both The Income for Life Model and Grangaard are examples of time-weighted, laddered strategies.

In terms of comparing The Income for Life Model with The Grangaard Strategy, here are some of the differences I pointed out to the financial advisor:

The first difference is in the underlying rate-of-return assumptions. Rate-of-return assumptions for The Income for Life Model (IFLM) were developed to be realistic across virtually all economic scenarios. For instance, The Grangaard Strategy (Grangaard) assumes 5% for the first, near-term investment bucket or “segment”, as we refer to it, versus a 2% assumed rate for The Income for Life model. About Grangaard, the first question I would ask is, “Where could you find 5%, say, three years ago?” It wasn’t possible. We simply view the issue of short-duration rate-of-return projections more conservatively.

Grangaard’s assumptions continue to assume more aggressive returns over succeeding segments. For instance, 9% on a ten-year hold versus 6% for IFLM. Grangaard also presumes a return of 10% on a fifteen year hold versus 8% for IFLM.

These are relatively large differences in assumed returns which we would not be comfortable using.

My understanding of the Grangaard strategy is that it uses historical “average” rates of returns. In a perfect bell-shaped curve, you would fall short of the average 50% of the time. Although there may be several rolling periods that didn’t fall significantly short, The Income for Life Model’s assumptions allow advisors to be delivering “good” news a higher percentage of the time. If the higher rates of the Grangaard assumptions are met with that model, it would be reasonable to assume they would also be met in the IFLM, thus allowing IFLM to deliver higher income without over-promising up front.

Grangaard uses, I believe, Ibbotson chart numbers combined with historical testing back to 1936. We have determined that the years most prone to deliver poor results were 1927-1930 and 1932. Had we eliminated those years in testing for The Income for Life Model we could have significantly boosted its initial income rate of 5.66%. The combination of not using the worst time periods, plus allowing nothing for investment expenses, allows Grangaard to project higher income levels.

Which leads to a very significant difference in the Models: as far as I can tell, Grangaard doesn’t calculate any compensation for the advisor. This is a very real issue. A large, independent broker-dealer which offers IFLM to its advisors tested IFLM assuming average investment product costs of 2%, and still concluded that it delivered 87% reliability. If you add to this a procedure called, “Risk Free Sweeping™”, the probability of IFLM increases to 90%. Again, this is derived from objective testing done by large broker-dealer customers that offer IFLM to their advisors.

Another advantage: The Income for Life Model is backed by an array of high-tech communications tools- including advanced, web-based tools- that are critical to providing solid education to consumers. These same communications tools also serve to educate advisors.

Although both Models, IFLM and Grangaard, potentially have the same investment opportunities, our research indicates that IFLM’s less aggressive assumptions, obviously, would have the higher probability of success. Most importantly, IFLM includes the most critical ingredient…the advisor!

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

Statman, MacLeay, Lofties & Robinson Agree to Upcoming “Leaders & Innovators” Interviews

A diverse and interesting group of individuals have recently agreed to have me interview them for this blog. These individuals- all innovators and thought leaders- represent a wide spectrum of industry sectors as well as academia. In the near future, look for interviews with Paul Lofties, Head of Wealth Management Services at Securities America Investments, Meir Statman, the Glenn Klimek Professor of Finance at Santa Clara University, Chuck Robinson, Senior Vice President for Investment Products & Services at Northwestern Mutual Life, and Tom MacLeay, Chairman of the Board, President & CEO of National Life Group.

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.

The Rogue “Hillary” Commercial Portends Change for Financial Services Companies

In recent weeks I’ve both spoken and written about a shift taking place in the manner in which people acquire information. A transition is taking place as information is increasingly conveyed electronically; consumers learn more and more by watching rather than be reading. As proof of the magnitude of the shift, I’ve pointed to New York Times Publisher Arthur Sulzberger’s comment at Davos that he is uncertain if he will be printing the newspaper within five years. Sulzberger has stated that is top business challenge is managing the transition from print to electronic delivery.

In my opening remarks to RIIA’s Managing Retirement Income conference (02/12), I talked about the YouTube phenomenon in order to place it in the context of the larger communications revolution that is unfolding all around us. I talked about how YouTube had massively disrupted the business of broadcasting; because of YouTube, any individual with a cell phone and an Internet connection acquired the potential to broadcast to millions of viewers i.e. the video of Saddam Hussein’s hanging.

It’s not surprising to learn that News Corporation and NBC are planning their own YouTube type application. It’s only the beginning.

Last week we saw how video delivered over the Internet may prove to be equally disruptive in politics. In just a couple of hours, one guy working on his Apple PC created a commercial in support of Barack Obama that showed images of Hillary Clinton edited into Apple’s memorable Big Brother TV commercial from 1984. Within days, millions had seen the video at YouTube and countless other websites. The implications of this are extremely powerful and disruptive. Only last month political contests were thought of as being a battle between two very powerful and well-funded armies- the establishment Republican army vs. the establishment Democrat army. Now, political contests may prove to be something that more resembles “guerilla warfare” where any individual with an Internet connection and a creative imagination can unexpectedly alter the dynamics of a national political campaign.

It may be easy for some to think that all of this will not impact financial services. Such a conclusion- should it become widespread- will prove to be disastrous for the industry. That said, I see some industry leaders beginning to focus intently on improving the experiences delivered to the web browser. This is healthy, and a hedge against the potential to misfire on a host of future business opportunities- such as Boomer retirement.

©David A. Macchia. All rights reserved.

Can a Commodity Become a Concept in the Consumer’s Mind?

“When a product becomes indistinguishable from others like it and consumers buy on price alone, it becomes a commodity.”

The tiny market share captured by immediate annuities has been the subject of numerous articles, academic papers and countless meetings within insurance companies. Even an informative interview at this blog http://davidmacchiablog.com/?p=26.

Many reasons for the underutilization of this valuable product have been offered. Here’s my own take on why the immediate annuity continues to languish: no emotional context has been attached to it in the minds of both advisors and consumers.

Over the years I’ve too often heard a SPIA described as “a commodity.” I’ve been told that there’s no viable strategy to present a SPIA in a needs-based or conceptual manner. Well, let me prove that particular conventional wisdom wrong.

Take a look at this 3-year old multimedia presentation on SPIAs created by Wealth2k. After watching the presentation let me know if your own view on how effectively “commodities” can be expressed to consumers has been transformed. See the presentation at http://www.wealth2k.com/SalesPresentations/flash_assets/spia_05.htm.

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

Phil Lubinski’s Retirement Security Advice for Boomers: A Host of Insights Which Are Seldom Communicated Effectively to Retail Customers

Occasionally we have the good fortune to meet someone through business who becomes very special to us. Over my 30-year career I’ve been blessed with my share of such relationships. None, however, have I come to admire more than Phil Lubinski.

Phil is a Certified Financial Planner who is based in Denver. I met him several years ago at a seminar where he presented to 250 retail customers on the topic of income distribution planning. This is a subject Phil knows a lot about- maybe more than anyone else in terms of his hands-on experience with retirees. Since 1984, Phil’s practice has been exclusively devoted to retirement income. That year he developed a time-weighted asset allocation model which he consistently and successfully implemented with retail clients for decades; that model became the foundation for The Income for Life Model™ program developed by Phil and Wealth2k in 2003.

Phil’s success in distribution planning led him to many consulting engagements for teaching other advisors how to implement his strategies. While consulting with Allmerica Phil was instrumental in the development the Post Retirement Navigator software marketed by Financial Profiles.

Today Phil devotes a portion of his time to speaking at industry conferences as well as ongoing training of hundreds of financial advisors in the investment and tax strategies necessary to properly engage in income distribution planning.

Phil, who in my judgment really is “The World’s Greatest Living Expert” on distribution planning. was kind enough to let me reprint the following article he wrote for Boomer clients:

Do We Have Enough Gold…
for Our Golden Years?

By Philip G. Lubinski, CFP
Co-author, The Income for Life Mode™

The largest population in history is about to transition into retirement (the wealth distribution years) and we better be ready because we have challenges unlike any prior generation. And, guess what, every financial services company and advisor is suddenly our best friend. Why, because we are 76 million strong and control an estimated 12-15 trillion dollars, that needs to be managed to provide a lifetime of income. Every industry from diapers… to baby food… to blue jeans…to automobiles has made fortunes catering to our needs and desires. Now it is the financial services industry’s turn and they’re frothing at the mouth. Retirement income models are sprouting up all over the country and we need to pick one that will work for us. Which one will be the best….unfortunately, none of us will know until the last boomer dies. What are we facing that no generation before has?….

1. broken promises….corporate pensions are failing at unprecedented levels and a day doesn’t go by that we wonder about Social Security’s ability to continue
2. longevity…. We are projected to live longer than any generation before us
3. medical costs that are bankrupting the average health care facility and passing through premiums to us that seem to have no limit
4. inflation…remember when a new mustang was $3,500 and a gallon of gas was 32 cents

Yet, we want to be more active in retirement. And now everyone and their brother has an investment model that promises to make our money last as long as we do. So how do we choose the strategy that is best?…….first and foremost, forget all the hypothetical theories and spreadsheets with future economic projections. Look for a model that has a successful history and deals with what we know to be true, not what someone is forecasting based on a lot of academic psycho babble. Also, look for an advisor who walks the talk and puts their own personal wealth in those products and strategies that they think are so good for you. Make sense? If so, read on.

No matter how much we analyze, forecast and hypothesize there are only certain things that can be declared irrefutable. The following 10 points are “truths” we can be certain of as we develop our retirement income strategy.

“The Ten Truths of Retirement Income Planning”

1. Historically, over long holding periods small cap stocks have outperformed large cap stocks… which have outperformed bonds… which have outperformed cash.

2. Over the long term there is an expected mathematical “spread” between inflation, stocks, bonds and cash.

3. There is no empirical evidence that would suggest that bonds with long term maturities adequately reward investors over bonds with short term maturities.

4. No retiree can know exactly what their income needs will be beyond 5 years.

5. No retiree knows when they will die.

6. No one knows what the future tax rates will be.

7. Systematically adding to a growth oriented portfolio during market downturns typically rewards the investor, while systematically withdrawing from a growth oriented portfolio during market downturns typically hurts the investor and could potentially destroy the portfolio.

8. Greed and Fear are emotions that have historically hurt individual investor returns.

9. Strategies for successfully distributing retirement income are different that those for successfully accumulating retirement wealth.

10. Individuals who employ personal coaches typically make
more progress than those who try to do it on their own.

For example, you can Monte Carlo test, stochastically analyze, historically research and run probabilities until you’re blue in the face. The fact is, over long periods of time small stocks have outperformed large stocks. Large stocks have outperformed bonds and bonds have outperformed cash. So, if you predicted that large stock portfolios would earn 10% at the end of 20yrs and they only did 8%…so what. Nobody else got 10% either, but they still would have done better than if they had invested in bonds or cash. Would we have as much wealth as we thought we would…of course not, but we wouldn’t be broke either. UNLESS, you made the fatal mistake of drawing income from the stock portfolio based on the 10% assumption.

Understand that the only way to achieve a 10% rate of return is that some years you make 20% and others you lose 10%. If you make the unfortunate mistake of drawing income at the same time the market is losing money then the combination of the two could drive your portfolio so low that no matter how good the next few years might be, you may never recover. When your growth oriented investment is reinvesting rather than distributing income the losses don’t hurt, they get averaged out in the end.

Most spreadsheets assume growth is linear, when in fact it never has been, nor ever will be. Consequently, the only reliable method of achieving higher rates of return is to leave the account alone and reinvest all of your earnings. So, where does your income come from??? An account that has no market risk….like cash. Are you beginning to understand the importance of identifying how much of your wealth is needed for income in the short term vs. how much you won’t need to tap for income until further down the road. Just how far down the road will determine the asset allocation for that portion of your money, i.e. if I don’t need the income on some of my money for 5 yrs. I could put that into something with a Bond orientation… 10-15 yrs. a large company stock orientation… 15-25 yrs could now be invested in something more aggressive like smaller company stocks. What should start becoming self evident is the importance of compartmentalizing or segmenting your money based on short, medium and long term needs. Any model that would suggest differently makes absolutely no sense.

One could argue the merits of trying to strategically move money along the way between stocks, bonds and cash. Typically, those moves are based on greed and fear resulting in miserable results. According to Dalbar and Associates 2006 study of investor behavior, mutual fund investors from 1986-2005 only achieved a 3.7% annualized rate of return and day traders actually had compounded losses of over 3%. Why….because we are humans and our emotions drive our decisions (the largest deposits into the U.S. stock market were in the spring of 2000 and the largest withdrawals were in October of 2002). Keep in mind that the U.S. stock market during this same 20 yrs. delivered more than an 11% rate of return. Once again it’s critical that we stay on a course that we know, rather than one filled with speculation and disappointments.

Another assumption that always tickles me is looking at long term spreadsheets that delve into multiple layers of depth trying to accurately forecast our future needs and tax brackets. In nearly 30 yrs. of working with retirees I have never seen anyone spend what they thought they would and I’ve certainly seen a pattern of constant tax law changes. The significance of this point is that you should be in a model that allows you to re-evaluate and make changes along the way in order to adapt to what you will really need vs. some hypothetical projection of what you think you will need (which, at best, might be close for the first 5 yrs).

Therefore, a single product model is absolutely ludicrous. Some single product models would have you put all your retirement assets in a single annuity and make withdrawals that stay under the typical 10% free withdrawal amount. So now you’ve locked yourself into this narrow strategy and suddenly an unplanned emergency or opportunity comes up that requires a significant withdrawal. In addition to a potential large tax hit (non-IRA annuities require all earnings to be withdrawn first and taxes paid) you also could incur a large surrender penalty that could be as much as 10-15% of your excess withdrawal. Single product solutions are rarely in your best interest.

Additionally, who knows how long we will live in retirement. Probability analysis is interesting information and should be taken into consideration, but once again, some models are based solely on probabilities. At some point we all become a statistic that most likely will not match the probability. I had a 30% probability of developing Diabetes, until I got the disease. Suddenly, my probability became 100%. Has my game plan changed…..ABSOLUTELY! So, a structured model based on probabilities alone is inferior to a structured plan based on flexibility.

And finally, a do-it-yourself model is nothing short of retirement roulette. When you were 25 and working with relatively small amounts of money you could make a few mistakes and learn. You had plenty of time and more money to invest. When you’re 60 and making decisions with your life savings, there’s not a lot of time you can afford to spend learning, and certainly no more money if you make a mistake. You only get “one” retirement and you need to get it right. Everyone thought it was so funny in the 90’s when chimpanzees throwing darts at the Wall Street Journal were getting better returns than the analysts. What we didn’t realize at the time was that these reports were making a mockery of advice. “Who needs an advisor, when a monkey is just as good?” What a costly lesson we learned as the market went south.

Whether you’re trying to lose weight…make “athletic” progress or “financial” progress, those who employ coaches do better than those who don’t. Find a financial advisor that can demonstrate expertise in retirement income planning. Your needs are changing as you transition to the land of “distribution”. It may require that you change advisors, just like you would doctors, if your current physician was not able to treat your condition. There will be a plethora of retirement income models to select from, but only a few that will meet your needs.

As a beginning point take a few moments to answer the following questions:

1. In retirement I am more concerned about the reliability of my income than I am the return on my investment.

2. I would rather make periodic adjustments to my investment income in retirement (up and down) based on the returns I actually achieve, than make no adjustments at all and potentially go broke.

3. Having a retirement income strategy that is flexible and liquid enough to adapt to unexpected changes during my retirement years is very important to me.
4. I would prefer not to put all of my retirement savings with one company.

5. I would like to have some guarantees built into my retirement income plan.

6. I understand that having an income that grows with inflation requires that some portion of my portfolio will need to be exposed to market risk.

Believing the 10 “truths” and answering yes to these six questions could result in a segmented approach to retirement income planning. Single product solutions…long term forecasting without sufficient parameters to make adjustments along the way… models that validate themselves primarily on statistical analysis alone… and self serving models that do not lend themselves to an open and diversified product solution shelf may not be in your best interest. Find an advisor who has access to a comprehensive product offering without any incentives to recommend one product over another and who has been trained in retirement income planning. Most of the financial services training programs are focused on helping individuals “accumulate wealth”. Your life savings is at risk.

The “Income for Life Model” is a trademark of Wealth2K, Inc. Copyright Philip G. Lubinski, LLC and Wealth2K, Inc.
All rights reserved 2004

Securities and advisory services are offered through INVEST Financial Corporation, member NASD, SIPC, a Registered Broker Dealer and Registered Investment Advisor.

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

garthblogGarth 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.

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.

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!

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