Financial Advisors' Discussions

The “Facebook-ing” of Retirement Income

What factors stand in the way of independent advisors and broker-dealers maximizing their success in the retirement income and Rollover IRA markets? It’s a complicated question with multiple answers including the impact of potentially disruptive changes in the regulatory landscape.

One area that I am convinced will really matter is the quality of advisor-client communications. Financial advisors, like most business people, are being affected by customers’ preferences and habits when it comes to evaluating products and services. The nature of the evaluating process is changing, with online research and validation becoming ever more important.

I recently wrote an article for Kerry Pechter’s Retirement Income Journal that addresses how the behavior of high-quality, Web savvy prospects for retirement income services may impact advisors’ future success. If you would like to read the article, click here.

Interview with Philip G. Lubinski, CFP. Leading Retirement Income Expert is First to be Featured in New Interview Series: America’s Elite Financial Advisors

philToday marks the introduction of my new interview series called America’s Elite Financial Advisors. I’m excited about these new series for many reasons but none more so than the opportunity to provide a platform to individuals who possess insights and knowledge that is too often insufficiently appreciated.

The subject of the inaugural interview is a man who counts me among the members of his fan club. Phil Lubinski is both a friend and business partner who has journeyed down the retirement income highway with me since 2003. Actually, I hitched a ride. Phil has been successfully navigating that roadway since 1984. It’s an obvious understatement to say that this was well before most had discovered the business opportunity in retirement income distribution.

It was Phil’s early work in crafting a time-weighted, laddered asset allocation strategy designed to generate sustainable, inflation-adjusted retirement income that led to the development of Wealth2k’s The Income for Life Model™ (IFLM).

Phil has brilliantly led the advisor education efforts around IFLM. He has completed training of more than 4,000 FAs using his one-of-a-kind approach to income distribution education. Focusing on the practical investment and income tax techniques that advisors are required to master in order to properly place retirement assets into a distribution mode, Phil’s IFLM Training Institute is hailed by advisors for the practical guidance and planning techniques they are taught. That advisors so easily relate to Phil is a key element in his ability to establish credibility with professionals who recognize that they are learning from one of their own.

A devoted Colorado Rockies fan (and season ticket-holder), I’m unable to easy Phil’s pain in seeing his favorite baseball team lose the World Series to the much superior Boston Red Sox. But I can make it possible for more people to get to know the man I refer to as the “Pope of Distribution.”

MACCHIA: Firstly, Phil, my sincere thanks to you for agreeing to have this interview with me. As you know, this is the first in a new series of interviews I’m calling America’s Elite Financial Advisors. I believe it’s important to gather the perspectives of those advisors who have managed to reach the highest levels of success. So, I’m happy you are the first to be interviewed. Thank you for that.

Phil Lubinski: It can only get better from here.

MACCHIA: I’m an optimist! Let me begin by asking you what you believe are the qualities of an elite advisor?

Phil Lubinski: Wow. You know I hope it’s not defined by the amount of commissions they generate on a yearly basis because, while that’s a measure of success, I really think the elite advisor is the one that has a relationship with a their clients that is far more than just transactional; elite advisors have a problem-solving relationship including advice and solutions in areas that have absolutely nothing to do with a product sale. A significant indicator of an elite advisor is the retention rate of their clients.

One measure of client retention was the National Quality Award. It was given to advisors who had an 85% or higher persistency rate, which correlates directly to client retention. Of all the top “production” awards I’ve received, my proudest accomplishment was receiving the National Quality Award for 20 consecutive years. The fact that I could retain more than 85 percent of my clients in good markets and bad spoke to the true nature of the relationship.

MACCHIA: You bring something up that resonates with me, Phil, because of my own background- having also entered financial services through the insurance door. And what you’re describing that doesn’t exist anymore is partly, if not totally, due to the fact that, along the way, insurance companies became product manufacturers with few exceptions. And the kind of development of not only the talent of salespeople but also, in a sense, the values of salespeople were lost. I wonder if you see that as being true?

Phil Lubinski: I see it as true and not necessarily in a malicious way. Like you, my roots also began in the insurance industry. My biggest decision 30 years ago was trying to select the best agency to join. In Denver, there were three very prominent insurance agencies that I interviewed; Northwestern Mutual, New England Life and State Mutual. Although all three companies had extremely competitive products, I chose State Mutual because its General Agent, Bernie Rosen, had a legendary training program. Not only was it a comprehensive 3 year program, but, more important, it instilled the “values” you referenced in your question. It was a true “needs” based approach that always placed the clients’ needs ahead of your own.

What I witnessed beginning in the late 80’s and through the 90’s was the explosion of the variable products combined with the greatest bull run in the history of the U.S. stock market. Planning and problem solving came to a screeching halt. Recommendations were no longer “need” based, but rather, “greed” based. Cost and performance became the mantra, insurance companies de-mutualized, stockholders needs seemed more important than the policyholder’s needs.

As the financial services industry focused more and more on profitability, budgets were cut, and one of the first things to go was advisor training. Unfortunately, the training was turned over to the product wholesalers. What I’m seeing now as we roll out the Income for Life Model™ nationally is advisors hungry for training. Advisors desperately wanting to learn how to sell the process, not the product. It has been an eye opener for me.

MACCHIA: Your answer raised many excellent points, some of which I want to come back to later- specifically in terms of retirement income. I want to stay on the issue of wholesalers for a minute because wholesalers are individuals that I know contact you and your associates quite often. And they are in the vanguard of distributing ever changing, ever more complex and ever more diverse products to advisors. How do you and your colleagues view wholesalers today? Do you like the process? Do you think it works? Do you think it’s broken? What is your general take on the whole notion of product wholesaling?

Phil Lubinski: I don’t know if our OSJ is a typical office or not. We have 11 advisors with more than 15 professional credentials and an average tenure of 17 yrs. We allow very few wholesalers to make presentations. The days of T-shirts and golf balls are over. We’re tired of hearing about yield and riders. Virtually every quarter there’s the new and improved rider, the “simple” single product solutions, the “my” fund beat “their” fund mentality. Even more alarming is that the products and features are changing so quickly that the wholesalers aren’t being trained adequately and several times have given us inaccurate information. We specialize in retirement income planning. We know there is no single product solution. We want wholesalers to show us how to strategically combine several products to meet our client’s needs. We’re not interested in hearing them “slam” their competitors. So, in answer to your questions, we don’t like the wholesaling process and through no fault of theirs…it is broke. Consequently, they bring little value to our table.

MACCHIA: Well, let me ask you this. In terms of products, in terms of the stories that you’re hearing about products and product innovation, do you view it that true innovation is occurring? Or do you view it that incremental changes are being made? Or do you find that it’s something different?

Phil Lubinski: It seems like many of the innovations are the same thing with a little different wrapper. There’s this kind of herd instinct out there though and I hate to keep picking on the annuity industry. The mix of business in our office is pretty equally spread between insurance, mutual funds, and advisory fee products. But on the annuity side that certainly has been where the changes have been the greatest. But what happens is every few months there’s “Here’s our new and improved rider. The one you sold your client six months ago (that was the newest and best thing then) isn’t as good as this one now.” And when there’s any play to that rider then there’s ten other wholesalers coming in saying, “We got one too, but here’s why ours is a little bit better than theirs.” It’s what happened with disability income insurance back in the early ‘80s.
The companies got so competitive trying to make their definition of disability unique that they almost put themselves out of the business. And now the annuity income riders have become so complicated that the wholesalers presenting them don’t understand them. What is more frustrating to us is that when a “new and better” contract comes out, the existing policyholders are not given the opportunity to exchange their contracts. It’s becoming more like the computer industry….”why buy one today, there will be a better one tomorrow”.

Are they innovative? I guess so, since prior to the income riders, your only choice was to take a systematic withdrawal and run the risk of over withdrawing and running out of money, or annuitizing the contract and giving up access to all your principal. They’ve played no role with our existing retired clients who have the traditional retirement with pensions and Social Security. They already have their base of guarantees and don’t need to be buying any more guaranteed income stream. But certainly those boomers moving into retirement without the guaranteed income streams their parents had definitely need a percentage of their income guaranteed for life. But certainly not 100%. In other words, the guaranteed income riders are potentially part of an overall solution, just not the only solution.

It’s kind of interesting that in 1952 a guy named Harry Markowitz suggested that diversification was a proper strategy for wealth accumulation. It was almost heresy to suggest such a thing but 40 yrs. later he was awarded a Nobel Prize. Today, diversification is a household term. Why wouldn’t the same diversification strategy work on the distribution side of wealth? Why would a retiree NOT diversify their income sources? Why not have a combination of income sources that offer guarantees, market opportunities and insurance against premature death, disability and longevity. Wrap all of these features and benefits up into a single product and now you have innovation. Until that happens, retirees need to diversify their income sources with a strategic mix of products. I just hope it doesn’t take 40 yrs. for this message to become widely accepted.

MACCHIA: Right. Well let’s talk about that. Let me begin with a compliment.

Phil Lubinski: I like that.

Macchia: One of the things that I often times- and publicly-say about you, Phil, and I know you’ve heard this before- but I’ll repeat my belief here that, after knowing you for a number of years now, and after working with you to develop solutions for retirement income, in my judgment no individual in the financial services industry has a greater practical, real-world understanding of the challenges associated with converting accumulated assets into distributed income than you.
Phil Lubinski: Thank you. You’re on a roll, keep going.
MACCHIA: Well, I’d like you to comment on a few things. One key thing that I have learned about retirement income planning is a phenomenon that I see repeating itself in the retail space over and over again. It’s financial advisors coalescing around philosophies or as I describe them “religions” of retirement income. There’s the religion of systematic withdrawals. There’s the religion of lifetime annuitization. There’s the religion of lifetime annuitization linked to, say, target date retirement funds. There’s the religion of laddered strategies- time weighted strategies. There is the religion of variable annuities and GMWB riders. I wonder if you see it this way? And what you think the ultimate conclusion of all this is going to be?
Phil Lubinski: Yeah, the religion analogy is a good one in that most religions will have a core belief and then they all have a different view on how to practice that core belief. Consequently, I don’t necessarily think that there’s a right religion and a wrong religion.

But more important, advisors have to develop a religion of retirement income they believe in and practice it. They need to stop trying to practice all of them simultaneously. When training advisors I jokingly say that you can’t go to the Synagogue on Saturday and Mass on Sunday. It’s not because one is right and the other wrong, it’s just that you can’t follow both. Once an advisor decides which religion of distribution they are going to practice, then confidence and passion follow. I’ve never met an “elite” advisor who wasn’t passionate about their work and confident with their recommendations.
As you said there are several “religions”…..systematic withdrawals, annuitization, segmentation, laddered securities, dividend/interest sweeping, etc. They all work, just some more efficiently than others. I’m obviously bias to the Income for Life Model™ because I began developing it over 20 yrs. ago and have used it to help hundreds of my clients retire. All I know for sure is that “churches of distribution” are going to be popping up on every corner and advisors better do their homework and understand the pros and cons of each. Additionally, we as advisors, better not lose sight of an extremely important obligation we have to our clients which is “knowing them well” and in some situations protecting them from themselves. The best intellectual solution may turn out to be the worst emotional solution.

Some retirees need to have surrender penalty fences built around their financial house. Others may need more guarantees. Income riders may give certain retirees the courage to take market risk with the rest of their retirement money. Which religion is best for boomers transitioning into retirement? I guess we won’t know until the last boomer dies. All I know is that I’ve never had a client who followed my religion miss a monthly check or go broke. Let me give you a couple of “real life” examples of human behavior dictating decisions and products more than intellectual analysis.
A couple of years ago I had a client who was retiring and given the option to take her pension as a life income or a lump sum that could be rolled over into an IRA. Based on the amount of the lump sum vs. the life income with 100% survivor benefit, it was mathematically clear that she would be better off taking the lump sum. The next day, she called to tell me that she had decided to take the life income with the survivor benefit instead. When I asked why she had changed her mind, her response was “I couldn’t share this with you last night when my husband and I met with you, but my husband is a habitual gambler. If I took the lump sum and then died before him, he would take the balance of the account and be broke in a short period of time. If I leave him an income stream instead, I can’t stop him from gambling it away, but at least the next month he’ll have another check”. Intellectually and mathematically her decision made no sense, but emotionally, it was the right decision. I just had another case where a client of mine received an inheritance and wanted to invest it. I recommended an annuity.

One of my associates asked why I would recommend an annuity to a single person who is only 50 yrs. old. I responded by explaining to my associate that in the 20 yrs. I’ve been working with this client the only wealth he has is in his 401k. He is constantly in debt (even though he has always said he was going to pay it off), he refinances his home every time there’s equity in it. The only monies he leaves alone are the accounts that he can’t get without big penalties. As advisors we think that our most important responsibility is to protect our clients from taxes and inflation. Sometimes, our greatest responsibility truly is to protect them from themselves! I kid my clients about my T.I.U. protection plan, telling them that part of my job as their advisor is to protect “your” money from Taxes, Inflation and “U”. Because I find that sometimes individuals do more damage to their wealth than taxes and inflation combined. Only by having a planning and problem solving relationship and knowing our clients “well” can we make the proper recommendations. Elite advisors have such a relationship.

MACCHIA: Well I think you raise some key insights, Phil, and it leads me to ask you why, beginning in 1984, you focused on the development of a time weighted asset allocation model that has become the foundation of today’s The Income for Life Model™ program?. And I gather it’s because of the experiences of working with real people at ground level. Because you saw the dimensions of that emotional problem firsthand. And I assume saw that that particular strategy helped minimize the negative effects associated with emotionally-based investment decisions. I don’t mean to put words in your mouth, but, is that how you saw it?

Phil Lubinski: The Income for Life Model™ evolved totally from day to day, one-on-one work with my clients. It literally stems from being in the “trenches” and dealing with the unpredictability of human behavior and changing events in a retiree’s life. It is, to some extent, an academic/intellectual model because you have to mathematically validate it and prove that the assumptions made are reasonable. But, currently, it is the only strategy in the market place that can easily adapt to retirees changing needs.

It’s nice to lay out a long-term financial plan with spreadsheets projecting income and expenses for the next 25 or 30 years. But, here’s reality: in the 30 years that I’ve been in this business I’ve never had a retiree spend what they said they were going to… I’ve never seen rates of return be exactly what we projected…and, certainly, unexpected expenses are common place. Spreadsheets are nice, but, at best, they are an indication of the future, not a precise predictor.
What’s evident to me is if you’re going to design a retirement income distribution strategy it better have tremendous flexibility and a regular process for review and re-evaluation. This goes right back to the relationship with your client. Each year we formally review the model and the client’s goals and objectives. We’re not chasing the highest yields, not focusing on new sales, but we are constantly “fine tuning” the plan. Adapting it to changing circumstances, not changing markets. Single product solutions will never provide this type of flexibility. As far as I can tell, the Income for Life Model™ is the only strategy in the market place that has this type of flexibility and a 20+ yr. actual track record…not a hypothetical one.

MACCHIA: Next, I’d like to ask you about other advisors. You are very fortunate to have possess a wealth of experience in income distribution planning through your years of implementing with your clients, and that’s an experience framework that 95 percent of advisors do not share. Now I know that part of your time is devoted to training other advisors on income distribution planning. What are the things you’re telling them when you talk about the income distribution opportunity? And what do you see or observe among these other advisors in terms of how you think they are relatively prepared or unprepared for this business opportunity?

Phil Lubinski: I believe they are more unprepared than prepared. This was documented in a study a few years ago by Cerulli and Associates concluding that neither the industry nor its advisors were prepared. The challenge is how to train and arm an advisor with a solution that has moving parts and has the kind of flexibility that I personally feel is necessary. For some advisors the learning curve becomes so overwhelming that they revert back to doing things the same way they always have or seek out a simple, set it and forget it, single product solution. That’s very bothersome to me. I’ve actually been told by some advisors who have attended my training classes that wholesalers were not only sitting in the audience, but have approached them within a day or two telling them that the solution really doesn’t need to be that complicated. And, furthermore, assure them that their product will accomplish everything a multiple product solution, like the Income For Life Model™ can… with a single application.
Damnit! This is someone’s life savings we’re dealing with. It’s not simple

MACCHIA: Right, right. Tell me about the training that you do. What form does it take? How long does it last? What is the reaction among the advisors you train? What do you see that advisors are able to achieve after the training that they weren’t able to achieve before?

Phil Lubinski: I think the biggest advantage of the training is it’s one of their peers training them. I’m still in the trenches with them and I’m talking to them at their level. It’s not coming from the academic on high. It’s not coming from that person that’s never met with a single client but thinks they know what that clients needs. So the reaction is very favorable. I relate well with them because I am one of them. And the ah-ha that has that come out of the training is– I really see it now. I get it.

You know, ten years ago there was a sense that things never needed to change when you transitioned from accumulation to distribution. It was a seamless transition. You just kept doing it the way you were doing it on the accumulation side…in reverse. So if I successfully dollar cost averaged into the market, why wouldn’t I dollar cost average out. Then, the horror stories started coming out during bad markets of people going broke.

The result of advisors attending my classes is they understand that the strategies used to distribute wealth are inherently different than those used to accumulate wealth. They believe that multiple products must be strategically combined. They understand the importance of annual reviews. They appreciate the depth of the relationship I have with my clients. I know the class made an impact when an advisor says to me “I’ve been doing retirement income planning for my clients, I just didn’t realize I’ve been doing it wrong.”

MACCHIA: I want to turn the conversation toward products for a minute, and begin with a discussion of annuity products. Having come from the insurance business you’re very, very familiar with all types of annuity products and I’m sure you recognize that the annuity industry is navigating through what is probably the most hostile marketing environment it’s ever faced. Certainly in my 30 years I’ve never seen anything the equal of it. I wonder how you view annuities today? Are you using annuities in your practice? And how do you perceive that your clients may be view annuities?

Phil Lubinski: Unfortunately, because of the publicity around the abusive sales of annuities, the vast majority of clients have a bias against them when they come in. An important part of the process with the client is to educate them that annuities aren’t inherently bad as long as they are positioned properly. I always try to give them “real life” examples they can relate to. A good one is comparing annuities, or any other financial product, to prescriptions that a doctor might recommend. I tell my clients that most prescriptions aren’t “bad”, but there are certainly some that are “bad” for you. If, after understanding your goals, objectives, tax status and risk tolerance, I believe an annuity is appropriate…I’ll recommend it. If not, I won’t…pure and simple.

We have an extremely proud generation of boomers moving into retirement. For some, their biggest fear is outliving their income and becoming dependent on their children or the government. Obviously, annuities are the only financial instrument that can eliminate this concern. Once again, I don’t see them as the only solution, but certainly use them as part of the overall solution. It’s funny (not really funny). I’ve listened to a couple of radio shows. One tells the listeners that annuities are good and mutual funds are bad. The other show says mutual funds are the only answer and annuities are evil. I’ve been told that the guy doing the mutual fund show is not insurance licensed and the one doing the annuity program is not securities licensed. Yet, the poor listener believes they are hearing objective advice. How often do you hear a news story about the merits of an annuity? How often do you hear about the spouse whose husband or wife died after the 2000-2002 market crash, but was paid the pre-crash values? How often do you read about the 92 yr. old still receiving monthly income from an immediate annuity he bought 25 yrs. ago? All the time I hear people say “insurance is a bad investment”. My standard answer is “you’re right, and investments are bad insurance”. Why don’t we decide together what is good or bad for YOU, not what someone writing an article thinks.

MACCHIA: Right. Well said.

Phil Lubinski: Just more words than it should have been.

MACCHIA: No, no. Not at all. Let me ask you about the role of RIAs which have changed and expanded over recent years. When you look at the world of RIAs from your vantage point how do you see it?

Phil Lubinski: I see a lot of confusion from advisors trying to understand the RIA business. Not knowing whether to register their own or operate under their broker dealer’s umbrella. Not receiving a lot of guidance as to the responsibilities and liabilities of being one. Every advisor would love to have 40 or 50 million under management and receive advisory fees year in and year out. Certainly having those fees is a financial comfort to the advisor and creates “equity” in their practice that can be sold to a transition partner. In theory, it brings more objectivity into the advisor/client relationship and certainly a more structured review process with your clients. Financially, it is very difficult for the “commission only” advisor to transition into a fee structure. The beauty of the Income for Life Model™ is it is best funded with a mix of fixed commissionable products and investment portfolios that can easily be placed in advisory accounts.

If an advisor is going to focus on retirement income planning there needs to be a commitment to regular reviews with your clients. If all the advisor recommends are first year commission products, then how can they possibly fulfill their ongoing commitment with no continuing revenue? Additionally, why would a junior advisor want to purchase a practice that requires ongoing servicing with no compensation? It’s interesting, when I first started in this business at 28 yrs. old, new clients would wonder if I would survive. Now, at 58 yrs. old, my clients wonder if I will still be reviewing their retirement income plan for the next 25 yrs. And, if I am, what went wrong with my own retirement plan? Three years ago I began a 10 yr. business plan to introduce my clients to my transition partner who plans to work another 20 yrs. We have a business agreement for her to purchase my practice based on the value of the reoccurring income.

Having a portion of their income model in investment advisory accounts easily establishes the purchase price. More important, it gives my clients peace of mind knowing I have a practice continuation plan. Also, they have this 10 yrs. to get comfortable with my partner. Being able to operate under an RIA is beneficial to my clients, my transition partner and me.

MACCHIA: Let me ask you about another RIA-related development of recent vintage. That is, the notion of insurance agents who are being solicited into RIA status. The effort seems to be aimed at annuity agents who may be unhappy with broker-dealer incursion into the equity-indexed annuity business, and, or, generally-heightened supervision by broker-dealers. But the “pitch” that’s put forth is that they become RIAs, essentially cutting their practice down the middle, becoming RIAs for investment activities and maintaining the traditional insurance license and relationships on the insurance and annuity side. Do you think that’s a practical model? A model that has the requisite integrity to be viable over the long run?

Phil Lubinski: Any business model that is focused primarily on commissions and the avoidance of supervision is fatally flawed.
MACCHIA: Let me ask it another way. Agents by definition are fiduciaries for the insurance company they represent. They are agents for the company. RIAs are fiduciaries to their clients. Do you think it’s possible to be both with the same client?

Phil Lubinski:
That’s an interesting question having been in the “captive” world and having my own RIA at the same time. Fortunately, the company I was affiliated with had a “full” product shelf and the amount of proprietary sales that were required to maintain benefits etc. was a small percentage of my total production. Certainly, their proprietary products were competitive or I would not have been with them. Bottom line, by always doing what was in my clients best interest first and running a very busy appointment schedule, I was able to fulfill my responsibilities to the company and my clients. Now that I am affiliated with an independent broker dealer, I don’t find my recommendations changing. I have, however, known advisors who have affiliated with companies whose local agencies place a great deal of pressure on them to only sell proprietary products. I believe they have a difficult time walking that line.

: Well, thank you for that answer. I think that makes sense. I want to ask you a couple of personal questions if I could.

Phil Lubinski: Okay.

: How about this: I somehow convey to you a magic wand, and you can wave it and immediately institute any changes at all in the business of being a financial advisor. These changes could be related to products, regulation, marketing. It could be something I’m not thinking of. What change or changes would you make?

Phil Lubinski: Wow! This is probably one of those answers that three days from now you wish you could change. I would like to see a focus at the industry level on process rather than product. I’m hearing some lip service to that effect at national meetings but I’m not really seeing it being implemented in the field. Every advisor would love to see different regulatory oversight because it’s gone to an extreme. It’s certainly not limited to our industry. We’re seeing doctors leaving their practices because they can’t practice medicine anymore. We’re seeing teachers abandoning teaching because they can’t teach anymore. At times you feel you’re practicing law more than financial planning.

Specific changes I’d make are…
1. Better training
2. Less complicated products
3. Re-define the wholesaler relationship and their compensation
4. A planning/problem solving focus

MACCHIA: Good answer. One more personal question. As someone who has helped hundreds and hundreds of people enjoy more secure retirements, when you imagine your own retirement, in its most conceivably perfect form, where will you be and what will you be doing?

Phil Lubinski: We’ve have a genetic flaw in my family. My 90 yr. old father just retired this year. The thought of not being involved in this industry in some capacity is unimaginable. This has been the most emotionally and financially rewarding career I could have ever asked for. The ideal retirement for me will be knowing my clients are in good hands, being able to continue developing the Income for Life Model™ and helping advisors establish meaningful and impactful relationships with their clients. This intertwined with time to kick back, marvel at the continued success of our children, spoil grandchildren and someday see the Rockies kick the Red Sox’s butts in a World Series would be perfect.

: Sounds pretty good- except the Red Sox part. Phil, I want to thank you for this conversation.

Phil Lubinski: Thank you. It was fun.

* * *

Part One: A Deadly Cocktail? The “Extreme Makeover” of Annuity Agents into Registered Investment Advisors

Earlier this year I published an essay on the burgeoning effort to recruit annuity agents into the ranks of Registered Investment Advisors. While I haven’t written about this issue since that time I’ve thought about it a great deal. So have a lot of other people including some who see an opportunity to create lucrative new businesses by disrupting independent agent distribution. I’m all for free enterprise. But I’m opposed to initiatives that may seek to exploit agents who are frustrated by challenges they didn’t’ ask for or expect.

Today’s article is the first in a series devoted to the agent-to-RIA conversion “pitch.” The more I delve into this the more concerned I become. One of my goals with this series is to help protect annuity agents by providing them a balanced perspective on the RIA option. It’s my hope that a thorough understanding of the risks and potential rewards will lead to good decision-making.

Back in April I expressed caution about the pitch to annuity agents that urges them to become registered investment advisors. My early caution has crystallized into a strong belief that for most annuity agents the RIA option is, well, unsuitable.

Opting to become an RIA may be a viable course of action for annuity agents willing to submit to a truly extreme makeover in terms of their stated allegiance and compensation model. How many agents will be willing to drink the fiduciary cocktail and take on the related responsibilities that come with observing a fiduciary duty once they understand all of its ingredients?

What’s in the Fiduciary Cocktail?

Ahh, fiduciary duty! That’s the key issue, isn’t it? I checked Wikipedia’s definition of fiduciary duty and this is what I found:

“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.”

The very last sentence, “A fiduciary cannot have a conflict of interest” would seem to crystallize the key challenge: how can an individual simultaneously act as a fiduciary and an agent for an insurance company within the framework of a single client relationship?

It’s not possible in the opinion of Rick Miller, a Certified Financial Planner from Cambridge Massachusetts and a member of the National Association of Personal Financial Advisors. According to Miller, “An annuity agent who is simultaneously a fiduciary sounds like a contradiction in terms at the most basic level. As a fiduciary the advisor must act in the best interest of the client. As an agent, the advisor must act in the best interest of the insurance company. I wouldn’t want to be the advisor who has to attempt to resolve that conflict.”

The website for Miller’s firm, Sensible Financial Planning, states: “We accept no commissions or any other payments from any financial product or service provider. We work only for you.” That description stands in stark contrast to the way annuity agents typically operate.

The August 2007 edition of Investment Advisor Magazine contains an article written by Bob Clark that stated, “The inescapable conclusion for anyone looking at the financial services industry and its marketing machine is that financial consumers—middle class and affluent—are completely ignorant of the fact that their stockbrokers or insurance agents are not fiduciaries, and have no legal obligation to put their clients’ interests ahead of their own or their firm’s.”

Some annuity agents may not fully understand the legal structure of the “principal-agent relationship” that governs their obligations to the insurance companies they represent. In the same manner that stockholders of a corporation (the principals) hire managers (the agents) to act in their best interests, the insurance company (principal) hires agents to act in its best interests. The fact is, under this relationship framework the primary duty an annuity agent undertakes is to represent the insurer’s interests, not the client’s.

There’s No Escaping Regulation

I sought the opinion of Joan Boros, who is a friend and a well-known expert in securities law. Joan, an attorney with the prestigious Washington, D.C. law firm, JordenBurt LLP, had this to say about agents contemplating registration as investment advisors:

“Agents should be aware that registration as an investment adviser carries its own set of burdens and vulnerabilities; there are always trade-offs. At a minimum, agents are subject to a whole new regime of regulation in each state where they operate. On a more challenging level, plaintiff’s lawyers and regulators have asserted the view that as an adviser the agent owes a fiduciary duty to the prospect or customer. While that may not be the outcome, threading through fiduciary duty obligations makes suitability determinations seem like a walk in the park.”

Yet the advertising coming at annuity agents sounds like the RIA makeover is a walk in the park. “End broker-dealer harassment and haircuts” goes the RIA pitch. To annuity agents who have seen their businesses impacted in ways they view negatively since the issuance of NASD NTM 05-50, it’s a powerful message. Is “harassment” a code word for rigorous broker-dealer compliance when used in the context of the RIA pitch? I suspect it is. And what annuity producer doesn’t want to earn more money by eliminating broker-dealers’ commission “haircuts?”

Annuity agents who have seen broker-dealers disapprove their relied-upon annuity advertising and sales presentation materials including letters, seminar presentations and display ads, will surely be attracted to the notion of becoming their own compliance officers. But how many annuity agents possess the knowledge and experience to develop compliant advertising in the context of a registered advisory practice? And what of the longer-term consequences following biennial audits of registered investment advisors’ practices including their advertising? Could annuity agents be setting themselves up for an unpleasant future shock?

Possible Unfulfilled Financial Expectations

One shocking change annuity agents who become RIAs may encounter in the future is reduced income. Agents who are accustomed to making larger commissions as their sales volumes increase may find that new approaches to annuity compensation may alter their expectations. According to Paula Hogan, Principal of Hogan Financial Management, a Milwaukee-based, fee only firm providing comprehensive financial planning services, “When people wear two hats it’s very confusing to the consumer. Consumers have a right to know who the advisor is working for.”

Hogan also believes that the transition to income-generation will lead to new ways to compensate advisors: “The issue you raise (compensation) is also an important one because it speaks to changes taking place in the financial services industry as people shift from accumulation to retirement income distribution. Annuities will play an increasingly important role as more and more people seek to insure their standards of living in retirement. I believe that advisors have real value to offer their clients and they deserve to be paid for it. However, agents’ traditional commission-based compensation models may prove as unworkable as advisors’ AUM-based models. It may be that new approaches to compensation will be needed including flat-fee arrangements.”

Fewer Advisors, Greater Responsibility

Boomer retirement is certainly likely to propel increases in annuity sales. But according to Harold Evensky, Chairman of Evensky & Katz, a wealth management firm headquartered in Coral Gables, Florida, annuities fit in a larger context of retirement planning which must prioritize the best interests of consumers. Says Evensky, “There’s good news for professionals in fields related to financial planning. The need for quality advice for retiring boomers is fast outgrowing the current supply of practitioners. However, as investment advice is often the core element of a good retirement plan, advisors need to ratchet up their knowledge of investment issues and register as Investment Advisors with the State or SEC. Doing so will meet their legal responsibility and insure that they are legally committed to placing their client’s interest first.”

Key Questions

Agents considering the transition to RIA status should evaluate the move carefully and ask themselves some important questions:

Am I willing to place the interests of my client ahead of my own?

Am I willing and able to accept an entirely new method of compensation with the result that my compensation may decrease?

And, under what legal framework do I wish to operate?

The potential answers to these questions imply an interesting set of trade-offs, opportunities and costs.

©2007 David A. Macchia. Al rights reserved.

A Particularly Insightful Comment in Response to My Essay on Becoming an “Admired” Life Insurer

Northwestern Mutual’s Chuck Robinson responded with a lengthy comment to my essay on what it will take for a life insurer to become truly admired. Chuck’s response was typically thoughtful and insightful- and correct, in my judgment. I want to thank Chuck for his response as well as highlight it here. Chuck’s comments concerning the growth of mutual fund giants like American Funds and Vanguard should send a sharp signal to life insurance executives thinking about their own opportunities in Boomer retirement. His comments about prioritizing consumers’ interests resonate deeply. Here it is:


Fascinating essay!!! I enjoyed reading it. At the end of the day, I think insurance companies, as well as mutual fund companies, perhaps all companies) become most admired because: THEY DO WHAT’S RIGHT FOR THE CONSUMER.

Companies like Vanguard, for example, were never swayed by what was trendy, what was new or what produced the highest gross margin and largest bottom line impact. John Bogle had a vision and a passion for doing what he felt was right for the client. The American Funds is another great example of that principle. If I may be so self-serving for a moment, it is one of the major reasons Northwestern Mutual has been selected as the Most Admired Insurance Company every year the survey was ever done. Consequently, I think your focus on Confidence, Pride and Transparency are absolutely right on.

Executives at Most Admired companies conduct all business as though every conversation, every e-mail, every meeting and every Board Discussion was going to appear tomorrow on the front page of The New York Times or typed up and distributed to all of their customers…….so I think your NYT Test is absolutely accuarate. Moreover, Most Admired companies are driven to produce superior customer service, not because of what their legal contracts say, but because of their desire to do what’s right for the client.

Most Admired Distribution companies will, in my humble opinion, begin to move primarily to an advisory model because it will be impossible to deliver the type of holistic, comprehensive retirement planning advice that is contemplated by Moshe Milevsky and others without being an advisor. Moreover, the discipline of delivering a fiduciary standard of care will preclude pushing products that are too expensive and fail to meet consumer expectations. It will also require far more intensive and comprehensive training programs and technology platforms to make sure advisors are truly delivering on the promise of objectivity, expertise and integrity.

Most Admired Manufacturing companies will only develop products their actuaries and attorneys would buy, not those that can be foisted on a poorly educated public who lack the training or skills to perceive the inherent flaws in products like index annuities and/or annuities that fail to keep pace with inflation.

Obvisouly, I really enjoyed reading your article and it stimulated a lot of thought.

Best Regards,


* * * * *

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

NAFA Meeting Kicks-Off; Press is a No-Show

What if you invited three-hundred people to a party and nobody showed?

While I know that press is highly skeptical of the fixed annuity business, even this jaded observer was astonished to hear NAFA Executive Director, Kim O’Brien, report that only 10 of the 300 reporters invited to NAFA’s Annuity Summit even bothered to reply. All who did responded declined.

If I were a Board member of NAFA I’d be in intense self-examination mode; a total press boycott should send a message about the strategy NAFA has taken in rebuttal of every negative article that’s hammered fixed products. I’ve read a number of NAFA’s formal, written responses to reporters who have criticized annuities-especially indexed annuities- and they all have corrected numerous factual misstatements about annuity products.

While that’s good and necessary, the responses aimed at the reporters have typically conveyed a “put down” feel to them that at times has sounded arrogant, angry and heavy-handed. This is a formula for alienation rather than cooperation that is unlikely to serve NAFA’s interests as indicated by the boycott.

If you are a regular reader of this blog you know that I’ve been on a mission to galvanize leaders to the urgency of confronting the industry’s most endemic, difficult-to-tackle problems: sub-optimal agent productivity, over reliance on high commission, opaque and complex products, suspect sales practices, suitability and archaic consumer-facing marketing. A thorough self-examination is vital so that the industry can set itself on a course for greater success in the future.

The industry needs to find the will to do what it’s never done: “call-out” providers whose products and marketing serve to damage the entire industry. I’ve not been timid about doing this. See my comments about Allianz Life as reported in InvestmentNews on 1/15/07. If, say, three years ago companies committed to consumer-oriented indexed products had attempted to isolate and marginalize competitors whose products are manifestly negative to consumer interests, I doubt that the industry would be facing the challenges it now faces.

This is where NAFA can provide leadership in a vital area. I don’t know, however, that it possesses the will to do so. Compare the strategies taken by NAVA and NAFA.

In February I attended the NAVA Marketing Conference. The conference began with NAVA’s CEO, Mark Mackey, delivering an entirely sober, candid and disturbing “State of the Union” that pointed out the tangible challenges facing variable annuity providers. For instance:

80% of financial advisors shun the product

That VAs have been mis-marketed (igniting criticism in the press over fees and tax efficiency) by comparing the variable annuity to other investment products like mutual funds rather than positioning them as risk the management vehicles they are

That VAs have expense charges that many view as unreasonably high

That the product acquisition process is cumbersome and inferior when compared to other investment choices

That the effectiveness of the VA industry’s consumer marketing has been lackluster

To me, this candid acknowledgement of the VA industry’s challenges by the VA industry’s national association is smart, appropriate, real, and entirely healthy. This self-examination and willingness to address its toughest challenges will lead the VA industry to its greatest success. NAFA, in my judgment, should step-up, mimic NAVA and take an active and relevant leadership role. If it doesn’t it will surely drift into irrelevancy.

Yesterday’s kickoff speakers demonstrated that some in the fixed annuity industry remain in a bit of a time warp. The first two speakers, Bob Williams, of Old Mutual, and Barb Cole, of M&O Marketing each presented with skill and passion. Yet, I was left with the feeling that they were missing the mark in terms of providing attendees the timely guidance they need to succeed; each presentation seemed slightly out of context in light of the undeniably hostile marketing environment annuity agents are facing.

I liked Cole’s exhortation to annuity agents to lay down their “credentials” early on in the interview process. She advised audience members that they should proudly tell their prospects that they belong to organizations such as the National Ethics Bureau, or carry designations such as Certified Senior Advisor, or possess any of the many other “certifications” agents typically acquire.

As I heard this I was left to wonder- in the context of the complaints issues in Massachusetts by that state’s securities regulator- if what’s being advised here is arguably illegal in one or more states. The National Ethics Bureau and the Society of Certified Senior Advisors were specifically alleged to be elements of unethical and dishonest marketing activities that agents use to “prey” on the senior population.

Moreover, the presentation techniques illustrated were likely to place the agent in a situation where he or she could be charged with acting as an unregistered investment advisor.

It’s clear to me that yesterday’s marketing techniques and presentation strategies are in need of complete overhaul.

Kudos to Richard Kado of Genesis Financial Products who delivered what, for an actuary, was a riveting presentation on new developments in indexed product design. Genesis’ research has shown that longer indexing periods (multi-year) deliver the best interest growth over time. He also enlightened the audience on the tough balancing act providers face in terms of providing annual liquidity balanced with the attempt to maximize cash value accumulation.

Aviva’s Mark Heitz presented a splendid albeit brief overview of the current annuity market and made some positive predictions about adoption of indexed products by broker-dealers and banks. After the meeting I had treat to share dinner with Mark and found him to be a very humble, classy and passionate industry leader. Mark also agreed to be my interview subject for an upcoming “Leaders & Innovators” piece

I’m anxious to find out how Day Two of this conference unfolds. More tomorrow.

©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.


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.

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

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

Yet, the annuity industry is beset with multiple challenges which may appear to some industry observers as intractable. These include a negative public image driven by intensely critical press reporting, cautionary statements issued by regulators to consumers, class-action litigation, compliance and suitability concerns, poor sales practices, opaque and complex products and ineffective consumer-facing communications.

As they emerge and intensify, the industry tends to swat at these symptoms of underlying structural problems as if it was swatting at annoying mosquitoes. But what is attracting the mosquitoes?

I say this in the context of my own extensive personal history in the fixed annuity industry. After 30 years of involvement with both annuity agents and annuity product manufacturers as an agent, agent recruiter, agent trainer, marketing company principal, industry marketing consultant, public speaker, industry thought leader and communications technology innovator, I remain an unvarnished advocate for annuity products. I also continue to believe in their vital role in personal finance. All advocates for the industry should wish that it achieves its full potential in the coming years. However, that goal cannot be reached unless and until the underlying disease that is causing today’s painful symptoms is identified, acknowledged and cured.

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

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

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

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

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

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

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

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

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

The Beginning of a Decades-Long Shift

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

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

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

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

Past is Prologue

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

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

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

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

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

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

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

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

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

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

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

Unique Perspective

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

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

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

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

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

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

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

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

Honesty & Honor on Both Sides

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

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

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

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

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

Unleashing the PC in the Rate Book Era

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

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

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

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

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

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

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

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

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

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

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

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