Technology & Improving the Sales Process

New Blog Excerpts Book Available for Download: The Preventable Demise of the Fixed Annuity Industry

You may recall the four-part series entitled The Preventable Demise of the Fixed Annuity Industry. This series sought to identify the seeds planted years ago that have sprouted into the negative public image and distribution challenges facing today’s fixed annuity industry. It also led to an OpEd published by InvestmentNews.

The fourth and final installment presented my vision for tomorrow’s fixed annuity producer, someone who is better aligned to meet the needs of a wider range of prospects. The annuity agent of the future will be more successful- and busier. Reliance, in part, upon next-generation consumer-facing marketing technology creates greater productivity and leads to the ability to successfully market products that offer inherently greater consumer value.

The four parts of this series have been published in a book format you may download at no cost by clicking here.

Introducing DB-by-INS™: Could Life Insurance Become the “Must Have” of Personal Retirement Security?

dm-turn2Is what I’m about to describe the next great life insurance sales opportunity? Is it possible to successfully market a life insurance policy designed to act as a personal defined benefit plan? Will individuals for whom limitations on retirement plan contributions make it impossible to fund adequate retirement incomes flock to a life insurance strategy that provides income at retirement that is tax-free?

In describing DB-by-INS™ I’m providing a framework for life insurers to look anew at the issue of retirement income funded by life insurance. I’m obviously not suggesting a replay of past initiatives, some of which were ill-conceived and misleading to consumers. That’s ancient history. Rather, I’m suggesting a way for life insurance to play a unique role in strengthening retirement security- for the right market segment: Affluent, aware of their future retirement security challenges and ready to try to meet them:

The belief that life insurance could be an extraordinarily attractive strategy for boosting personal retirement security may strike many as unreasonable. Yet a critical analysis reveals that for a number of reasons it may be highly desirable. These reasons include…

There is no cap on annual “contribution levels”.
Myriad investment choices within the life policy create substantial accumulation potential.
Pre-retirement, self-completion benefits are inherent, and,
At retirement the money comes out income tax-free…

These advantages should lead us to consider life insurance as potentially valuable to those who want to give their future retirement security some turbo-charging. Oh, did I mention that it can also serve as your personal DB plan?

Let’s analyze these claims to help you decide whether I’m describing the future “must have” of personal retirement security, or, if I’ve just plan flipped-my-lid (I’m confident I haven’t).

What’s in a Name?

Let’s call this personal retirement security strategy DB-by-INS™ (Defined Benefit by Insurance).

Defined Benefit because a specific retirement income objective is defined

By Insurance because the funding vehicle used to provide the retirement income benefit is Variable Universal Life insurance (VUL) or Indexed Universal Life insurance (IUL).

When thinking about the potential value of DB-by-INS™ it’s wise to have an open mind. Why?

1. It’s become clear to most observers that the massive shift to DC over recent decades has diminished the retirement security of millions. Retirement security is clearly strengthened when a pre-determined level of retirement income is defined and funded for.

2. The introduction of the Roth IRA and subsequent expansion of the concept validates the Roth-like income tax treatment of DB-by-INS™: Contributions (premiums) are paid-in after-tax, they grow tax-deferred and are received income tax-free (via loans against the policy’s account value).

3. There is no cap on the amount of money than can be allocated to DB-by-INS™. This is important to employees with higher incomes for whom limitations on pension plan contributions make it impossible to fund an adequate post-retirement income.

4. DB-by-INS™ offers an income tax-free life insurance benefit. This protection mitigates the risk to an employee’s family when an individual’s future earning capacity is lost due to untimely death.

5. DB-by-INS™ is not tied to an employer or plan sponsor; it is personal, flexible and custom-tailored to meet individual needs.

6. The VUL policy funding DB-by-INS™ offers numerous investment choices and significant growth potential. When IUL is used for funding, accumulation potential is achieved through linking cash value growth to an external index (i.e. S&P 500).

7. Unlike typical interest-sensitive life insurance policies, DB-by-INS™ has a higher probability of delivering on projected benefits. Why? It is linked to an administrative system that not only monitor’s annual investment performance, but also informs the policy owner annually over necessary adjustments to the annual contribution (premium) which will keep the policy on-track to deliver the desired retirement income benefit.

The mechanics of DB-by-INS™

When applying for the life insurance policy that will fund the DB-by-INS™ strategy, the applicant must make three decisions.

1. Identify a desired annual retirement income,
2. Select a retirement age, and,
3. Select an Assumed Investment Return (AIR).

Let’s look at an Example:

Ed Smith is a 45 year-old sales executive with an annual salary of $220,000. Ed and his wife Susan, a stay-at-home mom, realize that, due to the cap on how much of Ed’s salary may be deferred, his 401(k) plan is unlikely to provide sufficient retirement income.

Ed and Susan understand that their future retirement security is uncertain unless they supplement Ed’s 401(k) deferrals with additional after-tax savings.

Ed and Susan like the fact that DB-by-INS™ offers income tax treatment similar to Roth plans. They also like the strategy’s inherent ability to be flexible as their needs change over time.

They place a high value on the life insurance policy’s death benefit; Ed is underinsured and the additional coverage creates more pre-retirement financial security for Susan and their kids.

Ed and Susan also appreciate the admin system that wraps around the life insurance policy and is designed to keep them on-track to realize their defined retirement income benefit. They understand that investment performance varies and that the money paid into the policy must be adjusted downward or upward as often as annually.

How Much Life Insurance?

The purpose of DB-by-INS™ is not to maximize the amount of life insurance someone purchases based upon a given annual outlay. Rather, we would seek out the minimum (or very close to the minimum) amount of life insurance that would be required based upon the insured’s age and annual outlay.

Although it is easy to determine the minimum amount of life insurance needed to comply with tax guidelines that define the amount of insurance needed to preserve favorable income tax treatment, it is not a good idea to focus on the absolute minimum. The reason is that if the policy is issued at the minimum insurance amount, there will be no leeway to increase outlays in the future- a capacity that must be preserved when increases in outlay are needed in response to investment performance that is less than the AIR.

A good approach is to issue the policy at the minimum life insurance amount + 20%. This opens up a corridor to take in additional contributions in the future when they may be needed.

The Application Process

Issuance of a life insurance policy is not automatic and starts with a lengthy application. Information on the application, supplemented by reports from attending physicians, leads to an assessment of the applicant’s health status. There may be additional underwriting requirements such as a blood test and, or, a medical exam.

In addition to completing the life insurance application, an additional form must be completed related to the ongoing administrative oversight of the policy. The insurance company (or TPA) must know the income objective, the projected retirement age as well as the AIR.

Annual Monitoring & Compliance

The DB aspect to DB-by-INS™ stems from the annual monitoring and reporting functions that turn a life insurance policy into what is effectively a personal, defined benefit retirement program. I cannot stress strongly enough how important this characteristic of DB-by-INS™ is in achieving good compliance and quality sales in the context of the past, the present and the future of “real-world” sales and sales practices.

Since my first experiences with universal life insurance in 1980, I’ve seen the product consistently sold to thousands of consumers on the basis of policy performance projections made far into the future. I believe it’s a pretty sure bet that not a single policy sold over the past 27 years has performed exactly as it was projected to perform.

A steady downward trend in interest rates has wreaked havoc on fixed universal life insurance projections that were based upon 30 to 40 year interest assumptions as high as 12%.

Similarly, variable universal life insurance policies were often sold based upon projected investment results of 12% annually. Market downturns in recent years caused a large segment of VUL policies to under perform their projected results resulting in a plethora of negative consequences including policy premiums that didn’t “vanish” as they were projected to, investment losses on 1035(a) cash value rollovers, complaints against advisors, broker-dealers and insurance departments, litigation, arbitration awards to policy owners, etc.

Virtually all of this unpleasantness was a product of poor sales practices (and poor communications) including having no system to provide ongoing monitoring of life insurance policy performance. A characteristic of universal life insurance that is both important and inadequately understood is that when performance lags behind the projected level, immediate action to adjust premiums makes up for the underperformance and avoids a cascading multiplication effect that can overtake the policy entirely.

Just as compound interest works to our advantage, it also surely works to destroy universal life policies when the small annual adjustments needed to keep the policy in balance are neglected. This is because there are inherent costs in the universal life insurance policy in terms of “risk” charges- the actual costs for insurance deducted monthly from the cash value- as well as administrative charges. When the policy is in balance, when interest is being credited at its projected level, these costs are relatively inconsequential. However when interest crediting falls behind, even modest costs can consume the remaining policy cash value. Just a little bit more premium can make all the difference.

Speaking of Costs

The DB-by-INS™ strategy is all about balance. The amount of life insurance cannot be too high because the costs implied can become a drag on cash value growth. Neither can the life insurance amount be artificially minimized due to the need to maintain flexibility in being able to raise and lower outlays in response to varying investment returns.

As a general rule, properly designed DB-by-INS™ plans have modest costs for insurance and expenses. In addition, there should be no additional cost assessed to both monitor the policy annually and report on its investment results.

That said, DB-by-INS™ has costs. And these must be assessed in the context of overall goals for future retirement security. Some important questions:

Are the costs acceptable given that I will be able to access my money at retirement income tax-free?

The policy may have surrender penalties that may reduce liquidity should I need to reach my cash value before retirement. Is this an acceptable risk?

Is the ability to put away larger amounts of money inside DB-by-INS™ than would be allowed in qualified plans important to me?

There are critical questions that must be answered before starting the DB-by-INS™ strategy?

The Target Market for DB-by-INS™: Affluent Builders and Pre-Retired

For millions of American workers employee-sponsored retirement plans are insufficient to fund their income needs in retirement. According to research published in 2006 by the Retirement Income Industry Association, there are 5,590,000 households in the US categorized as Affluent Builders (ages 35-49) and 4,695,000 households categorized as Affluent Pre-Retired (ages 50-64).

Together these market segments make up 15% of households and control $5.8 Trillion in assets. The Affluent Builders and Pre-Retired stand above the Mass Market and below the Wealthy in terms of financial assets. Approximately 70% of Affluent Builders and Pre-Retired agree with the statement, “I am concerned about having enough retirement income.”

In terms of premium patterns that life insurance companies can expect from this target market, younger purchasers (35-49) will tend to favor annual or monthly outlays while older individuals (50+) will be inclined to supplement systematic premiums with lump sums. Of course, only after-tax dollars may be placed in the DB-by-INS™ strategy.

Marketing the DB-by-INS™ Strategy

The marketing of DB-by-INS is fraught with challenges that can be successfully overcome. As mentioned above, twenty years ago some agents and companies abused a similar concept and sold universal life insurance policies to individuals allegedly without mentioning to them that they were purchasing life insurance policies. Such actions led to expensive litigation, financial penalties, and regulatory reform. Moreover, a series of legislative actions systematically eliminated abuses of the favorable income tax treatment accorded life insurance. .

State insurance regulators developed a view that consumers must be provided a “balanced” view of what they are being asked to purchase. Consumers must understand that life insurance is an integral part of the concept, that it costs money to have life insurance, and that there may be limitations on liquidity. Insurance companies have created their own rigorous compliance standards which seek to ensure that purchasers understand what they are buying.

Following the abuses of the 1980s, I would argue that the industry over-corrected; it became afraid of the “retirement sale” for life insurance. Let me suggest that this was a mistake.

Over the past two decades the life insurance industry would have been better served if it kept its focus on retirement. It could have linked its universal life insurance policies to an easy-to-create administrative capability that would have provided the key piece of value policy owners needed in a declining interest rate environment: information. Insurers do issue an annual report to each policy owner that projects policy performance into the future. But they do not tell policy owners on an annual basis what changes to premium patterns would keep their policies on-pace with originally projected results. Adding this additional information would make all the difference.

Today’s web-based technology allows for DB-by-INS™ to be distributed in a way that assures consistency of message across multiple channels of distribution. A combination of streaming video, personalized advisor micro sites, real-time monitoring and dynamic disclosure generation create a capacity for large numbers of advisors to convey the “story” in a compliant manner.

Advisors/RIAs have the customers for DB-by-INS™. What they need is a marketing ecosystem that will allow them to effectively extend their influence into this new opportunity.


Twenty years ago retirement security in the US was more predicable than it is today. With the benefit of hindsight we now understand that the loss of “defined benefits” is sure to exact a cost to Americans’ retirement security. That cost may be exceedingly high.

Workers need to take stock and begin to focus their attention on creating their own “defined benefits.” The DB-by-INS™ strategy is one way that offers real attraction when retirement income predictability is what’s desired.

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

A Memo to Life Insurance CEOs: How to Make Your Company One That Is Truly “Admired.” Confidence and Pride Will Combine to Become the “Killer App” of Your Future

dm-turn2A recent conversation with a life insurance company executive led me to write this essay. During our discussion the executive mentioned that one of his CEO’s goals is to see that this particular insurance company become one that is widelyadmired.” Thirty years ago upstart names like Fidelity and Vanguard thought about what it would take to become admired organizations. They acted aggressively and attracted trillions of dollars in assets, much of that at the expense of insurers. Now, life Insurance CEOs find themselves at a momentous juncture, a moment when they must define their companies’ future success and prestige. Their decision-making can lead them to immense growth and admiration, or marginalization and lost shareholder value. What decisions will today’s life company CEOs wish to be remembered for?

WHAT WILL IT TAKE for a life insurer to achieve admired status? The first question that comes to mind is which audience should come to admire the life insurance company? Consumers? Distributors? The press? Regulators, rating agencies? All of the above? And for exactly what quality or qualities should the insurer be admired?

Although I know the CEO in question I haven’t yet had the opportunity to explore his thoughts and goals. In advance of that I’d like to outline the dynamics for transformation that, in my judgment, will allow a life insurance company to be admired not just by customers and distributors, but also by the press and regulators.

My thinking on this subject is not without context. If you are a regular reader of this blog you will be familiar with numerous essays I’ve published about challenges facing life insurers. These articles have appeared at this site as well as in numerous journals including InvestmentNews, Financial Planning, National Underwriter and Research Magazine, to name a few. This elaborate and ongoing exploration has been sparked by my fear that insurers may misfire on what should be their greatest opportunity for new business– Boomer retirement.

I’ve not hesitated to identify and criticize some of the anti-consumer sales practices and sub-par product creation that has, in part, led to today’s negative public image of annuities, in particular. I’ve always attempted to be constructive in my criticism, however. What will it take for a life insurer to become admired?

Confidence, Pride and Passing “The New York Times Test”

For a life insurer to transcend the present climate of negative perception and to elevate itself to admired status, a top down, CEO-driven priority to instill confidence among consumers must take root. “Confidence” is the number one deliverable for life insurers in the years ahead. They will either deliver it successfully or see their market share and public image erode even further.

The next key deliverable is pride. A CEO who is able to have pride in his or her entire product line, pride in all aspects of the sales process, and, critically, pride in the face of press scrutiny will be well on the way to achieving admired company status for his or her company. Pride that becomes infectious and filters through the entire organization will both galvanize all to the mission of best serving consumers’ interests and lead to high-quality growth.

We are well aware of instances in financial services where certain business practices become the subject of articles and exposes leading to embarrassment, damaged reputations, litigation, and the destruction of shareholder value. In some cases, even the CEO’s forced resignation. When such incidents occur consumers’ confidence is damaged- sometimes permanently.

The CEO of tomorrow’s admired life insurer will be able to feel the sense of pride even if any or all of the insurer’s business practices were to become the subject of a front page article in The New York Times. The notion of passing “The New York Times Test” should be tested against current insurer business practices. Any that that fail to meet this standard should be eliminated even if eliminating those leads to short-term pain. Passing the test on all counts properly aligns the company for success in both the near-term and long-term future. It also separates it from lesser organizations unwilling to place themselves under intensive self scrutiny.

Failure to deliver confidence to a life insurer’s present and prospective customers should be understood by CEOs to mean nothing less than missing out on the Boomer retirement opportunity.

Consumers’ Confidence Must Extend to The Product Itself, Not Just the Agent

Why do I believe that confidence and pride will combine to be the “killer app” of the life insurance company’s future?
And why do I believe that no genuine admiration of a life insurer can occur unless and until its customers can be truly confident about the PRODUCTS they purchase? The reason is that unlike in the past when insurers could ignite robust sales of iffy products based solely upon consumers’ confidence in their agents, the distribution phase will require consumers to also have absolute confidence in the specific product or solution they are purchasing.

I urge CEO’s take heed; the road to your company’s future success passes not through your distributors’ loyalty but rather through your customers’ emotions. But, not the emotions of fear and greed that have so often been successfully exploited to ignite past accumulation sales. Future success will be built upon your solving a key, emotionally-based equation:

Clarity plus Comfort = Confidence. Call it the Three-Cs of future success.

Reasons for Believing that a Confidence-Centric Sea Change is At Hand

Why do I believe that trust in the product as well as in the intermediary will be required going forward? There are several reasons:

• “Going forward” implies the conduct of an insurer’s business in the distribution phase.

• In terms of the insurance carrier’s future, the stakes in the distribution phase are so high, the business opportunity so vast, and the potential financial liability so extreme, a carrier will face harsh sanctions if it fumbles the ball on the mission of creating retirement security

• Unlike during the accumulation phase, if a consumer purchased the wrong product he or she may have suffered, say, a missed growth opportunity by 100 or 200 basis points, or faced a partial loss of liquidity for a period of years. That doesn’t make for a happy customer, but there is still no permanent damage done.

• During the distribution phase, however, a bad recommendation resulting in the purchase of the “wrong” income product may cause a consumer’s income to fail to keep pace with inflation or, perhaps, even cause “portfolio ruin.” For the unfortunate customer this may mean many years spent in old age with insufficient retirement income.

Consider the comments of Paul Lofties, Head of Wealth Management Services for the large independent broker-dealer, Securities America Investments. In an interview with me, he described future liability potential arising out of sales of variable annuities sold as “solutions” to provide durable retirement income. According to Lofties:

“The research that we’ve done just doesn’t show that there’s much opportunity for that income to step-up to keep pace with inflation or that’s its going to return principal. Because of that, if this is your single product solution, 5, 10, 15 years down the road you’re going to start to see some negative repercussions. Locking somebody into a solution like that may mean not being able to keep pace with inflation.”

“A further danger is that given the way that most of those products work, if you do indeed go over and above your withdrawal benefit it will reset the guarantee. So, if my actual account balance has dropped by 25%, and I now take a distribution that’s above my guarantee, in most of these products the guarantee resets at where the account value is, which would just be disastrous for somebody. That’s the most common single product solution, today, and I think it’s got a lot of problems if it’s used as a single product solution.”

I think about Lofties’ comments in the context of life insurers selling fixed annuities, primarily. I would argue that the indexed annuities, for instance (which are now being dressed-up with income riders) offer even less potential to keep pace with inflation than do variable annuities. What does this imply for a life insurer’s future liability potential if, say, an agent places too high a percentage of a customer’s assets in such a product?

• I believe that there is little chance of a carrier becoming admired unless the retirement products’ (annuities) sales process is radically transformed including reliance upon new technology-based communications strategies, enhancements in intermediary productivity and the introduction of more consumer-oriented products. Why? An already hostile and aggressive consumer press, aggressive insurance and securities regulators, plaintiffs’ attorneys, and, more significantly, dramatically new and non-traditional competition will force insurers to add far more consumer value to their products resulting in significantly lower compensation for intermediaries. The only solution to this thorny set of changes is to increase the productivity of intermediaries; larger volumes offset lower commissions allowing intermediaries to remain financially viable.

• The future competitive landscape for life insurers will be radically altered and include head-to-head combat with large asset management firms (with superior public images) that have already set their sights on the large Boomer consumer market. CEOs, get ready for combat on your traditional turf with the Goldman Sachs and Morgan Stanleys of the world! Consider the comments of Dr. Moshe Milevsky in response to my question on the certain debut of structured products in the consumer market:

“I think that’s what’s going to happen with some of the innovation in structured products in the US. Wherein there are a number of traditional asset management shops that are thinking about it, and they are talking about it. They’ve been talking about it for years. This is not something new to them.”

As soon as one of them makes that final move and brings it to market, everybody else will step in. I think that’s what’s going to happen. When will this happen? It’s tough to predict, but my sense is there is going to be clustered. I wouldn’t be surprised if two years from now there are 12 companies offering a new class of products that didn’t exist two years ago.”

• The lack of transparency in the life insurance industry has destroyed growth opportunities for insurers and, unless arrested, will likely prevent insurers from reaching their full potential in Boomer retirement. As I often observe, when I entered the life insurance business in 1977 it was life insurers that led in the management of pension assets. Enter the mutual fund complexes, and their superior business model that included genuine, confidence-building transparency. The result is that life insurers lost the pension business. What are the implications for life insurers if transparency is not introduced? I asked this question of Beacon Research’s Jeremy Alexander:

“I was a producer for ten years. When I was producer I was always in an uncomfortable position, where it took me at least a couple of meetings to get clients to trust me. Why? Because I was an insurance guy. Well, I didn’t think that this was fair. And I couldn’t understand what I was considered inferior, say, to a stockbroker. But the bottom line was that an individual could come into Merrill Lynch, and a Merrill broker would say, ‘Here’s what I recommend.’ And that person could go to their local library and check out S&P or Morningstar or Lipper, and they could say, ‘Gee, that was a great recommendation.’ And the rep could say, ‘We use this third party source and here’s how we came up with your analysis.’

“Well, as an insurance guy, I couldn’t do that. And I had clients who asked me would you sell this to your parents? And they’d look for me to flinch. Now that’s not the way to sell. That’s why the insurance industry has so many problems with how people perceive the industry. It’s simply that they can’t know that the recommendation is good. Until you have transparency you can’t have an efficient market. It’s bonds before Bloomberg. It’s mutual funds before Joe Mansueto. And until the industry solves this problem, it will always suffer from a poor perception.”

I asked Moshe Milevsky about the same issue:

“The black box of investments no longer exists; you can drill down to literally the stocks, the companies that you own. I think that’s what’s going to happen with many of the financial insurance products out there. Obviously, this is a controversial issue. For example, the whole topic of the life settlement business, a secondary market for unwanted life insurance. Open up the newspaper in Florida and you’ll see 12 different advertisements for seminars on how to get rid of your unwanted life insurance policy. Many, many people in the industry think that’s not good, a lot of insurance companies will say that they don’t like that trend, but I think that it’s happening and that’s another step in the transparency process. We have to rationalize pricing. I’m more of an observer than a participant in these markets, but I definitely think that transparency is a good way to describe it.”

Why Communications is More Important than Products for Life Insurers

How can it be that one industry is both the best at sales and the worst at marketing? The issue of Communications is often paid lip service but remains underappreciated in most life insurance companies. This must change. Why? Because I’m convinced that the “war” over Boomer retirement assets will be communications-based rather than product-based. CEOs, you need to drive a focus and priority around the communication of compliant, value-based messages in order to increase market share. This is an even more important issue for life insurers than for providers of other types of financial products because insurance products are inherently more complex.

In thinking about communications CEOs should be asking themselves some tough questions: Does my company excel at marketing? Are my agents sufficiently productive to make a successful conversion to levelized or reduced compensation? Is there a high level of inconsistency in the way my company’s products are explained to consumers? Will current or planned strategies for assessing suitability go far enough in protecting my company from future financial liability? Do I have any ticking time-bombs from past years’ sales efforts that may explode in my face?

These questions involve issues and challenges that can be at least partially mitigated through excellence in communications and marketing.

In my interview with Moshe Milevsky, I asked him if he agreed with my assertion that in the future it won’t be the organizations with the “best” products that will be most successful in terms of new sales. Rather, it will be those that are the best communicators- the ones able to communicate their value to a vast audience of potential consumers. This is what Milevsky said in response:

“I do. In fact I’m really resonating with the first comment that you made that it’s not necessarily the best product that’s going to win. I’m seeing that now, and it would be nice to have kind of a coherent framework to understand why it’s always going to be the second and the third best product that’s going to win.”

“It might very well be because of their ability to communicate their message better as opposed to the first one that put all its effort into product development and forgot about the second and third steps which are to make sure that people understand this and to communicate it and people absorb it. I see a lot of wholesalers in action that do these seminars and I get to listen before and after to some of the folks that get up and pitch various products. I see that the ones that are able to communicate in an almost simplistic way what a particular product or strategy does end up winning as opposed to the one that comes in with the very long list of product features and kind of confuses people.”

“Even though it’s really a better product they are not the ones that get the business. It’s almost as if I scale back on the bells and whistles and focus on the 2 or 3 really good things about your product and put the rest of your effort into explaining this to individuals as opposed to the other way around. I really do resonate with that. It’s only with time that I’ve come to appreciate how important the communication part is.”

“As a graduate student at university you never really appreciate or are taught the importance of clear communication. A professor with a Nobel Prize standing at the black board scribbling with chalk is a genius. It doesn’t matter if he can communicate or not. It’s the thoughts that count. It’s the papers that they wrote. It’s the products that they have helped develop. In time I’ve realized that it’s much more about communication, inspiration and clarity of ideas than it is about the actual development. It’s certainly a combination of the two. I do resonate with your earlier comment.”

Admired in the Future? An Achievable Goal that Implies Much Work to Be Done

Yes, I believe it is possible for a life insurer to become truly admired. Will attaining admired status be easy? No. Is it worthwhile to invest in the tools, transformation processes and technologies necessary to achieve it? Certainly.

As stated above, the stakes are too high to not attempt to have your company become admired. Thirty years ago upstart names like Fidelity and Vanguard thought about what it would take to become admired organizations. They acted aggressively and attracted trillions of dollars in assets, much of that at the expense of insurers. Now, life Insurance CEOs find themselves at a momentous juncture, a moment when they must define their companies’ future success and prestige. Their decision-making can lead them to immense growth and admiration, or marginalization and lost shareholder value. What decisions will today’s life company CEOs wish to be remembered for?

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

Interview with Dr. Moshe A. Milevsky: Leading Financial Strategist Calls for Greater Transparency and Broad Secondary Market for Insurance Products; Cites Importance of Effective Communications in Retirement Income Business Success

moshe-milevskyI’m a lucky man. I’ve just returned from a spectacular vacation in Greece made one day longer due to a strike by aircraft controllers in Athens. Danke to the unhappy Greek controller for allowing my family and me to enjoy an unexpected and delightful day of sightseeing in Frankfurt!

My hearty thanks to Francois Gadenne. Thank you, Francois, for taking over this blog in my absence and delivering even more than I promised you would!

Now that I’m back I’ve got a big, big treat. One of the greatest pleasures I receive from my work at the blog is having the opportunity to interview so many world-class individuals, the “Leaders and Innovators” of financial services. I get to learn a lot, and so do you.

Moshe Milevsky is likely the world’s leading authority on the interplay between financial risk management and personal wealth management. His best-selling books, scholarly articles, public speaking appearances and consulting work made him well know to all who are seriously interested in the future of retirement income.

In this extraordinary interview, Milevsky addresses many timely issues including the need for a secondary marketplace for insurance products (well beyond the present life settlement market), the necessity for financial services companies to excel at communications, transformation in the variable annuity market, the need for greater financial literacy, and the prospects for life insurers in terms of Boomer retirement.

Milevsky also reveals some deeply personal insights which demonstrate his devotion to teaching… and warm weather! Enjoy!

Macchia – Moshe, you are an international authority on retirement issues, a PhD, an associate professor of finance at York University, a best-selling author, and Executive Director of the non-profit, Individual Finance and Insurance Decision Center and CEO of the recently launched QWeMA Group. You’ve also written over 40 scholarly research articles, the most prestigious business journals worldwide seek out your views…and you’ve just turned 40. For most people, that would be a lifetime of achievement. You however still have decade’s worth of life expectancy. What are your goals beyond that which you have already accomplished?

Milevsky –I appreciate all of the kind comments and I’m not really sure where to be constructive in terms of answering that question. My interests now lie in bringing together the very, very distinct fields within personal wealth management, which are the traditional asset investment management side versus the liability and insurance side of the personal balance sheet.

For many, many years these two fields, both academically and from a practical point of view operated on a completely different level with different language, different silos, different organizations. When you would buy your car insurance or your home insurance or even your life insurance, nobody asked you about your asset allocation and your risk tolerance, or whether or not you preferred stocks to bonds and what your retirement goals were.

One was an insurance discussion and the other was a financial discussion, and my overall philosophy is to bring these two things together and to have a comprehensive risk management approach to wealth management. In that area I think there is much, much work to be done. I’ve spent a lot of time focusing on annuities and retirement income and pensions. The fields of insurance, like long term care, disability, critical illness, UL, variable universal life, term life insurance, require a more rigorous and comprehensive framework, and I’d like to develop some more academic research into how to go about modeling that in a consistent framework.

Macchia – Interesting. Your answer leads me to recall a question that I’ve asked of a couple of previous interview subjects.

When I entered the life insurance business in 1977, the insurance industry pretty much controlled the pension business. It then seeded away those assets to the mutual fund complexes that approached consumers with an arguably better model in terms of greater transparency as well as the ability to create greater clarity and comfort for consumers.

I’ve often used the analogy that the life insurance business was then like a “black box.” People made purchasing decisions based upon their faith and trust in their agent, without truly understanding the product they were purchasing. I think that you could argue that in the intervening decades this hasn’t changed very much. I’m wondering if you feel that greater transparency is going to be a requisite in terms of the insurance companies and their products reaching their full potential in the income distribution phase?

Milevsky – Absolutely. In fact, I think I’ll take the transparency issue one step forward. It’s not just the matter of transparency in terms of the process and what you’re paying for and what it costs, but a transparency in creating a mark to market value of all your insurance holdings. Dare I say that a secondary market is needed for those same insurance holdings so that you can take a look at whatever you own and sell them at a market price if you don’t need those products anymore? That will increase the transparency as well because then you will have traded market values for these instruments, and you can make much better financial decisions with regards to them.

Contrast that vision with the current state of portfolio holdings and other assets. The black box of investments no longer exists; you can drill down to literally the stocks, the companies that you own. I think that’s what’s going to happen with many of the financial insurance products out there. Obviously, this is a controversial issue. For example, the whole topic of the life settlement business, a secondary market for unwanted life insurance. Open up the newspaper in Florida and you’ll see 12 different advertisements for seminars on how to get rid of your unwanted life insurance policy. Many, many people in the industry think that’s not good, a lot of insurance companies will say that they don’t like that trend, but I think that it’s happening and that’s another step in the transparency process. We have to rationalize pricing. I’m more of an observer than a participant in these markets, but I definitely think that transparency is a good way to describe it.

Macchia – Do you believe or could you buy into the assertion that insurers are going to have to come to terms with handling some short term pain in order to configure themselves for greater long term success?

Milevsky – I think so. In fact, one of the things that I observe is that at the same time that the insurance industry opposes certain developments quite vocally on one side of their mouth, on the other side they are actually developing the infrastructure, the subsidiaries and the ventures to capitalize for the event that they lose what they are arguing on the other side of their mouth. I think that’s an interesting development and they are prepared for the fact that they might have short term pain, but in the end they will be the ones gaining because they are the best entities equipped to manage the markets in mortality, longevity and morbidity risk.

Macchia – Moshe, I would like to ask you about some of the things you’ve said that I’ve read in various articles. I’ve heard you say that retirement is not just about asset allocation, it’s also, and very importantly also, about strategic product allocation. Is this something that you could elaborate on?

Milevsky – Sure. That’s something that’s very close to my heart right now because I’m actually writing quite a number of research papers and developing some intellectual property (IP) via the QWeMA Group to try to build on that. To position what I’m saying, imagine you visit any asset management firm as an individual or as an institution and you’ll probably be shown a beautiful pie chart with how your assets should be allocated amongst many different investments. You’ll have a little sliver of the pie chart that shows emerging markets and a little sliver that shows alternative asset classes and real estate and large cap/small cap value growth. You get this instruction sheet that tells you, “Here’s how you should allocate your assets.”

Right now, however, no one in the industry has that type of approach for the universe of insurance products. That is to say, you as an individual sitting down with someone who says here’s how much long term care you should have, and here is how much critical illness insurance, and here’s how much annuity, and here’s how much of a reverse mortgage you should allocate, and here’s how much life insurance, and most importantly here’s how it all fits with your asset allocation, human capital, personal balance sheet, etc.

What I’m describing is the same kind of thinking used for accumulating wealth for retirement. But when you start to withdraw money, and you have to create your own personal pension, I think it’s critical that we start to think in terms of product allocation and asset allocation combined.

Macchia – I’ve heard you make the analogy while discussing the example of withdrawing money for your own retirement, that you have the personal ability to buy out-of-the-money put options funded by selling out-of-the-money calls, but that most people can’t do that. They’ll need to look at packaged products to achieve the same sort of result. Knowing all that you know, what do you see on the horizon in terms of the evolution of packaged products designed to meet the mass market need?

Milevsky – I think that you’re going to see kind of a bifurcation occur in the way the industry approaches this. I know that when I talk to some of the large producers for some of the wire houses they listen to what I have to say about risk management and retirement income and they immediately have the light bulb come on in their head and they say, “Hey, if the first few years are so critical when you’re withdrawing money, why not buy some puts and fund it by selling calls?” And, “If longevity risk is such a big deal, then why don’t I buy a little bit of the out-of-the-money longevity option, essentially a deferred annuity that pays off if I get to age 95?”

They are financially engineering or creating the packaged products themselves, and they are coming to the realization that they have to do it. But, for many, many other people it’s impossible or just too complicated to manufacture these themselves, and for many smaller investors it becomes prohibitive from a transaction cost point of view. We’re going to see structured products developed that are meant as income vehicles as opposed to accumulation vehicles. It’s not going to be about an indexed linked note that accumulates for 15 years and guarantees you a sum of money. It’s going to be about products where the sum of money is given now or over 5-10 years and it produces incomes with certain guarantees. I personally think you’re going to see much more development in the structured market as a replacement for Define Benefit (DB) pensions.

Macchia – In terms of structured products filtering down to the mass market, when do you expect to see it begin, and what do you think the result will be for insurance companies in terms of potentially significant new competition?

Milevsky – It’s tough to predict these things but I can tell you that as one big company moves in that direction other companies follow very, very quickly soon after. You have to predict when is the first mover going to do it and then everybody else fills in the gap. I’ll give you an example, a case study. I’m a business school professor, so I live on case studies.

In Canada for many, many years we did not have any variable annuities. We had something similar called a Segregated Fund, but there were some important differences and none of them offered any guaranteed living benefits. We certainly didn’t have any GMWBs, GMIBs, etc. Remember that in the US you’ve had them for 6 or 7 years now.

Four months ago the first company in Canada launched the guaranteed minimum withdrawal benefit (GMWB) similar to what is offered in the U.S. within variable annuity contracts. It was Manulife. About four months later the second largest company here, Sun Life, announced that launch of the exact same thing. Another traditional fund company partnered with a Bank to offer a similar product and there will probably be one other insurance company jumping in very, very soon. Seven years we see nothing and then within a six month period everybody steps in.

I think that’s what’s going to happen with some of the innovation in structured products in the US. Wherein there are a number of traditional asset management shops that are thinking about it, and they are talking about it. They’ve been talking about it for years. This is not something new to them. As soon as one of them makes that final move and brings it to market, everybody else will step in. I think that’s what’s going to happen. When will this happen? It’s tough to predict, but my sense is there is going to be clustered. I wouldn’t be surprised if two years from now there are 12 companies offering a new class of products that didn’t exist two years ago.

Macchia –Your comment is very interesting to me, and I’m quite familiar with this copy-cat syndrome among insurers, and deal with it in terms of the technology communications innovations that are my focus.

But I want to go back to variable annuities and income benefits, which you just raised. For some time you were well known as a critic of variable annuities. I believe that you looked at variable annuities anew in the context of the newer guaranteed income riders. I believe that your research concluded that the insurance companies offering these benefits- or at least some of them- may not be charging enough money for the economic benefits that they provide through these riders. Is this accurate? Is this an accurate way of describing your conclusions, and, if so, what are the implications?

Milevsky – As any good academic will tell you about a subject they have written a lot of papers on, it’s difficult to summarize in one paragraph the entirety of the various research results. But the bottom line is, yes. For many, many years the imbedded guarantees and some of the protection features that you had within these products, in my opinion, were overpriced relative to the capital markets value of traded options.

In the language of financial economics we talk about replicating payout more cheaply. You can cook these things for less. In a sense you are paying more than the actual embedded value of the guarantees. This result was described in a number of research reports that I’ve written over the years which got widely cited, and I kind of lost academic interest to be honest in this whole variable annuity market. I’d gone away from this in the late 1999, early 2000 period saying, “I don’t get this whole market. It doesn’t make sense to me. Buy some life insurance. Buy a tax efficient mutual fund, hold on to it. What’s the point?”

Then literally 5 years later with the explosion of living benefit products I took the opportunity to look at these things again, expecting to see the same conclusions that I had seen 5 years earlier. The results were very, very different, however. The features now made more sense to me because they were made to protect against living as opposed to protecting against dying. The features in there were meant to create pensions, and many of us are losing our pensions. The features in there were essentially put options that matured over long periods of time, which are quite expensive in the capital markets.

I inevitably had to change some of the conclusions on these products because the features had changed. There’s actually a story about Prof. John Maynard Keynes, the famous economist. Apparently he was approached by reporters after he released some policy recommendation and they accused him of changing his mind on something. He had been against a certain policy and then had changed his mind in favor. The reporters said to him, “Professor Keynes you’ve changed your mind. Why did you change your mind?” His reaction was, “Look, when the facts change I change my mind.
What do you do?, he said to the reporter.

That was his response to the reporters. Obviously when referring to Prof. Keynes one has to be careful since he is in a completely different league, but I kind of feel the same way here. For many years reporters and writers would call me to basically get negative quotes about variable annuities. Yes, some of them would call with an open and honest intention to discuss the pros and cons of the product, but many others simply wanted to get a live quote from the “professor and researcher” who found that VAs are overpriced. More recently these same people call to discuss the new generation of guaranteed living benefits and now I have to say, wait a minute, you’re talking about the exact opposite exposure here; longevity risk. This is income for life. This is not easy to hedge individually. In fact, call up your favorite OTC put-option market maker. It’s a lot more pricy to replicate. It’s not easy to quantify and do proper risk management. Many of the popular financial writers are still thinking in terms of the old products and guarantees. I finally decided to write an article about this and confess my current frustration, and let it go from there. And that’s what I published in January in Research Magazine.

Macchia – The insurance companies have put a lot of financial engineering behind the development and hedging around these riders. Do you think they are just making a big mistake?

Milevsky – No, absolutely not. I can’t use the word mistake to describe any of this. I think that many of them are making strategic decisions based on a careful cost/benefit analysis. For example, if living benefit riders on a variable annuity generate only 2% of your company’s revenue, and you have exposure to the opposite mortality and morbidity risk then no matter what happens in this particular market it’s not going to impact your overall firm exposure. They can be more lax about hedging out every single possible path. They can be more relaxed about risk management, after all they have natural hedges in place.

On the other hand, if you’re a small company, and this is generating 70% of your revenue, this is starting to pose some systematic risk, especially if you are using static assumptions about policyholder behavior. Practically speaking, it is the stock analysts that have to be weary about profits and earnings. The credit market analysts have to be concerned and the regulators have to be alert.

I know from looking at these things that they are very complicated to hedge. They depend on policy holder behavior, who is going to lapse, when are they going to lapse. They depend on competing products. If somebody comes out with a better product, people are going to lapse, but if they don’t then they are going to hold on. It depends on education, it depends on the intermediary. This is not like put options that you buy on the CBOE where they are commoditized yet, so there are a lot of assumptions there.

Bottom line is I’m wondering, are people getting this right? That’s it. The recent overseas experience with similar products has implications in the U.S. It’s what happened in the UK with Equitable Life. It may be a personal bias, but I was giving a lecture at the London School of Economics a few years ago when the Equitable Life fiasco blew up. This was the largest, most venerable, most prestigious insurance company in the UK having sold guaranteed living benefits. In the year 2000 they literally had to shut down. They were declared insolvent soon after because essentially these guarantees matured in the money and they didn’t have the risk management and hedges in place to cover 100% of the promised payouts. Anybody that lives through that has an obligation to ask how do we make sure that this doesn’t happen in the US? One of the ways is to just make sure that you are vocal and ask questions about risk management practices. I don’t want to be a Cassandra, but at the same time the more that we remind people due diligence is also about risk management, the less the chance this is gong to happen. If insurance companies are selling instruments that are supposed to transfer risk from my personal balance sheet to their corporate balance sheet, I want to understand how they are managing that risk. The answer: “We have scale economics and use the law of large numbers to diversify risk” doesn’t cut it for me.

Macchia – Now, I’d like to ask you about something different. That is the work that led up to the awarding of a patent to you and Dr. Peng Chen. I’m wondering if you could talk about the work that you did that led to that patent, and how you see that patent unfolding now to help financial services companies. How do you see the patent actually impacting the marketplace?

Milevsky – Sure. To be absolutely clear and up front, this is a patent that I developed that was transferred over to Ibbotson Associates, so although I am the inventor, the co-inventor with Dr. Peng Chen, they are the ones that are taking the lead in terms of business and business development, and you should probably ask then a lot more than you should ask me what their strategic plans are.

The research that had led up to it was the very simple question that I was asked almost 10 years ago: What is the most optimal allocation to annuities? How much of my money should be annuitized and how much should not be annuitized? How much should be left liquid? This is a very fundamental question in economics. Asset allocation and portfolio choice has been studied for 20 or 30 years, but nobody ever asked the question in terms of insurance products. The questions were always posed: How much international exposure should you have? How much bonds versus stocks? How much cash versus how much invested? Nobody actually looked at how much should be annuitized.

The research that I had done more in a theoretical point of view was to try to determine an optimum and what kind of framework do you use in order to develop this optimum. That’s kind of the theoretical work behind it. My work with Ibbotson over the years was about trying to implement that in a way that could be understood and used by individuals. The question then got flipped around: What kind of questions do we have to ask people so that their answers will lead us to an optimal allocation of annuities versus non-annuities?

Macchia – There are not that many individuals like yourself who stand at the top of the food chain in terms of understanding all of the intricacies and economic factors and issues that will impact peoples’ retirements. In your view what is the toughest concept for ordinary investors to understand when it comes to their retirement?

Milevsky – I think that they are a collection of behavioral-almost fallacies or behavioral mistakes that people make, and they all have to do with very long and uncertain horizons. I believe that when you tell someone to plan for something that may last only 5 years, or that may last as long as 35 years they then commit a series of mistake behaviorally that all relate to the fact that they don’t’ really know hold long they are going to live. Those mistakes can then become things like not planning to have income for the rest of your life because you don’t know how long it’s going to last. Or a misunderstanding of the impact of inflation. Or not understanding the impact of healthcare costs and what that means in the long term. Or how markets behave in the long run versus the short run. If I can summarize it, the biggest misunderstanding is how to handle horizons that are stochastic.

Macchia – Moshe, a great deal of my work involves the development of the next generation of communications technologies.

In part, my investment in this area derives from my sincere belief that while products and processes will be important in the future, there will be a different driver that will, to a large extent, determine a financial services company’s future success in the retirement income business. I mean by this that the greatest success will not necessarily come to an organization with the “best” product, but rather will come to those organizations which are the best at communicating their value to a large and fluid marketplace.

I believe this is true for many reasons including my own substantial practical experience, as well as the fact that the Baby Boomer cohort is so vast, and the number of financial advisors arguably insufficient to meet all of their needs, that only by using communication tools effectively will companies be able to successfully engage large numbers of consumers. I’m wondering if you can buy into what I’m saying.

Milevsky – I do. In fact I’m really resonating with the first comment that you made that it’s not necessarily the best product that’s going to win. I’m seeing that now, and it would be nice to have kind of a coherent framework to understand why it’s always going to be the second and the third best product that’s going to win.

It might very well be because of their ability to communicate their message better as opposed to the first one that put all its effort into product development and forgot about the second and third steps which are to make sure that people understand this and to communicate it and people absorb it. I see a lot of wholesalers in action that do these seminars and I get to listen before and after to some of the folks that get up and pitch various products. I see that the ones that are able to communicate in an almost simplistic way what a particular product or strategy does end up winning as opposed to the one that comes in with the very long list of product features and kind of confuses people.

Even though it’s really a better product they are not the ones that get the business. It’s almost as if I scale back on the bells and whistles and focus on the 2 or 3 really good things about your product and put the rest of your effort into explaining this to individuals as opposed to the other way around. I really do resonate with that. It’s only with time that I’ve come to appreciate how important the communication part is.

As a graduate student at university you never really appreciate or are taught the importance of clear communication. A professor with a Nobel Prize standing at the black board scribbling with chalk is a genius. It doesn’t matter if he can communicate or not. It’s the thoughts that count. It’s the papers that they wrote. It’s the products that they have helped develop. In time I’ve realized that it’s much more about communication, inspiration and clarity of ideas than it is about the actual development. It’s certainly a combination of the two. I do resonate with your earlier comment.

Macchia – Moshe, I’d like to ask you about the non-profit organization for which you serve as Executive Director, the Individual Finance and Insurance Decision Center. Could you describe the work that you’re doing there and what you’re aiming to achieve?

Milevsky – Sure. The IFID Center is a not for profit that is currently housed at the prestigious Fields Institute in downtown Toronto. Some of your readers might not recognize the Field’s Institute but will have heard of the Field’s Medal. It is a prize that’s awarded every few years to the best mathematicians in the world, similar to the Nobel Prize.

The Fields Institute has incubated and housed The IFID Centre for the last seven years. What we tried to do is to create a network of academic researchers who are interested in personal financial problems. Helping individuals make better decisions in their financial wealth from a distinctly mathematical point of view. We’ve done projects over the years, many of them funded by government agencies, increasingly lately by actual institutions, and many companies in the financial services sector.

They will approach us with a question such as: Is it better for our clients to take on a variable (adjustable) rate mortgage or a long range fixed rate mortgagee? We’ll do a statistical analysis, we’ll develop mathematical models and we’ll tell them things like 80% of the time you’re better off doing that versus this. Or, here are the conditions under which the decision makes sense relative to other assets and liabilities on the balance sheet.

As another example, companies will ask us whether it is better for our clients to have term life insurance or whole life insurance or some combination thereof, and we will again look at the underlying mathematics and analytics and give them rigorous recommendations. That’s what we’ve been doing over the years. We have an affiliated network of researchers, some of them at my own institution, York University, some of them in the US, South America and Australia. They are literally across the world at this point. They collaborate with us on a research projects, present results of their research at seminars and the end result, the output, the deliverable is a white paper or presentation that’s placed on our website and that’s available free for all to the world to download- which then generates its own research.

Macchia – Speaking of research, you have collaborated with Research Magazine on what’s called Retirement Income University where your- and these are by the way extremely well written- efforts to help advisors focus in on some of the insights that they may be lacking. What led to Retirement Income University and what’s your aim with it?

Milevsky – One of the editors (Gil Weinreich) of the magazine contacted me more than a year ago and asked me whether I’d be interested in writing a column for them on the subject of retirement and retirement income. At the time I had a lot of commitments and it was hard to commit to do this on a monthly basis. Gil was very persistent and I would get a weekly email from him asking if I would reconsider and I met with him.

Finally, I realized that his might be a good thing to disseminate some of my ideas beyond just publishing research papers on the website at the IFID Center. What I’m trying to do with the column is to cover systematically what you need to know to be an intelligent practitioner in the field of retirement income planning. I’ve got this list of concepts that I will be elaborating on one month at a time that I think enhances people’s knowledge on retirement income from a slightly academic point of view. To me it’s a bit of a curriculum, where at the university you spend 2 or 3 weeks in a given course and you systematically cover another topic. That’s what I’m trying to do in the column. I believe that this month’s column is on inflation. What do retirees experience in terms of inflation? How does it differ from the rest of the population? Next month I’m looking at the subject of longevity risk, and we’re going to talk about long term care and living benefits on annuities, reverse mortgages, what do people need to know about Medicare, Medicaid, what you need to know about a particular topic condensed to 2000 or 3000 words. That’s the agenda for the next few months.

Macchia – I see. Let me ask you about what’s happening at ground level in terms of retirement income distribution solutions. The way I observe it, and often make the analogy to describe what’s occurring, is that people are coalescing around philosophies that I can almost compare to the various religions that we have in the world. There’s the religion of time segmented or time weighted strategies, there’s the religion of lifetime annuitization, the religion of systematic withdrawals, the religion of combining annuitization and a target date retirement fund. I wonder if you see it as I do and, if you do, do you view this phenomenon as short term or long term in terms of how it will actually play out.

Milevsky – I definitely see that now. It’s almost frustrating to me, at times, to have discussions with people that are entrenched, almost fundamentalists of a particular viewpoint, and to them everything is solvable with one of those philosophies.

You talk to someone who sells or wholesales mutual funds and everything is about proper asset allocation created systematically with a withdrawal plan that is will last, and you should be okay if it’s tax efficient. They don’t see the need for any kind of guarantees or downside protection or annuities or longevity insurance.

You talk to a shop whose specialty is annuities, whether immediate, deferred, fixed, variable or equity-linked and that’s all they do, as you pointed out. Everybody should be annuitized, and the sooner the better.

It’s very much where you happen to land that you then develop this approach and of course the true solution is a combination of all of the above. Anyone who comes in and is able to create- again the word product allocation- but the framework that combines all of these, and maps personal preferences into a combination of these strategies is, I think, the one that’s going to win. I call this comprehensive product allocation taking into account the personal balance sheet

I have actually done some historical research on this. I’ve looked at the genesis of the money management industry. Thirty years to forty years ago you had folks that believed that everybody should have their money in “a few good stocks”. You invest in 2 or 3 companies, you pick utilities, you hold the utilities, you get dividends, there’s no point in buying anything else. There was no rigorous framework for systematic asset allocation across thousands of stocks and tens of asset classes.

There were others that were invested entirely in the Dow 30 stocks, the nifty fifty. You’d have this vehement discussion in the media and all of them kind of ignored the idea of broad asset allocation. Now everybody understands that you’re managing a small piece of your client’s investments and then we have to be diversified across countries, sectors, styles. I think that’s what’s going to happen with these strategy classes. People are going to realize that you need them all in small pieces.

Macchia – That makes sense. Right now, Moshe, I’m reading Walter Isaacson’s wonderful book about Albert Einstein. Einstein has been a hero to me over the years. I’m wondering if he’s a hero to you, or if you have others that you admire?

Milevsky – Absolutely. I sometimes joke that he’s my intellectual grandfather. I use the word grandfather because one of his key students, Arthur Komar, was a professor of physics of mine when I went to Yeshiva University in the late 1980s. In academia your pedigree is based on who are your parents and grandparents and great-grandparents. I’m one generation removed. Einstein trained him at Princeton and then he came from Princeton to train students at Yeshiva University and I got to sit at the knees of the child, or the intellectual child, of Albert Einstein.

Obviously he passed away well before my time so I never got to meet him. But, absolutely. It’s impossible to describe in words the way he changed the world. I mean a patent clerk sitting in Bern, and literally processing patent claims, and when you think about who works in the patent office these days it’s just stunning to believe that he could create a theory that literally changed the way in which we think about the world.

And not just once or twice, but three or four times. What many people don’t realize is that many of the models that we use in financial management are based on these underlying stochastic stimulation models, were actually put on a foundation by Albert Einstein in 1905 – 1906 in his work on Brownian motion. If you’ve ever heard the term Brownian motion applied to modeling stock prices, he’s one of the people that developed that framework and we’re essentially using his model in finance as well.

Macchia – Since we’re thinking in such a broad spectrum right now I’d like to ask you three personal questions.

Milevsky – Sure. You can ask then I’m not sure you’ll get an answer.

Macchia – Well, we’ll see. The first is this: If I could convey to you a magic wand, and by waving this wand you could affect any changes in the world of financial services that you wish to, and could make these changes instantly, what would be the first two changes you’d make?

Milevsky – Oh boy. These kinds of questions have to be mulled over. I’ll probably revise this, but I would say that financial literacy would be the wand that I’d like to wave. I’d like people to graduate from high school with a much more sophisticated financial view of the world than they have right now. I get to see them in their second and third year of university or college and those are the elite ones that actually come to our school and are studying business, and it is very depressing… the level of lack of knowledge.

They will be able to fix your iPod and reconfigure your internet connection and literally do mind altering things when it comes to electronics and gadgetry, but when it comes to simple questions like mortgages or checkbooks, or how do you manage money, or compound interest, they were just never taught this. I think that a magic wand that would increase the level of financial literacy across the planet in terms of the financial services industry would do wonders to avoid many of the problems that the industry faces. On issues like suitable sales, and seniors that didn’t understand what they purchased, and individuals that buy bad products that speculate on things that will never make money. Financial literacy would be a big help, and I’m a big advocate of that. I sometimes get flack when I say this. I have 4 children in school. Let’s teach them a little less Shakespeare and a little more asset allocation.

Macchia – Well said. The next question: If you were not Dr. Milevsky doing what you’re doing now, but instead could have any other career in any other industry or field, what would you choose to be?

Milevsky – I would probably, oddly enough, be a pulpit Rabbi. That’s what my father was (Chief Rabbi of Mexico), and my grandfather was (Chief Rabbi of Uruguay), and my great-grandfather was (Rabbi in Lithuania). I was kind of the black sheep. I was the one that said, you know what I’d like to do is something a little bit more practical or realistic.

Hey, it’s a tough life being a Pulpit Rabbi. The pay isn’t very good and you have a community to manage. Many of them are cranky members of your synagogue. It’s a tough life, but I could see myself doing that in another life. Certainly, not in this one. Obviously it would be a very, very big change for me and I doubt that I will ever do it, but that’s kind of in an alternate world what I would be doing. Probably not the response that you expected.

Macchia – I expect nothing. Whether you said Rabbi or trumpet player I would have been equally unsurprised. You get interesting answers to this question. Now, last question: I’d like you to describe your own retirement in its most conceivably perfect form. What will you be doing?

Milevsky – It terms of the daily activities, I believe deep in my heart that I will continue to teach, lecture and speak until the last day on this earth. I will be speaking in front of undergraduate students or graduate students or fellow research faculty members of even industry practitioners. I hope to be giving seminars until the last possible day.

That said, I most probably won’t be living in Toronto, which is where I and my family are based right now. It will probably be somewhere nice. I think Southern California. Specifically, Orange County and Laguna is very appealing to me. Of course the housing prices there are ridiculous on a professor’s salary, but perhaps 30 more years of saving will get me there.

I will also definitely be writing and publishing research articles. It is an interesting question to ask since last week I attended and gave a presentation at the MDRT meeting in New York. They organized a conference called Boomer Retirement and they invited some very well known speakers. It was a huge honor that I was asked to speak as well, since speaking the night before was Alan Greenspan as well as Ken Dychtwald and other notables..

The reason I mention this is that Alan Greenspan was also asked what he was going to be doing in his retirement. His response was, retire to what? He said: “I’m going to continue doing what I’ve always been doing. Maybe a little more golf.” That was his response to great laughter. , To me he was saying, look, this is what I enjoy doing and plan to continue doing it. That really resonated with me. If I wanted to do something different I would do it now already. I never do an activity where at the end of that I say, Gee, I can’t wait until I retire. I probably won’t be doing the volume and pace of what I do now, probably a little less intense, but definitely teaching and writing.

Macchia – I like your answer. Laguna is one of my favorite places and right now I’m looking right behind my desk and there’s a photo of my wife with a building on the beach that says Laguna Lifeguard Station with her standing in front of it. It’s a special place.

Milevsky – That’s definitely where I’m going to end up. I also spent a couple of years in Mexico when I was a kid growing up, so I’ve picked up Spanish quite fluently, and I like the kind of Latin environment close to Mexico and the fact that everyone there, especially in the services sector, speaks Spanish. To me it’s a special place, not just because of the natural beauty and lifestyle. I will probably be sitting on the Laguna Beach somewhere typing and giving webcasts or something but definitely writing. I have a whole bunch of books that I’m still trying to write, so I need time to do it.

Macchia – The good news is you might have 60 or 70 years left to do it. Hopefully with the right annuitization.

Milevsky – And the right healthcare provider and a better diet and a long list of other things that my wife reminds me of.

Macchia – Moshe, is there anything that I’m forgetting that you’d like to talk about that we haven’t. Anything you think readers…

Milevsky – I think we’ve covered a long list of things and it’s certainly reflects a broad range of my interests. So, the answer to your question is “not that I can think of”, especially as it pertains to retirement and retirement income and financial literacy, so you’ve touched on all of the hot spots.

Macchia – I’ve enjoyed it immensely. Thank you, Moshe.

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

Who Will Emerge as the Apple of Retirement Income Solutions? The Organization That Focuses On the Number One Deliverable: “Confidence”

I believe it was Winston Churchill who said, “A young man who isn’t a liberal has no heart. An old man who isn’t a conservative has no brain.” Leaving behind the politics, I enjoy the symmetry of these words. Churchill’s quote inspires me to fashion my own:

“A new retirement income initiative that isn’t focused on product has no brain. A mature retirement income initiative that isn’t focused on communications has no chance.”

I define a “mature” retirement income initiative as one that is ready to roll-out, set to be unleashed upon a waiting world. Many financial services companies are devoting huge levels of resources to the development of their own retirement income solutions. Which will emerge as the retirement income version of Apple? And which will land with a thud in the junk heap of failed efforts? I won’t predict which will flourish and which will fail; I will predict how success will come to some.

Unique Experience and a Distinctive Perspective from Which to Make Predictions

In terms of my career in financial services, over much of the past thirty years I’ve been like a fish swimming simultaneously in two separate and distinct ponds. The breadth of my work experiences is unusual, to say the least.

For 25 years, one-half of my business life was devoted to the wholesaling and distribution of insurance and annuity products. Call this advisor-centric place, the salt water pond. In the salt water pond large networks of financial advisors were recruited, trained and serviced. Their business challenges became my challenges; solving them, even partially, led to production loyalty, referrals to other advisors, and business growth.

So, when advisors made comments to me like, “compliance is driving me nuts”, “that damn insurance company screwed-up my 1035 exchange”, “I can sell, I just need a way to get in front of more people”, “each seminar is costing me $8,500 but I’m getting only half as many people to show-up as I used to”, “my biggest in-force life policy was just replaced”, “I’m losing annuity sales to (insert name) bank”, “I need a higher commission on this product”, or, “I need a product with higher interest rates”, I understood the pain and frustration behind each of these statements.

The other half of my business life was spent in (and, in fact, is now entirely spent in) the fresh water pond. The fresh water pond is habitat to the product manufacturers and, to some extent, broker-dealers. The language spoken in the fresh water pond is different than that spoken in the salt water pond. Different issue and challenges take form. Whereas the advisor is vexed over the insurance carrier’s or the B-Ds “insane compliance”, the carrier or broker-dealer seeks to limit insane levels of potential future liability.

In the fresh water pond I originated all manner of marketing tools, programs, strategies and technical innovations that insurance companies and, or, broker-dealers used to boost their value to both producers and consumers. I developed numerous, highly successful marketing programs and presentation tools that collectively ignited multi-billion dollar increases in new sales. I served as one life company’s de facto CMO for 12 years as it navigated through a myriad of mergers and name changes (Commercial Union, CGU, CGNU, Aviva). Over the years I consulted with another twenty or so life companies on a variety of projects.

I delivered hundreds of motivational speeches, training seminars and product rollout presentations. As a consultant to PaineWebber I traveled across the U.S. to provide training on life insurance to its stockbrokers. To jumpstart sales of life insurance in the PaineWebber network, I was sent to major cities to deliver seminar presentations to the clients and prospects of PaineWebber stockbrokers.

I wrote scripts for consumer presentation on many life insurance and annuity products. I then was video-taped as the talking head, delivering the seminar presentations I had written. More than 200,000 duplications of these video tapes were created and distributed to agents who successfully used them to close sales and gain qualified referrals.

In recent years more than 1,000,000 CD ROMs containing sales presentations I wrote covering a variety of products have been distributed to agents by insurance companies. These companies have been rewarded with sales growth as their agents become better educated. The presentations are now being delivered over the Internet through technology I designed that meets rigorous compliance and distribution complexities.

I became an early mover in the retirement income space by developing web-based, time-weighted, open-architecture income distribution solutions that are backed by peerless, compliant communications tools.

Interestingly, for years I used many of the innovations I developed in the fresh water pond to boost sales in my own salt water company.

I tell you all of this not to make myself sound ego-centric, but rather to explain that I’ve accomplished a lot in both ponds, and that I’ve had a lot of success in both ponds. I believe this experience gives me a unique perspective to make some judgments about the future.

Experience also helps me to understand the Yin and the Yang: For instance, the producer wants “higher interest rates” or “higher caps, but the insurance company wrestles with sub-optimal spreads owing to a flat or inverted yield curve, unmovable ROI targets, asset liability matching, hedging, reserving- all of which impact the ability to deliver crediting rates that may or may not satisfy the advisor’s perceived need.

Building a Bridge

Between the two ponds there exists a massive and institutionalized failure of communications. As a result levels of cynicism and mistrust are high. Although the two ponds clearly require each other’s unique capacities, they co-exist in a relationship which is seldom completely satisfying and too often is only temporary and designed to fulfill both the advisor’s immediate need for compensation and the provider’s quarterly need for increased sales.

So, for instance, we have today’s deferred annuity industry where four-fifths of annuity business in 2006 was the result of advisors moving the very same assets from one insurance company to another. This is a maddening and ultimately destructive cycle brought about by low productivity, ineffective marketing and, not uncommonly, gimmicky product innovation made to appear as genuine innovation.

As The Conversation Shifts to Retirement Income, “Confidence” Becomes Your All Important Deliverable

Just as surely as poor communications and its component elements- lack of transparency, lack of clarity and lack of confidence among purchasers- serve to perpetuate the status quo, effective communications strategies will be the linchpin in providing thrust behind newly introduced retirement income solutions.

To all of my friends busy at work developing “your company’s” retirement income solution, take note: your solutions will not realize their marketplace potential unless you wrap them in a strategy capable of conveying clarity and confidence to consumers who will be expecting nothing less. “Confidence” will be the key deliverable in the retirement income phase.

We’re in a period of transition from an era when, in order to gain a sale, it was sufficient for the consumer to have confidence in the advisor. Going forward, the consumer is going to demand confidence in the solution. You will commit your organization’s future success to history’s retirement income dustbin if you believe that you can meet this emotional need exclusively with a product focus.

No issue is of greater importance to you as you work to pin last minute tweaks on your income-generation solutions. Here’s why: The stakes around this issue are just as high for the customers you are targeting, not to mention the advisors you will rely upon.

Based upon my salt water experience, I’m certain that consumers will view their decisions over whether to turn their retirement assets over to you as virtually life or death in terms of its intrinsic importance.

This is not accumulation. A bad purchase decision in accumulation may have resulted in a customer earning, say, 200 basis points less over a few years, not in injury beyond repair.

If you fail to link your solution to communications tools that engender clarity and confidence, you will not make this sale. Moreover, your advisor-distributor will abandon you in favor of your competitor who delivers what you fail to deliver. Write this down.

About individuals who may view this assertion skeptically, I know that you live in the fresh water pond.

About individuals who immediately recognize the accuracy in what I’m saying, I know that you live in the salt water pond.

Each of you needs to merge into an understanding of the other’s pond, with the conduit for that merger communications between you that is satisfying and meaningful. When you merge you will eliminate mistrust and craft a bright future. And your retirement solutions will flourish, perhaps, even, as one or more retirement income versions of Apple.

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

The Preventable Demise of the Fixed Annuity Business: Part Four of a Multi-Part Series

In the first three parts of this series I offered a historical context for the present challenges confronting the fixed annuity industry. In this fourth installment I’ll present a vision of tomorrow’s practicing annuity producer: an agent who is more productive, who is selling a more diverse lineup of annuity products, who is financially successful, and who is compliant by definition.

Meet Ben Harrison, Future Annuity Agent (with 40 Assistants)

Imagine an early morning in the not too distant future. An annuity producer named Ben Harrison, arrives at his office, logs on to his computer and checks his email. Among the messages he finds are three from individuals not yet his clients.

The first email message is from Sydney Atwood, a 62 year-old employee of VestiTech Manufacturing. Upon opening the message Ben soon realizes that Sydney has 1, during the previous evening visited his Retirement Income Strategies microsite, 2, viewed the movie entitled, “Transition Management Planning Using Fixed Annuities”, and 3, requested a telephone appointment with Ben to discuss one of retirement asset principal protection concepts presented in the movie.

Next, Ben sees an email from Frank Poretta, a 73 year-old retiree who had, at 9:42 PM the previous evening, visited Ben’s Fixed Indexed Annuity microsite and watched the presentation called, “Longevity Insurance: Income Security You Cannot Outlive.”Frank’s message to Ben includes these words: “Thank you for sending me the link to your website. I watched the movie and I feel that this product may be right for what I’m looking for. Please call me a 1-555-465-1103 so that we can arrange to meet and talk about this.

The third message is from Jennifer Wolfe, a 47 year-old single mom who has visited Ben’s Saving for Retirement microsite. After viewing the movie entitled, “Long Term Savings with Tax-Deferred Annuities”, Jennifer has decided to contact Ben to talk about her desire to increase her personal savings. In part, Jennifer’s message stated, “I feel it’s time that I begin to save regularly, especially in light of my company cutting back on matching contributions to my 401(k) plan.”

Ben utters to himself, “Forty active microsites and only three leads today?

Ben’s Multiple Markets & Increased Productivity

Sydney, Frank and Jennifer are individuals with entirely different needs requiring diverse solutions. By virtue of his licensure, industry knowledge, practical experience and product manufacturer representation, Ben Harrison is an annuity agent well-equipped to meet the needs of each of his new prospects.

After closing Outlook, Ben thinks to himself, “It’s a lock that I’ll reach my goal of four sales this week.” Any why not? It’s only Wednesday and Ben has already made two sales; an income-generation indexed annuity with a $125,000 premium, and a MVA annuity with a $215,000 premium. It’s going to be a very good week! Says Ben, “I’m definitely going to reach my goal of 200 cases this year!

In fact, by week’s end Ben’s sales have topped $600,000. Ben likes his “new approach” to the annuity business: He’s selling many more annuities, and his gross income is significantly more than in the past. That the commission on each annuity sale is less on a percentage basis doesn’t concern Ben. He’ll settle for a much greater volume, any day.

The Next-Generation Annuity Agent

Ben Harrison is a modern annuity agent. He doesn’t shrink from what he is, he doesn’t camouflage his identity – he doesn’t have to. He proudly broadcasts to the buying public that he is an expert in the multiple financial needs where annuities play a potentially central role.

Ben Harrison is web-enabled to a super extent. He has forty live microsites, each strategically aimed, and each capable of delivering compliant, state-of-the-art video presentations on each and every product and solution covered in his practice.

Ben Harrison has learned the power to be found in empowering his prospects and clients. He’s learned that consumers enjoy “taking control.” Ben knows that his prospects enjoy learning about and evaluating his products on their own terms: when and where and how they choose. Ben’s come to know that all that really matters is that they call him when they’re ready to talk or meet. Ben’s learned that the power of technology personalization keeps the prospect in his circle of influence.

Ben Harrison has learned that his capacity to cross-sell and up-sell successfully has finally been realized through his ability to aim his microsites at different, needs-based customer segments. Ben has learned that his microsites’ ability to deliver highly-effective sales presentations on a wide spectrum of products has resulted in his ability to earn commissions on a much wider spectrum of sales.

In the context of his prospecting and sales activities, Ben has come to see his microsites as “clones” of important parts of himself. Each performs a limited number of vital functions: engaging clients; educating prospects on products and solutions; asking for an appointment; asking for a referral.

No individual microsite can equal Ben’s own abilities, knowledge and experience. Collectively, however, the microsites create a combined prospecting and sales capacity that Ben could never hope to equal.

Ben has come to value the end of “wheel spinning
.” Until the rollout of his microsite-based prospecting strategy, Ben wasted considerable time with prospects who really weren’t prospects. Ben has learned that it’s more efficient to meet only with individuals who are pre-qualified. Or, as Ben likes to say, “…half sold already.”

Ben has learned to translate the power of “reach” into higher personal income. His forty microsites are able to reach-in and engage prospects even at great distances. Previously, Ben would tend to ignore prospects that live 50 or miles from his home. Now, he regularly acquires clients who live more than 50 miles from his home.

Ben likes to hear his clients tell him that they enjoy the educational and entertaining experiences he provides them through the video presentations he streams from his forty microsites.

Ben likes to hear praise from his clients, not criticism. He is glad for their trust rather than their skepticism.

When Will Ben Harrison Emerge?

In short, he already has. In fact, the technology to create personalized, compliant, streaming video microsites for Ben-and thousands of other annuity agents- is already in use with several visionary annuity providers including SunLife Financial, Aviva and National Life.

These companies are in the vanguard of a movement that will combine compliant video educational content and web-based technology to deliver engaging experiences to consumers’ web browsers; all while strengthening the central role of annuity agents.

Personalization, compliant educational content and agent-centricity are the three indispensable components of the next-generation communications strategy which will help to solve today’s market conduct related problems and liabilities.

To help agents as much as they can, insurance companies must begin to move away from the “all-encompassing, enterprise website mindset” to a new strategy, one that focuses on the creation of dozens of small, strategic and personalized websites for each licensed agent. Only then will today’s problems begin to vanish due to agents who are vital, productive and financially successful through their marketing of annuity products that convey consumer value that is obvious to all.

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


Interview with Phil Eckman: President & CEO of Transamerica Retirement Management Cites Lack of Insurance Industry Progress Despite Years of Intense Product Focus; Calls for New Communications Strategies

philipeIn this wide-ranging interview, Phil Eckman, CEO of Transamerica Retirement Management, talks about Transamerica’s view concerning the importance of the Boomer retirement income business as evidenced by the company’s decision to create an entirely new business unit. Eckman also addresses the challenges arising out of the inherently greater degree of complexity of insurance products, and stresses the need to develop superior, consumer-facing communications strategies in order to overcome that complexity.

Macchia – Phil, let me begin by asking you about your work. Please begin by telling us your title, your role and your responsibilities.

Eckman - My title is President and CEO of Transamerica Retirement Management, which is a new business unit that we’ve created within the AEGON USA/Transamerica Companies. My responsibilities center around building a new business unit that is solely focused on the unique needs of the boomers as they move into this transition called retirement. We’re leveraging what we have to offer from our various companies across AEGON/Transamerica family to help with these unique issues that folks are facing.

Macchia - Okay. I understand. Now, the progression of developing a retirement income solution at a large company can sometimes, if not often times, get bogged down with conflict among silos. Sort of the belief system that it’s my solution…no it’s my solution…no it’s my solution. Is what you’re doing at Transamerica an effort to cross silos in an effort of incorporate the best of all silos?

Eckman - Exactly. I believe that while it may not be an explicit objective, I think implicitly as we build out our group, we will cross silos and take ideas that have been working in one area of the company and have them cross over that line and bring them forward in another part of the company to reach a new consumer base. So absolutely, practically what’s going to happen is we will be taking ideas across silos and exposing them to mew markets that otherwise would not have the opportunity to see them.

Macchia - In terms of Transamerica Retirement Management and how it was developed, what thought process led to the creation of this entirely new business unit?

Eckman - Our CEO of AEGON USA, Pat Baird, about 2 ½ years ago challenged the management team of the organization to look ahead, think forward about this large retirement market that’s going to be coming upon our industry; to think hard about how we as a company can best serve the group, putting aside some of the typical issues around silos and short-term business objectives. A task force was put in place to look into these questions. One of the recommendations was to start a new business unit.

Macchia – And I gather the decision to start a new group implies that the entire retirement income business is deemed to be something of a very high strategic priority for the corporation.

Eckman – Absolutely. It has not been a cultural business strategy within the AEGON group to start new business units like this. We have strong, autonomous growth targets and we have a history of acquisitions, so to start a new group like this was entirely new.

Macchia - Phil, would you describe the introduction of Transamerica Retirement Management as an incremental change to the existing business model, a moderate change to the existing business model, or even, potentially, a large change?

Eckman - I think it’s a potentially large change. If we wanted to take an incremental approach, we would get working groups together, we would have senior management from the different divisions collaborate and then go back to their day jobs.

Macchia – As I observe it, Phil, distribution strategies seem to be evolving along somewhat philosophically- based lines. I often liken this to religions, in the same manner that we have various religions in the world. So, we have religions of distribution planning popping up, such as the religion of systematic withdrawal programs, the religion of laddered strategies, the religion of time-weighted strategies, the religion of lifetime annuitizatioin. Do you buy into this description what’s developing in the marketplace, and if you do- or if you don’t- explain how you see it, and where Transamerica Retirement Management might play in this context.

Eckman – You and I have talked about your description of this sort of religion analogy, and I think it’s a pretty good one. Each manufacturer or advisor is going to have a core philosophy around income management. Just like there are many ways to invest and accumulate assets, there are many ways to convert these assets into income. Some are simple, some are complex. Some are product based, some are planning based. Some offer guaranteed lifetime income, some do not.

We generally believe retirees should build two income streams. The first is guaranteed for life and is made up of Social Security, pensions, and some form of lifetime annuity income. This income stream covers the basic living expenses around food, housing, health care, etc. As retirement may last over 30 years for some couples, they have the piece of mind knowing that these essential expenses are always covered. The second income stream is not necessarily guaranteed and made up of a systematic withdrawal strategy, possible ongoing employment and possible home equity release strategies. This income stream covers the discretionary expenses of travel, entertainment, etc. Of course, the art is working with the customer first to build a plan that meets their unique situation and, second to support them over time to execute and tweak the plan. I guess you could say this is our religion.

Macchia –I did some searching on the internet and read where one of the missions that Transamerica Retirement Management has undertaken is to leverage AEGON’s extensive network of internal and external distribution partners in order to deliver solutions. Is that, in fact, true? And if it is, can you comment or go a little bit deeper into the strategy?

Eckman – Sure. We have to prioritize the opportunities before us as we build this group and march it forward. We’re starting in terms of distribution by connecting with our pension organizations, Diversified Investment Advisors and Transamerica Retirement Services. We are bringing product development, marketing strategies, and an advice platform to these organizations that leverage some of the capabilities across AEGON.

Macchia – I can look back over the period since I came into financial services inn 1977 through the insurance door, and I can remember that the pension business back then was pretty much owned by life insurance companies. Over the course of my career, during the last three decades, we’ve seen life insurers cede away that business to the mutual fund complexes. I wonder if when you look at the distribution opportunity, you see insurers as ready to or potentially able to take back those pension assets, or do you think that there are some fundamental challenges that insurers face that will conspire to hinder their progress in reaching that goal?

Eckman – I think your premise is true. The asset management industry certainly has done a fantastic job serving customer needs within the 401K and general savings space. It’s not surprising because the primary need through the working years is accumulation and investing. But as these investors age and get closer to what we call the third stage of life known as retirement, their priorities and needs change. While investing and accumulation is still important to them, they need to understand the new risks associated with income planning such as longevity and healthcare.

Those sorts of issues obviously play into insurance industry strengths, and our capacity to build solutions to help these folks manage these risks that now have come and moved up the list of priorities as they have moved along in their own life. The insurance industry is in a position to certainly help folks with these important issues.

It’s going to be a lot of work for us, particularly on the marketing side and on the education side. These types of issues, these risk management issues, by their nature are more complicated. So, how can we help people understand the issues and questions? How can we help them make the right choices? Those are going to be the key issues that will determine how the insurance industry, as a whole, and how individual insurance companies will succeed in this opportunity ahead.

Macchia - I think that’s a very insightful observation. You indicated that the very nature of the products that are going to have to be distributed and explained in the future are more complex by definition. Does this make you think that new strategies for communication are going to be in order, and if it does, where does technology play into that? How important do you think technology will be in the coming months and years? How do you see the whole customer communications issue fleshing out in the future?

Eckman – I think it is going to more complicated and it’s going to be challenging. Whether we in the insurance industry are trying to come up with new ideas to help advisors carry the load and get this point across with their customers, or, whether we’re talking to a customer directly. We have to make it clear, transparent and understandable.

Trying to reach people differently, trying to leverage technology to help explain products is definitely an opportunity for the industry. The other point that we haven’t talked about are the compliance issues. With the more complicated suite of products that need to come of the fore, we need to make sure that advisors are able to clearly explain what they need to with their customers. We must have the right tools in place to deliver compliant, clear presentations so that customers fully understand the issues and the options available.
Leveraging technology to help with this challenge is a real opportunity. Video, electronic presentations, those sorts of things, by their nature, can be controlled more effectively.

Macchia – Phil, when I think about the role of consumer-facing technology in the future, one of the issues aside from compliance, and aside from consistency in message- and a myriad of other advantages- when you get down to the very basic question, you realize that there are gigantic numbers of individuals that are going to need to be contacted and provided guidance in the distribution phase of their lives, with a relatively small base of advisors to reach them. Is this something that you at Transamerica Retirement Management have thought about and if it is, what do you foresee as potential strategies that you may use to address this very issue?

Eckman - It is something we’ve thought about and wrestled with. We are like a lot of companies in our position. We have a large advisor community that we distribute through, and they are always looking for help in good, compliant presentation and educational programs that allow them to bring value to their customers.

We’ve got work to do with some sister groups to put that type of tool together in the short and long term. I think that companies like us are going to have to be very successful on that front if we are going to get the time and the attention of the advisor base moving forward. Beyond the advisors there is certainly an opportunity to more effectively reach those individuals that either are not working with an advisor today, or prefer to just do it themselves.

There’s a chunk of the Baby Boomer population that are going to want to do it themselves, and providing more avenues for them via the web and other technological tools so that they can understand, become educated and ultimately make the right decisions for themselves, is going to be an opportunity for the industry, for sure

Macchia – Phil, I’d like to ask you next about products. In our industry there is no end to the talk about new types of products that are being developed, may be debuting in the near future, and may transform the way that products work. It’s stated by many that these new products are going to be very important in meeting Boomer needs.

There is another philosophy that’s sort of out there in parallel that says- and this was reflected to me most recently in an interview that I hadwith Jeremy Alexander- that we’ve got longevity insurance, we’ve got lifetime annuitization, we have products that guarantee principal and simultaneously provide upside potential, we have lifetime annuitization products, and guaranteed withdrawal riders. We have mutual funds, we have equities, we have bonds. In other words, the products are already there. It’s a matter of figuring out how you package them to work synergistically to deliver good long term results for the consumer. I wonder how you feel about this issue.

Eckman – I would agree with it. The product innovation on behalf of the insurance industry is never going to stop, and I don’t know if it will ever slow down. But I think we’ve seen, looking back over the last five years or more, that most of us in the industry are not terribly happy with the results that we’ve had in really driving the growth in all of the income product innovation that’s taking place.

We’re making progress, but in the big picture of things, relative to the mutual funds and other more traditional accumulation focused investment solutions, I don’t think any of us are comfortable with where we’re at. Which then leads you to the question as to yes, products are important, but is it the communication, is it the method or context in which we’re describing them. Do we need to look harder at that?

Macchia – You bring up something that I’ve talked about and written about a great deal. In fact, I’ve said quite publicly that the winners in Boomer retirement are not going to be those companies that necessarily even have the best products, but rather will be those companies that are the best at communicating their value to a large and fluid market place. Does this strike you as true?

Eckman - It does. I’ve heard you say it a couple of times and every time I hear it it rings very true to me. It’s something that is easy to say, harder to do, but the more I think about it the more I realize we must become better communicators.

I think this is coming back to us as feedback from a lot of advisors that we work with in this organization. They want to be more effective in the way that they communicate to their end customer. Let’s not over complicate the product so that we can’t clearly explain its value and ability to solve a customer’s need.

Macchia - When you look forward in the context of your position of heading up this business unit, what do you define as your greatest challenges?

Eckman – I think there’s an inherent education gap that we as an entire industry need to focus on. It’s making a connection between savings and income. In all of the focus groups we’ve done, every consumer understands the notion of a nest egg.

But, when you start asking questions about, “How are they going to put that nest egg to work to replace an income stream or how will they develop an income plan to manage a 30 year retirement?” They have no answer. They have not thought about it. We, I think, have a big job to just close that educational gap and help people to think about income earlier on as they approach this transition so they can start to plan and really understand the issues at stake, and sort of change their way of thinking. They’ve got to begin to think, “Now, I need to move into more of an income management and financial risk management mindset.” That’s a big task.

Secondly, I think it really gets back to your communication point that our products within the insurance industry are going to be more complicated, making it even more critical for us to succeed on the communication front. Finally, we have to understand that to the end consumer, retirement isn’t in their minds primarily a financial event. We come from the financial services industry, so we think of it as a financial event, but they don’t. First and foremost, it’s a life event to them.

We need to understand that reality, and help them with this whole life transition, and help them understand how the financial part of it is certainly an important component, but it doesn’t start with that. When they come to a meeting with an advisor, when they are talking with an advisor on the phone, or when they are going online to a website, they are coming to that meeting or they are coming to that website not wanting to jump right into financial planning, but to just get some general perspective around this life event that’s coming their way. Once this context is laid, it’s easier to weave in the financial aspects of the transition.

Macchia - That’s a very… reality-based take on the issue. Which reminds me of advertising. The advertising that’s been done to date to the Boomer audience has struck me as very odd and, arguably, disingenuous. On the one hand you have all manner of statistics that indicate that the typical Boomer is not well positioned to generate a significant retirement income over a retirement that may last a very long time. Social security is uncertain in terms of what may happen to it in the future, the national savings rate is very low, and typically Boomers have more debt than net assets.

So this is a mixture of facts that doesn’t bode well for mass market retirement security. At the same time, we’ve seen advertising that consistently describes retirement as a time to enjoy all of the exotic activities that you’ve never been able to previously enjoy; that retirement is the time to learn to snowboard, for instance, or parachute, or take an around-the-world cruise. I’m wondering if you feel that financial services companies, thus far, have been real and candid? If you feel that the current trend in advertising is misguided? I’m wondering how Transamerica Retirement Management will view the issue in terms of its own advertising?

Eckman - Within our organization we have made it a point to be realistic with all of the content and images we use in our literature and on our website.

It’s possible to be both realistic and optimistic. From a planning standpoint, our group is committed to helping the middle market/mass affluent retiree understand how Social Security, possibly a pension, supplemented by some other form of ongoing lifetime income, and, realistically for a lot of people, some sort of ongoing employment on their terms, can all work together to form a sound income plan.

Let’s face it; the typical picture of the couple on the yacht or in front of the second home on the beach is not realistic for a lot of people. Nonetheless, these folks have the potential, if they do the right kind of planning up front, to have an incredibly fulfilling and financially secure retirement, which is what it’s really all about.

Macchia - Phil, I’d like to ask you three questions that are entirely personal in nature. I’m going to, starting with this interview, include these questions in every interview going forward. The first one is this: if I could somehow convey to you a magic wand, and by sweeping this magic wand you could instantly institute any change that you want to see occur in this industry, what are the first two changes you would make?

Eckman – that’s a tough one. So any two changes within the industry…

Macchia - Anything, this is virtually the power of God I’m describing.

Eckman - Other than tripling everyone’s investible assets to put towards retirement, I presume that’s off the table!

I think number one….I just think a general increase in awareness of the issues and risks- and I don’t mean risks in that scary, negative sense- but just an awareness of the issues that people need to be thinking about when it comes to retirement.

If we can wave the wand and implant that knowledge in peoples’ minds, I think that obviously would be an enormous benefit for all of us.

Secondly, I think there are a lot of things, clarifications that need to be addressed from a regulation standpoint between the groups that govern equity products, insurance products and pension products. There’s a lot of confusion and red tape that needs to be resolved, that slow us down from putting the right kind of education and solutions and guidance in place to help people. So, if I could wave the wand and clarify a lot of issues and get some consistency across all of these different regulatory organizations that govern the various parts of our business, I think that would ultimately be a big help to the end consumer.

Macchia - Good answer. Next question: If you were not CEO of Transamerica Retirement Management but you could have any job at all, in any other industry, doing anything you wished, what would it be?

Eckman – I think that I look back at my career and experiences, some of the most rewarding work I’ve done involves working individually with people on their own issues. Honestly, if I could actually get into the chair of the advisor and truly help individual retirees successfully plan and make this transition into retirement, I think that would be incredibly rewarding.

Macchia - Lastly, I would like you to imagine your own retirement in its most conceivably perfect form, where perfection is anything you want it to be. Tell me what you’d be doing.

Eckman – I think I would be engaged with my kids’ and grandkids’ growth and lives, hopefully in a very active way. I would be enjoying, certainly, time with my wife doing the things we like to do together. I think I would also be engaged in some kind of ongoing professional endeavor or volunteer work.

Macchia - Sounds like a pretty nice vision. I want to thank you for your time and for your answers. I’ve enjoyed it.

Eckman – I have too, David. Thank you.

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

Phil Eckman, President & CEO of Transamerica Retirement Management and Fred Conley, President & CEO of Genworth’s Institutional Retirement Group to Appear in Industry Leaders & Innovators Series: Retirement Income Industry Leaders to Address Broad Range of Strategic Opportunities and Business Challenges

I am pleased to announce that two of the retirement income industry’s leading lights will be the subjects of interviews in my Industry Leaders & Innovators Series. Phil Eckman and Fred Conley are articulate and talented individuals charged with significant strategic responsibilities within their respective organizations. Their visions and insights will be welcome by all who are concerned with the future of U.S. retirement security.

Soliciting Annuity Agents to Grow the Ranks of Registered Investment Advisors: Road to Salvation? Or A Path to Destruction?

“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.

The Preventable Demise of the Fixed Annuity Business: Part Three of a Multi-Part Series

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.