Retirement Income

RIIA Holds Annual Meeting, Communications Conference & Awards Dinner; Professor Zvi Bodie Cited for Lifetime Achievement

Apologies to OppenheimerFunds’ Kathleen Beichert, Chair of RIIA’s Research Committee as well as to RIIA’s research partners, Elvin Turner of Turner Consulting, and Larry Cohen of SRI-BI. Also, my sincere apology to JordenBurt’s Joan Boros.

A cut/past error earlier caused the contributions of these individuals at RIIA’s Annual Meeting to not be mentioned in yesterday’s article (I create these articles in Word and them past them into the blog application). Please see the section I’ve added in the text below.

On Monday of this week the Retirement Income Industry Association (RIIA) held its Annual Meeting and Awards Dinner. Over the course of a long but stimulating series of presentations attendees were left with a vivid sense of the unique value RIIA brings to the retirement income industry. Where else does the cross-silo retirement income conversation take place?

RIIA’s Founding Chairman, Francois Gadenne, kicked-off the day with a presentation summarizing RIIA’s mission and goals including a report card on the substantial progress that has been made in achieving them.

The various morning sessions offered specific insights into the important work being undertaken by RIIA’s various committees. Laura DeFraia (Wachovia), Laura Varas (Financial Research Corporation) and Elmer Rich (Rich & Co.) highlighted results from RIIA’s Employment Survey.

Rick Nersesian, formerly Director of Retirement Income at UBS and now a private consultant, discussed ongoing efforts to expand RIIA’s membership ranks.

Royal Bank of Canada’s Ron DeCiccio, Chair of RIIA’s Education Committee, was joined by Retirement Learning Center’s John Carl, in a presentation about the expansion the curriculum that will lead to the awarding of the professional designation, RIIA Retirement Income Expert (RIE).

Kathleen Beichert, Chair of RIIA’s Research Committee, invited Elvin Turner and Larry Cohen to describe RIIA’s latest research efforts. Larry and Elvin delivered a concise overview of RIIA’s next research report addressing, in part, the number of financial relationships consumers in different market segments maintain and the implications arising out of a shrinking of that number as retirement draws near. Like, the first research report in this series, the new report will provide completely new insights.

Russell Investment Group’s Richard Fullmer, Chair of RIIA’s Methodologies Committee, introduced RIIA’s Statement of Principles. These principles govern software used to illustrate retirement income projections. Larry and Elvin delivered a concise overview of RIIA’s next research report addressing, in part, the number of financial relationships consumers in different market segments maintain and the implications arising out of a shrinking of that number as retirement draws near. Like, the first research report his series, the new report will provide completely new insights.

Next, Joan Boros of JordenBurt LLP delivered a presentation on the organization of RIIA’s Compliance Committee including an overview of the Committee’s goals and future value to RIIA members.

Matthew Greenwald (Matthew Greenwald & Associates) delivered the lunchtime Keynote address entitled, “The Inevitable Grassroots Change”. Greenwald presented a moving and candid analysis of US retirement security in the context of real life examples.

In the afternoon it was my privilege to Chair RIIA’s Communications Conference. I began with remarks detailing the reasons why I believe that, for retirement income businesses, success is synonymous with excellence in communications.

The program then shifted to multiple presentations from elite financial advisors – “Income Pioneers”- who have already made a successful transition to income generation oriented practices.

Phil Lubinski, CFP® and Briggs Matsko, CFP®, demonstrated their communications techniques and financial strategies for income generation. Rick Miller, Ph.D., CFP®, talked about the impact of technology on fiduciary advisors and nimble product providers.

Harold Evensky, CFP, ®, summarized how financial advisors should be preparing to meet the retirement income needs of the Boomer generation. Evensky provided helpful glimpses into the strategies he has used to manage clients’ expectations across volatile market conditions.

The financial advisors’ presentations were enormously insightful and really drove home the point that the genius of successful advisors is due, in part, to their genius as effective communicators. I concluded the Communications Conference with the observation that Lubinski, Matsko, Miller and Evensky are members of an elite minority of advisors, and that the real challenge for the industry will be in introducing the educational tools and communications technologies needed by the 95% of advisors who have yet to acquire equal income planning skills.

RIIA’s Lifetime Achievement Award Goes to Professor Zvi Bodie

The next part of the program was the presentation by Research Magazine Editor, Gil Weinreich, of RIIA’s Lifetime Achievement Award to Professor Zvi Bodie of Boston University. Bodie is the Norman and Adele Barron Professor of Management at BU. He was selected for the award for his many achievements in applied research. Bodie holds a Ph.D. from the Massachusetts Institute of Technology and has served on the finance faculty at the Harvard Business School and MIT’s Sloan School of Management.

Professor Bodie’s textbook, Investments, is the market leader and is used in the certification programs of the Financial Planning Association and the Society of Actuaries. His textbook Finance is coauthored by Nobel Prize winning economist, Robert C. Merton. Professor Bodie’s latest book is Worry Free Investing: A Safe Approach to Achieving Your Lifetime Financial Goals.

Prior to the RIIA Excellence in Communications Awards Dinner there was a cocktail hour which included a book signing opportunity with two noted authors, Terry Burnham (Mean Markets & Lizard Brains) and Harold Evensky (Retirement Income Redesigned).

The Keynote Address was presented by Professor Bodie. His talk, entitled “Encouraging Adaptation” was funny, motivating and highly insightful. Bodie has a unique capacity to both simplify complex issues and pummel conventional wisdom. For instance, I’d bet money that his comments on Target Date mutual funds caused many audience members to re-examine their views on these popular investment vehicles.

After Professor Bodie’s address it was time to present the RIIA Excellence in Communications Awards in the categories of Best Advertising Award, Best Retail Communications Award and Best DC Communications Award.

RIIA’s media sponsors selected the various award winners from the many entries submitted. Armee Lee chaired the Investment Wires Committee that selected Nationwide Financial as the winner for its “Life Comes at You Fast” campaign. AXA was runner-up for its “800-pound Gorilla” campaign.

Evan Cooper of InvestmentNews presented the Retirement Income Communications Award in the New Media category to Morningstar for its Retirement Income presentation, part of Pincipia Presentations & Education module. Runner-up went to Jackson-National Life for the “But What if I Live” DVD presentation.

In the print category, Columbia Management took the top honors for its Columbia Management Retirement Learning Center. Securities America Investments was runner-up for “Imagine Your Life without Limits.”

Allison Cooke
of Sponsor of PLANSPONSOR presented the DC Advisor Award to Genworth Financial for its “ClearCourse Personalized URLs.” Receiving the runner-up award was Pacific Life for its “Destination Independence” piece.

Francois Gadenne closed out the eventful day with a gracious thank you to all that participated.

In thinking about the RIIA event I feel that attendees gained tangible value, and that RIIA may have exceeded the expectations of some. Important insights emerged that could only have come out of a meeting where multiple silos across multiple industries are brought together in a single conversation. That’s both unique in the retirement income industry and very much needed.

©Copyright 2007 David A. Macchia. All Rights Reserved

Inconsistent Odds in Monte Carlo! Developing Needed Standards for Retirement Income Planning Tools

Since the formation of the Retirement Income Industry Association (RIIA) a number of initiatives of genuine importance to its members have been launched. One of the most important is an effort to develop sound principles for the creation of industry-wide standards for the development of retirement income calculators, tools and illustrations that promote various retirement income products and strategies. On August 10 RIIA issued a press release on this subject but the effort is deserving of additional attention.

Led my Russell Investment Group’s, Richard Fullmer, CFA, RIIA’s Methodologies Committee has crafted and introduced a Statement of Principles to provide needed guidance in this critical area. Other members of the Methodologies Committee that assisted in the development of the Statement of Principles include Moshe Milevsky (IFID Centre), Anna Abaimova (IFID Centre), Peng Chen (Ibbotson Associates), Ben Williams (Retirement Engineering, Inc.), Phil Edwards (Standard & Poors), Pirooz Vakili (Boston University), Kazi Ariff (Bank of America), Kim McSheridan (Symetra Financial), Lowell Aronoff (Cannex Financial Exchanges), Bob Padgette (Klein Decisions) and Thomas Idzorek (Ibbotson Associates). The Methodoligies Committee will deliver a presentation on its work at the upcoming RIIA Annual Meeting and Awards Dinner to be held in Cambridge, Massachusetts on September 16-17, 2007.

Says Fullmer, “A significant number of retirement income projection models have been introduced into the marketplace over the years, and RIIA believes that many of these models may need improvements in disclosing key underlying assumptions or limitations. In addition, the output of various projections differs widely even with consistent input. This may lead to confusion among the public which threatens a loss of confidence in the financial services industry.”

Because of these concerns and inconsistencies, the RIIA Methodologies Committee took on the task of establishing a Statement of Principles as the first step in creating industry standards for developing illustrations, calculators, and other materials
necessary for retirement income planning and promotions. The Principles seek to promote the use of clear and effective modeling techniques, explanation and communications through complete disclosure of assumptions and the use of consistent terminology. To view the Statement of Principles, go to

RIIA’s Methodologies Committee also intends to provide:

A set of guidelines to these Principles which will provide guidance on meeting the RIIA standards.

A set of “calibration points” by which model developers can compare their assumptions and results against.

“As the baby boomers march into retirement, their shift from focusing on accumulating retirement savings to creating a secure retirement income makes consistency, clarity and understanding of income modeling more urgent that ever,” contends Francois Gadenne, Founding Chairman of RIIA and CEO of Retirement Engineering, Inc. “RIIA is an organization that succeeds because of its members’ active leadership and participation. The members of our Methodologies Committee felt strongly that RIIA take responsibility for improving projection models because a failure to do so is a disservice to both the retirement income industry and the clients we serve. It is gratifying to see the early results of their important work,” says Gadenne.

A full report on the Statement of Principles as well as updates from the other RIIA Committees will be provided at the upcoming RIIA Annual Meeting and Awards Dinner on September 17, 2007 at the Royal Sonesta Hotel Boston in Cambridge, MA.

To learn more or register for the event, please go to

About the Unique Opportunities for Attendees at RIIA’s Annual Meeting and Awards Dinner

Summer’s over, September is upon us. That means I have to get back to work on this magazine; lots of interesting topics to be explored, and some fantastic interviews to publish! Tomorrow I’ll publish part one of a multi-part series on the efforts underway to remake annuity agents into Registered Investment Advisors.

One of the major industry highlights in September is the Retirement Income Industry Association’s Annual Meeting and Awards Dinner.

In just about 2 weeks from now- September 17, 2007 at the Royal Sonesta Hotel, Boston – RIIA’s Founding Chairman, François Gadenne, will convene what is shaping-up to be a very unique event. With many of my readers active participants in the retirement income industry, you’ll not want to miss the opportunity to attend this one-of-a-kind gathering. Here’s how François describes the meeting:

The Annual Meeting and Awards Dinner provide us an opportunity to meet with a large group of Financial Advisors (FAs), their key membership organizations and their specialized trade magazines to learn, from their perspective, how well the industry is doing during this transition from asset accumulation to income distribution. We expect that attendance will range from 150 to 200.

One key question directed to FAs that will be explored at the meeting has already been publicized in our conference promotion materials:

“Do you know how to build a successful retirement income practice while the industry is slowly moving from an accumulation focus and towards a retirement income focus?” It’s an important question that will be answered by an elite group of advisors who have already successfully made the transition to income-generation practices.

The structure and content of the conference is meant to attract FAs who are interested in retirement income issues and want to do something practical about it, now.

The value of the conference for RIIA’s Regular Members and conference sponsors is that up to 50% of the audience will be FAs and that there will be plenty of time to interact with them.

During the morning sessions, the Committees will present the relevance of their work for FAs. In particular, look for key announcements and developments from the Research, Education and Methodologies Committees.

During the afternoon sessions, the Communications Conference will focus on the communications needs of FAs during this time of transition. RIIA’s Committees as well as experienced and successful Financial Advisors will present what they have done to address the question and their results to date. Their insights will be valuable to any retirement income organization looking to maximize success.

The lunch keynote (Matt Greenwald), afternoon keynote (Harold Evensky), and dinner keynote speaker (Zvi Bodie) are leaders in the field who have relevant messages for FAs.

Our Noted Authors (Terry Burnham and Harold Evensky) will sign books that were selected because they have relevant messages for FAs.

During the dinner, the RIIA Awards will recognize companies whose work and communications are particularly helpful to FAs during this time of transition.

Given the attendees list, much of the value-added will take place during the breaks, dinner, and desert/after-dinner drinks.

To register for the Annual Meeting, please visit

Interview with Heather Dzielak; Head of Lincoln Financial’s RISV Group Cites Need to Reduce Product Complexity; Describes Planning Focus As Key to Compliant Sales

dzielak-oct-2005Heather Dzielak is Senior Vice President of the Retirement Income Security Ventures (RISV) group at Lincoln Financial. She is heading a unit whose stated mission is to position Lincoln as the nation’s “preeminent provider of retirement security.”

Dzielak is an executive who’s clearly on top of her game. In this wide-ranging interview, she addresses a host of issues including product complexity, distribution challenges, communications, non-traditional competitors and income-generation strategies. She also describes Lincoln Financial’s strengths in terms of balance sheet and distribution, and she provides insight into how new distribution models may evolve to meet the future needs of various market segments.

Macchia – First of all thank you for agreeing to let me interview you.

Heather Dzielak is Senior Vice President of the Retirement Income Security Ventures (RISV) group at Lincoln Financial. She is heading a unit whose stated mission is to position Lincoln as the nation’s “preeminent provider of retirement security.”

In this wide-ranging interview, Dzielak addresses a host of issues including product complexity, distribution challenges, communications, emerging competitors and income-generation strategies. She also describes Lincoln Financial’s strengths and provides insight into how new distribution strategies may evolve to meet the future needs of various market segments.

Dzielak – You’re very welcome.

Macchia – To begin, Heather, would you describe your title and role at Lincoln.

Dzielak – Absolutely. The official title that I carry right now is Senior Vice President of the Retirement Income Security Ventures Group. And it’s a new group that was formed in October of last year. The group was really the outgrowth of the more strategic work that Lincoln has undertaken over the last three years.

Former CEO Jon Boscia had a vision that the baby boomers moving into retirement are going to create some unique opportunities for the financial services industry– most particularly for insurance companies, given our ability to underwrite both mortality and morbidity risk. It’s a capability that we believe is going to be critical to helping secure retirement income for our boomer clients.

With that said, Jon asked a group of us over the last couple of years to really think about what all of this means to Lincoln Financial Group. What does it mean in a way that wraps the entire company around it? Our current strategic intent is to be the leader in retirement income security.

We did some strategic work about two years ago. And in 2007, we really began to focus more on execution – the top initiatives that we as a company need to undertake to position ourselves for the future. And out of that work came some execution items, but more importantly came the realization that this opportunity is big enough; that it warrants a group of folks who could think about it and begin to understand and watch this phenomenon on a 24/7 basis. That really was the formation of the Retirement Income Security Ventures (RISV) Group.

It was a commitment by the company, recognizing the magnitude of this opportunity and the need to have a group that sits horizontally across our company to help each of our businesses make sure we continue to position ourselves as a leader in this space. So, that’s the group that I head, and it’s going to be a very lean, agile group. If I were to describe it to someone in our industry such as yourself, it’s like an internal consulting group. We really partner with the businesses to make sure we’ve got the focus and discipline to drive the strategic intent.

Then secondarily, there will be a subset of our group that’s really going to be focusing on the future. What do we think the world will look like 2 to 3 to 5 years out? Much more in an R&D capacity. Really observing the behavior of the boomers and making sure we stay ahead of the trends that emerge as they move into their retirement years.

Macchia – Right. So what you’re describing is a group that sits cross-silo.

Dzielak – Yes.

Macchia – I imagine that given the strategic importance of what you’re attempting to do, having a view across silos was inherently important. Is that right?

Dzielak – Yes. It was very important. It’s important to have the cross-silos seat, but also to sit on the same management team as the business leaders so that this group partners with them. When you think about driving initiatives and accountability, leadership from the highest levels and throughout the business units agreed that it’s about partnership. All of the business leaders, including myself, report to Dennis Glass.

Macchia – When you articulated the stated mission to become the preeminent provider of retirement income solutions

Dzielak – Security

Macchia – Security… Sorry, Security.

Dzielak – Yes.

Macchia – I said to myself that’s a mighty big apple to pick.

Dzielak – Yes, it is.

Macchia – What is it about Lincoln particularly in terms of its inherent strengths or willingness to innovate – what are the qualities that you understand that you think make that possible?

Dzielak – I guess I think about a couple of things. First and foremost when you think of retirement and retirement security, I want to be clear that our mission here isn’t about just creating retirement income streams. It’s more about understanding clients’ risks in retirement and a recognition that the products that we bring to market today are uniquely positioned to help clients manage many of the risks that are of top concern to them.

I can articulate the five risks that we’re focused on. If you think about what’s unique about Lincoln, at the highest level it’s the products that we bring to market to address market risk, inflation risk, longevity risk, healthcare risk – in some capacities there are some opportunities for innovation there – and the last one we call “sources of income” risk– that’s the recognition that clients are no longer going to be able to fully retire on pensions or Social Security and that there are other forms of income that they are going to have to build into their plan.

So, I guess that one level is about our products. That is, as we tend to phrase it, our “franchise rights”. There are some innovations that Lincoln brought to market within our product categories, such as Money Guard®, which is a hybrid product to help deal with long term care risk. We have an innovation around income called i4Life®. Both of those products have been recognized in the market as innovative products that are attracting and meeting retirement income needs.

The second distinguishing feature of Lincoln that gives us the belief and comfort that we can be the leader is our distribution. We have an incredibly powerful wholesale distribution group – Lincoln Financial Distributors. And what’s unique about LFD is that they’re a distribution group with all of the product lines under common management.

When we think about retirement income security, it’s not just about an annuity play, it’s not just about a mutual fund play, it’s not just about a life insurance play– it’s about how we bring our product capabilities together to effectively meet consumers needs. We have the competitive advantage in our distribution because they all fall under common management. We’re not dealing with three or four silos of product-oriented wholesalers. They come together under common management, which gives us the unique platform to launch what we believe is important in a retirement income security plan. We also have an incredibly powerful retail distribution outlet which gives us an opportunity to actually pilot some ideas we’re already talking about in a very controlled, disciplined environment. So it’s the combination of the wholesale and the retail distribution that we believe positions us well.

The next area that we view as a competitive advantage is our employer market business. If you think about the future of retirement income security and the future of retirement for many of our clients, they’re all likely going to be coming out of some employer sponsored plan. We have a very large employer based business – 403(b) and 401(k) – which we believe are going to lead to future growth. That business today is teaching us a lot about how clients want to think about their retirement. The bulk of that business actually sits right in the sweet spot – the baby boomers . So as much as our retail distribution gives us an opportunity to study how advisors are going to meet this need, this employer market business is giving us the window directly to consumers as they hit that tipping point and realize retirement is down the road. We’ve got an interesting opportunity to study them, and we believe that they are also giving us insights that will lead to industry leadership. It’s the bench strength that’s going to be the engine that will drive retirement income security.

Macchia – What else?

Dzielak – The last thing I’d say, and this is a little bit from the conversation we had two weeks ago, one of the areas where we have a lot of improvement to do…there is a belief here at Lincoln that the winners in this game aren’t going to be about just product. They aren’t going to be just about distribution. They are going to be thinking about creating that experience for the customer. And we’ve got a new model that emerged with the integration of Lincoln and Jefferson Pilot – we consolidated all of our customer service capabilities under common leadership – we call it a Shared Services organization.

But, there is a belief and an interest in that organization to really think about how we can service our customers in a very consistent way regardless of where they are in their life stage. Whether they came to us as a participant in an employer plan or came to us as an annuity contract owner through LFD, but service them in a way that’s consistent. Again, no matter where they entered Lincoln in their life stages, or no matter if they have a life insurance policy, an annuity policy or a defined contribution plan, Lincoln has created an environment where they understand why they own our products and they understand why those products are so critical for their retirement income security. I believe we’ve got the combination of products and distribution, but also somewhat of a structure that enables us to execute more effectively than we could have years ago.

Macchia – Right. Inherent in those advantages is the reality that Lincoln is a large multi-faceted company.

Dzielak – Yes.

Macchia – Do you think there’s an inherent competitive advantage going forward in boomer retirement on the basis of the size and breath of a company?

Dzielak – Yes, I do. I think size and scale is going to be critical. It’s much more difficult to move a bigger organization, but size and scale is so critical in the way we’re thinking about playing in this environment. If you hear what I’m saying about retirement income security, it’s about having the capital and the wherewithal to really honor those guarantees and points of security that we’re going to be promising to our consumers.

So, from a size and scale play I think distribution is going to be crucial. There are several ways to look at it – there’s breadth of distribution, but there’s also having the capital capacity to be the provider that customers truly believe can pay off on those guarantees. So size and scale do matter from a couple of perspectives.

Granted, it will challenge our nimbleness and our ability to execute. And that’s why, when I think about Lincoln, to have this unified strategic intent that drives every line of business is so critical because of our size. We need all of our 8,000 to 10,000 employees thinking the same way, so we’re not corralling stray cats. It’s really, David… it’s been kind of a refresher for a lot of folks that are on the ground here to have a single common strategy to drive to. I think it’s very unique for Lincoln, and it’s created a level of simplicity in how we think about our business which helps when you’re as big as we are.

Macchia – Heather, you mentioned advisors.

Dzielak – Yes.

Macchia – And I know that Lincoln has a large and highly skilled advisor distribution network.

Dzielak – Yes.

Macchia – That collides demographically into a consumer base of tens of millions of people who will be needing distribution guidance in the future. Moss Adams in a recently released LIMRA study indicated, among other things, that 70% of the industry rather, is made up of solo practitioners who don’t want to grow, and that in absolute terms there’s too few advisors for the amount of available prospects who will be needing assistance. I wonder what you think about when you hear me say that, and what you think the implications are for advisors and for other forms of distribution?

Dzielak – I completely agree with you. It’s one thing we think about a lot as we’re embarking on this work.

One thing that we believe in wholeheartedly at Lincoln is advice. I didn’t say advisor, I said advice. We’ve built a very profitable, successful business based on a face-to-face advisor relationships, which I believe will continue to be absolutely critical in the markets we operate in today. But, the reality, as you just stated … I mean there’s the whole other side of the population that either has chosen not to engage with an advisor, for whatever reasons – and we’re going to be studying that – but also the population that may never choose to engage with an advisor.

I don’t believe it’s completely about wealth and wherewithal. I think people like to do business the way they like to do business. And what we are recognizing and discussing right now is a notion we call ‘stages of advice,’ … especially with the size of our employer-based business, we need to think about bringing advice to these customers in a variety of ways. Whether that’s online, through a call center, the OnStar kind of capabilities, or whether that be face-to-face– which could be similar to our high-end fee-based channels.

Or, there’s another face-to-face model that’s much more economic and also appealing to consumers who aren’t interested in the traditional advice channel. So, we also want to create an environment as I referred a moment ago as stages of advice. You may enter at one place and go as far as you can on the phone or on the web, but you may want to be referred out. So, it’s not about building separate self-contained advice channels, but advice channels that can give clients market entry into Lincoln in ways that are comfortable for them— but provide flexibility as they understand how complex their needs may be or may not be. That type of thinking is very much in infancy, but I think, in general across the company, there’s a recognition that the way we’ve been so successful today will continue to help us be successful in the future— and we also need to think of alternative ways to expand our reach to keep customers that we believe would benefit from our products and services.

Macchia – In my judgment, that’s a very well conceived formulation and the future is probably going to hold all of those pieces working simultaneously.

I’d like to ask you about something else and that is: What constitutes a “solution” to generate income? I say this understanding that there’s a more holistic view in terms of the other issues that need to be addressed. But, there’s a couple schools of thought about retirement income generation solutions. One is that it’s by definition going to require new types of products that have not yet been introduced in the retail world, and there’s another school of thought that says we have everything we need right now. We have ETFs and mutual funds and variable annuities and insurance products, long term care, fixed and variable annuities, etc., etc., etc., and that putting these products in strategic combinations is really the answer. I wonder if you have a view of which of those may be correct?

Dzielak – As of right now, I do believe that the products that are offered in the market today are ahead of the consumers. We have the right tools today to begin to meet the needs of retirement – whether it be with annuities, ETFs, mutual funds. The issue I believe we have as an industry is that we haven’t positioned them, talked about them or sold them to meet the income needs. They’ve still been positioned as accumulation products – even if you get into the withdrawal benefits on the annuities.

Bottom line, I do think on the whole we have the products that can carry us for the next 12, 18, 24 months. I think new product categories will likely emerge, probably more in the area of turning non-liquid assets into liquid assets. If you think about how much equity these boomers have in their homes, how do we convert that to income? So there’s probably new categories that will emerge – are reverse mortgages are the right thing? But, David, honestly I think we have the products right now. What we don’t have is the process to help the advisors better position those product options to meet the consumers’ needs.

Macchia – I agree.

Dzielak –I believe in my heart that we have made our products much more complex than customers can swallow- and advisors for that matter. I think we’ve out innovated ourselves. We need to move back to the basics and really simplify the products that we have.

Macchia – I also agree with that. Let me ask you about another aspect of this, and that is something that I see developing out there in the retail world. You have advisors who are increasingly interested in income distribution; they clearly need training and insight. But you have some that are tending to coalesce around what I would describe as analogous to the religions we have in the real world.

You have the religion of VA GMWB, you have the religion of target date retirement funds, or the religion of target date funds that are linked to a lifetime annuity, or you have other people who say that lifetime annuitization is the answer, others who say the religion of systematic withdrawals, and others who believe in time-weighted , segmented strategies. I wonder if you see this phenomenon, and if so, what you think the end game here is in term of choosing a religion.

Dzielak – We see it everyday– we are a very product lead industry. You’ll see certain advisors, brokers who migrate to their religion of choice. We believe that will continue to exist. We need to make sure in a product lead channel that we have the right solutions.

There is an emerging belief- not only at Lincoln, but I think in the market – not in your traditional wire house broker channels – that planning is really what’s going to bring advisor capability to the top, and what planning is about to me is understanding first the needs of the client and then matching the right product solution to meet those needs. And that’s the approach we’re taking here at Lincoln. I think we’ll have the most success as we move into this new era with those advisors and those advisor firms who really value the notion of needs-based selling and planning and aren’t as transaction and product lead. I don’t think you’re going to get away from it. I mean, it is very rooted in a lot of the advisors that we work with today. They specialize in one product line or one product for that matter, and have been extremely successful with it. There are solutions that enable them to provide some level of retirement income to those clients, but the real magic and the real successors will be those who take a much more planning lead approach.

Macchia – And, related to that, what about compliance and potentially future financial liability risk? If, for example, an advisor recommends to a consumer with $700,000, in retirement assets that putting it in a VA and using the GMWB as the retirement “solution” is the answer. Does that perhaps denote a problem in the future?

Dzielak – Absolutely. It’s interesting because that’s why we believe so much in this planning process that we’re working so hard on. It’s going to have some substance as to why you recommended that portion of the portfolio being an annuity or that portion of the portfolio being in this basket of mutual funds. It’s definitely a fine line, and we’ve engaged our compliance area in the work that we’re doing on the planning process.

We believe with the proper planning approach that it is going to be a much more compliant sale. Today, I don’t know, to be candid with you, what the thought process is in a lot of our advisors heads on why they recommend a certain portion of the portfolio in annuity. There’s not a lot of rigor around matching the annuity sale up with the income need. The tools and capabilities we hope to bring to market will give a lot more credence to the product recommendations to justify why a portion of the client’s portfolio does belong in an annuity and why a portion may belong in this insurance policy and mutual fund.

But it is a very interesting area, and it’s going to be. I do think we’re going to have to challenge the norm on some of the compliance. There is some game-changing stuff here that this industry really needs to step up and challenge traditional norms- around the annuity sale in particular, but also enable advisors to provide more advice than they do today.

Macchia – Your comments remind me of something that Wealth2 has recently done, driven by one of our large independent broker-dealer clients which is to develop what may be the first risk assessment process covering retirement income.

Dzielak – Yes.

Macchia – It’s obvious that this is conventional wisdom in accumulation, but the exercise here is to try to determine – based upon 17 questions – a client’s volatility factor and guarantee factor. In other words, what is the tolerance for variable versus guaranteed income? How much of the overall income should be provided, say, by a GMWB benefit? And what target rate of return assumptions should be used to develop, over time, the variable income stream? Does this resonate with you as something that’s important?

Dzielak – Absolutely. Yes. As I hear you talk and think about the work we’re doing, it’s very similar. When we think about accumulation, a lot of what went into driving the accumulation success in individual markets is: Are you saving in the right products? Is your asset allocation appropriate? Are you getting yourself enough upside and protecting the downside?

As we move into retirement and think about what clients are going to face, it’s much more about product allocation than it is about asset allocation. Product allocation helps you more effectively address the risk side of this equation. But I think what Wealth2k is undertaking is very similar to the types of questions that will lead to the product solutions that we believe are critical to securing income in retirement for these clients. And it’s the questions that we’ve gone out and talked to advisors about; they are not questions that are being asked en masse today.

Macchia – Clearly.

Dzielak – They’re not driving the recommendations that advisors are providing the customers.

Macchia – I think that, while I’m happy to hear you say it, and I agree with you completely. I want to ask you about something else and this is a question that I ask in every interview because it goes to the core of my beliefs of what’s at stake in terms of boomer retirement.

I have many times stated and have sometimes found absolute perfect agreement in my assertion, and other times I have been challenged, sometimes vigorously challenged, over my belief that in this high stakes contest over boomer retirement assets, the ultimate winners will not be those companies that have the “best products,” but rather will be those companies that are best able, most effectively able, to communicate their value to large and fluid segments of a marketplace. I wonder what … I wonder if you buy into that?

Dzielak – I completely agree with you. I do not believe this game will be won by product leadership or product innovation solely. I think that will be table stakes. When I think about retirement income security–it’s probably articulated in this interview in a way that makes you and potentially the readers of this interview think that it’s about products that bring security. To me, I think the more important aspects of security are a relationship with a company and an advisor that make them comfortable that retirement is going to be okay.

So when I think of what we could do at Lincoln and what we’re thinking about at Lincoln is creating that experience— but extend it well beyond our product set and give the advisor and the ultimate consumer, or consumer directly, comfort that Lincoln understands their needs. They’ve developed products, their capability, how ever they think about us, that addresses those needs and gives them comfort that they don’t have to worry about their finances in retirement. The winners are going to be a very customer-experience lead company.

Macchia – I agree again. Is it true? Do you have a formal experienced officer; someone who’s been identified…

Dzielak – No, we don’t. But in the group we spoke of when we first started this interview, I do have an area of our team that is focused on the product/service experience. So we are incubating that notion here within the group that’s been formed. The work they’re doing bridges across how we’re creating the experience and the products we’re building, the services we’ll be providing– how we’re creating that experience at every customer touch point. I think it will grow and emerge to something like an experience officer, but it’s very new territory for us, so we haven’t justified that role yet.

Macchia – I understand. I want to ask you about something else which relates to the communications question and the high stakes nature of this contest. But while insurers slowly and, in some cases, glacier-ly ready themselves to prepare for this opportunity, other types of organizations have set their sights on the same customer base. In terms of large asset management firms which for years have successfully developed, marketed and sold structured products in the institutional markets, there’s a great deal of focus currently on building products with guarantees and qualities that mimic, say, variable annuities or other insurance-related products, and selling those into the large consumer market right in the middle of the insurers’ ball field. And some of these companies are very large, very sophisticated and move quickly and have a high degree of marketing savvy. I wonder if you think about that. I wonder if you think about that in a year or two or three … that Lincoln or other insurers could be facing a whole new level of competition, and if so, what you think the implications of that might be?

Dzielak – Yes. We think about it every day. In this role that I have here at Lincoln, if you ask me who my peer group is, it extends well beyond – and it may not even include a lot of the top insurance companies that we face off with – it does include the asset management companies. It does include brokerage. It does include banking.

The world’s watching and very aware and concerned because they are the companies who have the customers today. If you look at asset management and defined contribution – a Fidelity, or an American Funds – they have huge client bases that, if they out execute us, they have a high likelihood of success. The one area that we still own is the guarantees. Yes, there are synthetic guarantees being built, as you know. Is that of equal value to customers? Is that level of guarantee going to be acceptable to the customers? It’s something that concerns us.

This is our game to lose and execution is going to be the key. We’ve got something special in the insurance industry. As you mentioned in your question, traditionally we’ve operated at glacial speed. The formation of this group here at Lincoln was based on a recognition and a challenge to pickup the pace, to out execute and to think less about operating at a traditional insurance company pace, but keeping up with asset management and brokerage firms.

The other thing I’d say to you, as much I get anxious about the activity going on out in the other competitors … is it all about one company owning this opportunity or is it about creating relationships with some of these forward thinking asset management companies? Is there a way to bring our franchise rights in combination with some of them so it comes together? We own this space. Who’s going to win this game? I don’t believe it’s the company that’s going to build all of the necessary capabilities, but companies that create those appropriate relationships with other folks in this industry who want to be leaders and bring our complementary skills together. So as I think about it, it’s not as much our strategic intent as it is that we want to be the retirement income security company; we may get there through joint ventures, through partnerships or building our own capabilities. That’s still to be determined.

Macchia – I actually see the potential of that in a similar fashion. I think there are important strategic opportunities, but I also think that a minority of insurers will be able to execute on those strategic opportunities.

Dzielak – Yes.

Macchia – But, for those that do…

Dzielak – it will be big.

Macchia – It could be really big and highly rewarding.

Dzielak– Before I forget, when I think about partnerships and joint ventures, the other thing that the insurance industry has been woefully behind on is technology. So, when you think about creating this experience for customers– is there a way for us to leap frog some of these other industries or competitors that we just talked about and think about joint ventures more on the technology and service side, too? It’s not just about the assets and asset management and insurance, but also looking towards technology as being an enabler. How do you create some distinct competitive advantage there, too?

Macchia – Well, in my commercial life I’ve certainly staked a large financial bet on the truth in what you just said.

Dzielak – Yes.

Macchia – We’ll see. Heather, we’ve covered a lot of ground. Is there any area that I have failed to address that we should talk about?

Dzielak – The only other comment I would make is that we’re just at the beginning. There are a lot of folks out there that don’t believe that the wave has hit yet, and question why everyone is focusing on retirement income. One of the things we talk a lot about here as a real challenge as we embark on the next one to three to five years is that we recognize that it’s an evolving era we’re entering.

A lot of the work that we’re doing today is creating capabilities that will allow us to watch and study consumer behavior, so that we’re ahead of the trends. One thing I worry about and that we’ve tried to be careful about here at Lincoln is to build capabilities and infrastructure that enable us to evolve. I can guarantee that what we understand today is going to be very different than how we understand it two years from now. We need to create environments in financial services that allow us to observe customers at a much more direct level. Most of what’s driven our business today is a lens through our advisor channel. The financial services industry needs to take some learnings from the consumer products industry and other industries – the credit card industry – that have become much more in-tune with buyer behavior. I think we’re going to learn a lot from our customers in the next decade and we better be setting ourselves up to be willing and able to learn and capture those learnings and transition them into products and solutions.

Macchia – On that very large thought, I like to transition into a couple personal questions, if I could.

Dzielak – Sure.

Macchia – The first one, Heather, is this. If I could somehow convey to you a magic wand and by waving this magic wand you could affect any two changes that you wish to make in the world of financial services, what would those changes be?

Dzielak – Oh, my goodness. That’s a big question.

Macchia – It’s my specialty.

Dzielak – If I could change anything, the one thing that I see holding companies back from progress is – how do I say it – silo or segment mentality. I believe that the way that companies – and I’m not just speaking to Lincoln, I’m speaking in general – the way that we’re structured, the way we’re “incented” drives the behavior today that’s not aligned with how customers interface and buy our products and have relationships with our companies. So, if there was a way to break down the silos and get more enterprise customer-facing thinking, I think progress would move at a much more rapid pace. Does that make sense?

Macchia – Well, to me it makes perfect sense. That’s why I helped to put RIIA together. That’s the reason. Let me ask you the next question. Which is: If you were not heading up the strategically important group at Lincoln, but instead you could have any position, any occupation in any other industry, anything in the world, what would you choose to do?

Dzielak – I’d actually be an entrepreneur. And I would be an entrepreneur that would be focused on proving financial advice to consumers. It’s interesting, I feel so passionate about the power of this opportunity, and I believe Lincoln’s the company that can be a leader. If Lincoln can’t or we can’t pull it off here because of the corporate culture or the size, there’s a tremendous amount of gratification I could get from personally figuring out ways to bring financial security to boomers.

I don’t know that I would engage in another corporate job. I think I’d like to be in an environment where I can actually affect execution on something I believe in. Whether that’s consulting or whether that’s building out my own advice capabilities. I don’t know what form it would take, but I would take the work I’m doing here and bring it into an environment where I can actually effect change and execution.

Macchia – Well, your passion for that is palpable. Last question. I’d like you to imagine your own retirement, but in its most conceivably perfect form. Where would you be and what would you be doing?

Dzielak – Where would I be and what would I be doing? My kids would be grown up and successful. I would still be very active. I don’t believe I would be– I know I wouldn’t be active in financial services. I’d be active in doing good for my community, doing good for the less fortunate and doing it in an environment where I never had to think about my finances. I want to get to a point in my life where I can really create a legacy for folks that are less fortunate. I worked with someone in the past who talked to me about income as freedom, and it rings so true to me. I want to get to a point where I feel very comfortable– and that’s not traveling around the world to me. It’s about knowing I can wake up in the morning and actually do good for people that haven’t been able to do good for themselves. For me, retirement is not about the glamour. It’s about the time in my life where I’ve taken care of my family, protected myself, and now have the financial wherewithal to make a difference in some else’s life.

Macchia – Pretty beautiful vision.

Dzielak – It will come true; I know it will. I think about it a lot and feel so lucky to have the life I’ve had, and I just can’t wait for the day when I can share it with someone who just hasn’t had that fortune.

Macchia – I wouldn’t bet against you. Let’s put it that way. Thanks so much.

Dzielak- I’ve enjoyed it.

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

What May Start-Ups and Retired Households Have in Common?

fg1Retirement Income Industry Association Founding Chairman, Francois Gadenne, has contributed numerous essays to this blog (soon to be called a “magazine” because that’s what it has turned into). Today Francois explores the similarities between the financial challenges of start-up companies and households. It’s an interesting way to look at financial dynamics which show remarkably consistent characteristics.

A key to understanding the 20th Century is to focus on the development of science. In particular, towards the end of the century, cumulative growth in science brought about a widely visible convergence of once diverging fields under a common narrative – evolution/systems dynamics – that allows for the explanatory merger of nature and culture and just about everything else.

For instance, think of Physics and Chemistry, Computer Science and Biology, Geology and Genetics, etc.

I remember the despair felt while studying in France in the 60s and 70s as it appeared that we were all condemned to make a life-limiting choice to become specialists who would be increasingly unable to communicate with one another. I also continually feel the surprise and joy since the 1980s with the increasing diffusion of generalizable findings from System Dynamics, to the New Darwinian Revolution and Complexity Theory etc.

Relevant concepts include the difference between stocks and flows, feedback loops vs. simple causality, time delays vs. immediate feedback, linear thinking vs. structural non-linearities, etc.

And, for the investment industry in particular, all of this matters before we even get to our own bounded rationality, biases, distortions, errors and defensive routines that we learn about in Behavioral Finance.

Here is a small example of such convergence in our industry: What may start-ups and retired households have in common?

Let’s start with the start-ups.

How do you kill a start-up company? There are probably more than 50 ways, but one has always amazed me because it often seems to surprise so many entrepreneurs. It is indeed counter-intuitive and it fits in one word: Growth.

The device that turns growth into a start-up killer is working capital. The enabler is success as evidenced by the growth of the business and its increasing demands for cash. As you grow, it is easy to let working capital requirements grow faster than your ability to raise cash from existing operations, lenders or investors. Pretty soon, you can run out of cash entirely.

This is an example what can happen with delayed feedback.

This puts the start-up at the mercy of the next round of funding and the tender mercies of funding sources, if they are available. Venture capitalists thrives on the situation while entrepreneurs get stomach ulcers. Funding the growth will leverage great wealth away from the latter and toward the former. This reality can be made more tolerable if the start-up is a home-run (rather than a single), grows far beyond initial expectations, given the injection of capital, and beats its competitors since start-up economics often leads to a winner-takes-all outcome. But what are the odds?

How does this relate to retired households?

This is the same class of problems that households face when managing their budget. How can you keep your expenses inside the time and dollar envelope of your cash in-flows as your family grows?

This problem is not limited to young households. Retired households can have the same experience. Health care shocks come to mind for instance. The problem in all cases is related to the lumpiness and delayed feedback of expenses vs. income. However, while there can be a redemptive upside for home-run start-ups, can there be one – ever – for retired households?

This would suggest that retirement income plans need to factor in such lumpiness and delayed feedbacks.

Let’s close with two questions:

- Are traditional retirement plans built for the best of all worlds? Do they assume a precision (instead of accuracy) that comes easily from automated computation but that does not fit well in the daily experience of the real world?
- When real-life shocks hit your clients, in what ways do your products and processes allow for correction and adaptation?

To be continued…

Francois Gadenne

Retirement Income Authority and Certified Financial Planner, Philip G Lubinski, Takes On Fixed Annuity Income Riders: “Quit Implying It’s Simple!”

On the topic of retirement income planning Phil Lubinski is one the most experienced and knowledgeable financial advisors practicing. His virtually exclusive concentration on income distribution over more than two decades places him among a tiny minority of advisors who have mastered the investment and income tax strategies required to properly place retirement assets into a distribution mode.

Lubinski, who is both a friend of mine and business associate, doesn’t believe in easy answers to income planning needs. Too often, he says, advisors take the easy way out by substituting products for good planning. In response to yesterday’s essay Lubinski sent me his views on income riders that are increasingly being applied to fixed indexed annuity contracts. I thought I’d share his commentary as he makes some great points.

Insurance companies would be well-advised to move cautiously and carefully in the positioning of these fixed annuity income riders to both agents and consumers, in my judgment. Already, some broker-dealers have become concerned about financial liability potential arising out of their registered representatives’ positioning of variable annuities with guaranteed income riders as “solutions” to retirement income needs. Among the concerns expressed are worries that these riders in many cases may not provide step-ups in retirement income over time. This worry is arguably more urgent when the same type of riders are placed on fixed indexed annuity contracts where the long-term growth potential is less than with variable annuities.

The tendency of some insurance companies to seek the easy way out with their agents by appealing to the agents’ desire for an “easy” solution to a complex income planning challenge may provide insurers with short term gratification. But that gratification may come to insurers at the expense of long-term financial pain should consumers determine that these riders are really not the “solution” they expected.

David Macchia

I appreciate the attempts by annuity providers to create single product solutions, but I feel they are trying to cater more to the needs of the “fixed only” licensed reps, than to the true retirement income needs of retirees.

Research has shown that systematically withdrawing from a growth asset class is “risky business” Yes, a fixed indexed annuity protects the client from negative returns, but it does not protect them from losses due to “over withdrawing” during periods of “low” returns over normal market cycles.

Additionally, when markets are strong, every indexed annuity I’ve seen deprives the investor of S&P 500 dividends (2-3% of the total return) and credits interest based on complicated mathematics that I haven’t found an advisor or even a wholesaler can adequately explain it to me. All I know is that when discussing the rate-of-return goals of an indexed annuity with actuaries, I’m told that, at best, an EIA will deliver 50-60% of the S&P 500.

Moreover, when I’ve looked at research that has tested annuities with income riders, there is a significant probability that the account balance can go to zero leaving the beneficiaries nothing. Also, who in their right mind would want to tie the success of their retirement income to one company, one asset class and one product?

Imagine if doctors wrote prescriptions in this manner (we certainly wouldn’t need to worry about longevity any more). Indexed annuity products may have a place in an overall, multiple product/multiple strategy retirement income model, but they certainly are not a solution in and of themselves- no matter what income riders they may offer.

Retirees should be looking for advisors with legitimate credentials (CFP or ChFC), and multiple licenses (life and health, series 6, 7 & 65) who can demonstrate a comprehensive approach to retirement income planning. We’re dealing with an individual’s life savings here, folks. Quit implying it’s “simple”. It’s NOT

Philip G. Lubinski, CFP
Denver, CO

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

Which Industry Will Grab the Brass Ring of Consumer Confidence and Principal Protect Boomers’ Retirement Assets?

In spite of its warts, the indexed annuity industry and the products it provides may well play an important role in helping Boomer investors maximize their capacity to generate retirement income. People like me who advocate for an improved annuity industry hope that the indexed annuity industry will meet its varied challenges head-on and ultimately realize its full market potential.

Today I’d like to share some information about Wealth2k’s efforts to promote improvement in the indexed annuity industry in terms of sales practices, consumer education, product quality, suitability and agent productivity. As I see it these are the five main problem areas which cry out for improvement.

Armies of Virtual Agents In Response to 05-50

Largely in response to the publication of NASD NTM 05-50, about 18 months ago Wealth2k developed a vision for a new and better way for annuity agents to market, present and close indexed sales. We believed that by fostering improvement in key areas we could help lift the fortunes of those indexed product providers that wished to be perceived as being tangibly separated from the poor sales practices and inferior product designs that were driving significant business to some providers.

In part, Wealth2k’s new strategy was designed to help annuity agents increase their productivity, thereby making it possible for them to begin to transition to selling indexed annuity products that offered greater consumer value albeit with lower commissions on a percentage of premium basis. Increasing the productivity of annuity agents is an elusive goal that has not received the attention it deserves.

Annuity agents typically do not connect with enough prospects for the products they sell. So, among other things, the Wealth2k strategy would have utilized our Traject network’s capacity to dynamically create virtual agents for each human agent, technological alter egos designed to extend the human agents’ reach and brand.

The virtual agent’s job would be to support and strengthen the human agent’s capacity to prospect and educate on indexed annuities. The virtual agent meets with prospects at their web browsers and utilizes streaming video presentations to deliver high quality education on indexed annuity products. The engaging video presentations are fair and balanced and they serve to help prospects gain realistic expectations of an indexed annuity’s performance potential.

No human agent is capable of working 24 hours a day, not to mention working without salary and benefits. But that’s what the virtual agent offers as a non-stop “sales assistant” toiling away on behalf of its human boss.

Not bound by constraints of geography and time, the virtual agent meets with prospects at any place and at any time the prospect chooses. It’s the prospect who’s in control of every interaction with the virtual agent without ever being subjected to sales pressure.

After meeting with the virtual agents the prospect may click on a button to send a message to the human agent:” I just watched the movie at your website and this product seems to make a lot of sense. Let’s get together and talk about it for some of my retirement money. Are you free on Tuesday? 7:00?”

Growing the Pie

Growing the entirety of the indexed annuity pie was and is a major aspect of Wealth2k’s strategy. I’ve long stated and have written in published articles that the $27 Billion high-water mark for indexed sales has the potential to be four times that level in the not too distant future. $100 Billion in sales is an attainable goal because the underlying value proposition indexed annuities offer- principal protection combined with continuous interest growth potential- is one that is critically important to millions of Boomer customers as they enter the Transition Management phase of retirement.

Academic research has shown that investment losses occurring over the period beginning roughly eight years prior to retirement and continuing until ten years after retirement will cause a lifelong reduction in retirement income if not portfolio ruin. (to read an academic paper on this topic that I co-authored with three other members of the Retirement Income Industry Association click here).

To implement its strategy Wealth2k set about to create what amounted to an advanced “operating system” for the indexed annuity business. In terms of its distribution, the industry has been operating on what would we believed was analogous to the old DOS operating system for PCs in as much as the functions that couldn’t be delivered were serving to both limit growth and expand future financial liability- a bad combo, to say the least.

Our analysis revealed that the “old” operating system was deficient in these areas:

It had little or no capacity for real-time management by compliance officers

It didn’t put video at the forefront of its prospecting and educational efforts

It failed to leverage web-based technology to boost marketing effectiveness

It did little to help agents increase their overall sales volumes, and,

It wasn’t in harmony with broker-dealer culture or process.

For these reasons I led Wealth2k’s effort to develop the” windows” analogy application for indexed annuity distribution: modern, technologically-advanced, compliance-centric, consumer friendly, video enabled, even successfully reviewed by the NASD. This was a model for success if there ever was one!

The Peril of Being Too Early

Did it work? No. Why not? Simply put, it was just too far ahead of its time. By April of 2006 when we had finished the application that we called…

• The Massachusetts Securities regulator had not yet set his sights on annuity sales practices. He hadn’t yet sent a letter to every senior in Massachusetts advising them to exercise caution before purchasing an annuity.

• Regulators’ focus and criticisms over specious professional designations for annuity agents had not yet begun

• Hundreds of articles in the consumer press negative to annuities had not yet appeared

• The Parade Magazine expose on fixed annuities had not yet been published

• The devastating front page article (July 2007) in the New York Times had not yet appeared and been parroted by hundreds of other news outlets

• Certain class action lawsuits had not yet gained certification, and,

• Congressional hearings looking into indexed annuity sales practices had not yet been deemed necessary

On May 9 of 2006 Wealth2k brought together nine indexed providers for a meeting in Boston to explain our vision of how to transform, improve and set-up the indexed business for compliant, quality growth.

I opened that meeting by introducing our goals and during my remarks predicted virtually every sad event that’s taken place over the succeeding fourteen months. Honestly, I even predicted the New York Times’ front page article.

The value proposition that day to the carriers was straightforward:

Act quickly and decisively to separate yourselves from the questionable sales practices of certain indexed providers and upend your competition

.Take action to enhance your marketing and distribution by adding features that are far more “B-D friendly” in terms of compliance and process.

• Place high-quality, balanced consumer education front and center in the sales process

• Give your agents impressive, consumer-facing technology that allows them to reach more prospects with compliant, value-based messages

• Set yourselves up for robust growth at the expense of others who won’t be endowed with the same compliant tools, technology and strategies that you will be working with

The company representatives who came together that day were mightily impressed. But they could not as a group get together to act on the opportunity we presented.

Why? With the benefit of hindsight it’s quite understandable. When things are going well there’s little in the way of perceived urgency to make changes. The focus on short-term tactical needs and quarter-by-quarter sales goals is simply too powerful to undertake a structural repair job. Who needs to upgrade operating systems when the present one is still serving your needs?

Now, of course, it’s a very different world. The indexed annuity industry has two black eyes, a few broken bones and an uncertain diagnosis. The accumulated toll of so many unfortunate events over the past fourteen months serve to validate Wealth2k’s strategy, in my judgment. It’s past time for the industry to embrace a new model that can be perceived by objective observers as serving consumers’ interests.

My sense is that the entire indexed business is really up for grabs in a way that’s never before happened. Or maybe what’s up for grabs is not so much the indexed annuity industry as it is its value proposition. Already, other industries are targeting the very same economic benefits offered by indexed annuities. Have no doubt that competition from non-traditional sources will pose big challenges for all indexed annuity providers.

Will it be the structured products providers that grab the brass ring of consumer confidence? Or will it be one or more enlightened and committed insurance companies?

That’s a key question in determining which industry will serve millions of Boomer customers by addressing a fundamental financial need.

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

Risk Assessment for Retirement Income: A Logical Innovation Whose Time Has Come

The need for certain innovations is just too obvious to explain why they’ve taken so long to emerge. One example is the process of assessing an investor’s risk tolerance for generating retirement income. Why is this important?

Certain types of retirement income are guaranteed (lifetime annuitization and GMWB income, as examples). Other income streams are not guaranteed and are, in fact, contingent upon the attainment or targeted, future investment returns over decades. What percentage of guaranteed versus non-guaranteed retirement income is appropriate for any given investor? And what targeted rates-of-return should be selected for that component of retirement income that is variable?

It’s now possible to answer these questions due to the advent of a formal retirement income risk assessment process. The risk assessment process begins with the completion of an online questionnaire that results in a “Guarantee Factor Score” and a “Volatility Factor Score” for each investor. Taken together the two scores provide financial advisors with the information necessary to illustrate a retirement income plan with just the right combination of guaranteed versus variable retirement income streams, not to mention the appropriate rates-of-return model for generating the variable income component.

This is big news, in my judgment. Suitability is well-served by the process of assessing retirement income risk tolerance. For example, is there a better way to provide a compliant context and process around the selection of a variable annuity GMWB rider to serve as the guaranteed income component of a retirement income plan? Rather than positioning the variable annuity as the “solution” to deliver retirement income, an inherently better approach is to position it as a vital component of a larger income distribution strategy. I believe that positioning VAs in this manner will not only enhance suitability but will also lead to expanded sales of variable annuities.

The theme of assessing retirement income risk will be explored further in the coming weeks. Next month a large, independent broker-dealer will introduce the first online retirement risk assessment application. It’s an exciting development that I believe will lead to improved compliance and suitability through a whole new outlook on planning for retirement income needs.

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

EBRI’s Dallas L. Salisbury to be Featured in Leaders & Innovators Interview Series.

dsAn interview with Dallas Salisbury, President & CEO of the Employee Benefit Research Institute (EBRI) will be appearing soon as part of the Leaders & Innovators series.

EBRI is an unbiased research organization whose stated mission is to contribute to, to encourage and to enhance the development of sound employee benefit programs and sound public policy through objective research and education. EBRI is one of the 25 most frequently quoted “think tanks” in the world.

Salisbury joined EBRI as its founding in 1978. He is regularly featured at Congressional and Commission hearings, and in print and broadcast media around the world.

Salisbury assists as a member of a number of commissions, study panels and editorial advisory boards. He is a Fellow of the National Academy of Human Resources and a member of the Board of the NAHR Foundation, the Fidelity Research Institute Pyramid Prize Advisory Board, the Commission on a High Performance Health System, the Board of the NASD Investor Education Foundation and the Board of Advisors to the Comptroller General of the United States, the NACUBO Human Resource Quarterly Advisory Panel, and on the GAO Advisory Group on Social Security and Retirement.

He has served on the Secretary of Labor’s ERISA Advisory Council, the Presidential appointed PBGC Advisory Committee, the Board of Directors of the Society for Human Resources Management, the U.S. Advisory Panel on Medicare Education, and the Board of Directors of the National Academy of Social Insurance.

Salisbury has been honored with the Award for Professional Excellence from the Society for Human Resource Management, the Plan Sponsor Lifetime Achievement Award and the Keystone Award of World at Work. Dallas was a delegate to the 1998, 2002 and 2006 National Summit’s on Retirement Savings, and the 2005 White House Conference on Aging.

Salisbury has written, edited and lectured extensively on economic security topics, including 24 books and 129 book chapters and articles. His most recent books are: “Retirement Security in the United States: Current Sources, Future Prospects, and Likely Outcomes of Current Trends”, “The Future of Retirement Income in America”, “The Future of Social Insurance: Incremental Action or Fundamental Reform?”, “IRA and 401(k) Investing” and “Managing Money in Retirement”.

Prior to joining EBRI, he held full-time positions with the Washington State Legislature, the U.S. Department of Justice, the Employee Benefits Security Administration of the U.S. Department of Labor, (formerly known as the PWBA) and the Pension Benefit Guaranty Corporation (PBGC). He holds a B.A. degree in finance from the University of Washington and an M.A. in public administration from the Maxwell School at Syracuse University.

Interview with Chuck Robinson: Retirement Income Czar at Northwestern Mutual Cites Misalignment in Conventional Approaches to Income-Generation; Sees Need to Create “Marginal Utility” for Retirees When it Really Matters

8308Macchia – Just by way of background for my readers, would you be kind enough to talk about your position and title at Northwestern Mutual, and specifically, what your role there involves?

Robinson – Sure. I am responsible for developing the strategic initiatives for what’s called our Investment Products and Services Division. My primary focus right now is developing our retirement planning philosophy and strategy. However, I also have responsibility for strategic initiatives that include our wealth management company, our broker/dealer, the development of our annuity products and our mutual fund products, specifically the integration of Frank Russell Mutual Funds into the Northwestern Mutual Financial Network.

Macchia – Chuck, I know that you’ve been a very active road warrior, you’ve been a speaker at many industry conferences and among the things that you’ve talked about, and I’ve certainly heard your presentation at least a couple of times, is what I would categorize as a very innovative solution for long-term retirement security, albeit one with a different approach and focus than perhaps anything that we’ve seen anywhere else. I know you know what I’m talking about. I’d like to explore this in some depth because I thought that it was a rather fascinating solution when I first saw it. Cleary the creator of that solution, which I take to be yourself, has seen some insights that perhaps others are missing. I’d like you to take me through, if you would, what was going through your mind when you first thought of this solution.

Robinson – It’s really interesting. This whole idea that you refer to, that we call the Lifestyle Income Approach (LIA) or a phased income approach, is something that I’ve been thinking about for a long time. I began working on pieces of it 25 years ago when I was helping non-profit employees plan for retirement. I have spent most of my career focused on retirement planning and retirement income development. For about 20 years I was with a company called VALIC (Variable Annuity Life Insurance Company) which used to be a subsidiary of American General and is now wholly owned by AIG. Their whole focus was on developing retirement programs primarily for public employees, school teachers, university employees, health care workers, state, county municipal government employees, and eventually they got into the 401K market. The real genesis of the LIA concept lies in a group of ideas that are neither unique nor revolutionary, nor were they invented by me. They are ideas that have been around for a long time. Some of the ideas that are key components of the lifestyle income approach are things like the old split annuity concept, which was a pretty common part of any retirement planners arsenal when I came into the business 25 years ago.

I should point out that there was a time in my career when I actually worked as a retirement planning advisor. I started out as a financial planner in the field and spent a lot of time with people who were planning their retirement. There was no question in my mind that when I talked to retirees about their dreams, their hopes, and how they expected to live out their lives in retirement, they had a vision of how they would be living that was at odds with a lot of conventional thinking.

The conventional thinking was that you started out with a set withdrawal amount roughly equal to 60%-80% of your pre-retirement income and you increased it by inflation every year for the rest of retirement. However, the more I talked with people, the better I understood that they did not intend to spend less in retirement than they spent when they were working. In fact, they were actually planning to spend as much or even more money in the early years of retirement than they did when they were working. In those early years, they perceived they would still be relatively healthy, vital and active and they intended to live out their dreams of travel, recreation and leisure while they were still young enough to enjoy them.

Subsequently, McKinsey Consultants and others have conducted some fascinating research that has validated the tendency for affluent retirees to spend as much or more in retirement. McKinsey discovered that, on average, 40% of people spent as much in the first few years as when they were working. Among affluent retirees (those with more than $1 Million in investable assets), 60% spent as much money in the first few years of retirement as they spent when they were working. Those findings are certainly consistent with what I observed when I was in the field working face-to-face with both pre and post retirees.

The other thing that impacted my thinking was the fact that I began to pay a lot more attention to observing the way that elderly people live their lives. As I watched grandparents, aunts, uncles, acquaintances in my community live beyond 85 or 95, it seemed transparent to me that the nature of their lifestyle changed dramatically. As I began to talk with my clients about these observations, they confirmed that they did not see their lives unfolding in a linear fashion. Most believed that they would eventually slow down dramatically as the infirmities of old age began to restrict their activities. (Parenthetically, I might note that this was not a unique observation on my part. Michael Stein wrote a book called “The Prosperous Retirement” in the late nineties that articulated three stages in retirement: The Go-Go from 65-75; The Slow-Go from 75-85 and No-Go” phase beyond 85.)

However, I’ll never forget one experience when I was talking with a client about this issue and I was sharing my perception that people don’t spend the same amount of money all the way through retirement. I think they spend more in the early years of retirement and it starts to decline as they get older. Sometime in their eighties it starts to decline pretty dramatically. Certainly by the time that somebody gets into their nineties or even one hundred they are just not as active and they are not as vital.

My client suddenly looked at me and he said, “You’re describing my mother.” I said, “Well, tell me about mom.” He said, “My father was an executive for a small company that was bought out by a Fortune 100 hundred firm. Mom was left in pretty good shape. She inherited about $5 million in company stock and it is now worth about $15 million.” He said, “She’s eighty-six years old.” And I said, “Well tell me about how mom lives.” He said, “Well, three things are really important to mom. Number one is menthol Kool cigarettes (hard to believe that she lived to be eighty-six). Number two is the rock candy that she used to eat when she was a little girl. Number three is Vernor’s ginger ale.” I looked at him, I smiled and I said, “Well, tell me how much of those mom can eat or smoke in a year. He kind of laughed and I said, “Obviously what I’m asking you is, how much money do you think your mom is spending?” He said, “Well, she’s no longer living in the big house. She moved to a small condominium. She doesn’t travel the way she used to. I’d be really surprised if mom is spending more than $50,000 per year.” Now this is somebody who, when her husband was alive and they were young and they were healthy, was probably spending several hundred thousand per year.

The more I thought about that I really began to look around at people that I knew – relatives, neighbors, people who lived in my community – and when I speak to advisors I frequently ask them, “I want you to think of someone that you know, or knew, who was more than ninety-five years old. I want you to get a picture of that person in your mind. Tell me about the kind of lifestyle they live.” And obviously at ninety-five the issue isn’t “Am I going to travel around the world?” The issue is “Can I keep my driver’s license to be able to travel around the corner to go to the local grocery store.” Almost without exception, the level of income expenditure for consumable income needs beyond the age of 95 is significantly reduced, other than potential health care. Health care is always a major wild card and should be addressed separately with a different set of metrics and assumptions regarding inflation, costs and investment solutions.

There’s no question that running out of money is one of the worst things that can happen to retirees. However, for many retirees, the next worst thing to running out of money in retirement is discovering that they cheated themselves out of opportunities to enjoy their retirement by spending too little money when they were young, healthy and active. It became clear to me as I talked with people and sat down to plan with them that you had a lot of elderly people who had skimped and saved and had done without during their working years and in the early years of their retirement, only to discover in their late eighties or nineties that they have all this money left over. Some of that was a factor that we were going through the great markets of the 1980s. You had people like this woman, whose original $5 million had now grown to $15 million. The sad thing was, at 90 or 95 there was almost no marginal utility to that additional money. What difference did it make whether her income was $50,000 or $500,000? She couldn’t enjoy the additional income and she couldn’t use it.

On the other hand there is a tremendous marginal utility to every dollar that can be used on the front end of retirement. Although most retirees really want and can use more money on the front end, they are absolutely frightened to death to spend money on the front end of retirement because, “We’ve got to save for a rainy day.” There may be a time when we require hospitalization, long term care and/or home health care. Of course, this is precisely why I advocate addressing these issues first; then, dealing with the issue of generating consumable retirement income.

The next part of the LIA concept was trying to figure out the role of annutities. Most 65 year olds are reluctant to trade access to their assets for a slightly higher income payout. As a result, most immediate lifetime annuities are not purchased until 10 years after retirement when retirees begin to realize they may not have saved enough to cover the increasing costs of retirement. Considering all of these factors, the thought occurred to me that perhaps it made more sense to delay the annuitization decision until Age 85 when the mortality premium was so high, and was so large, that you literally could generate twice as much income as the traditional method for the same amount of assets; or, you could generate the same income for half the assets. At Age 85, the consumer has an enormous incentive to trade liquidity for a significantly higher income and by Age 85 most retirees will have a much better idea of whether they will need a larger income.

Of course, half of them will be deceased and will never have to deal with the issue. Deferring to 85 also gives the retiree liquidity and access to assets from 65-85 and aligns with the advisor’s interest in continuing to receive an asset based fee. Combining this concept of delaying the annuitization decision with an understanding of the phased nature of how people spend money in retirement and a desire to create a program that advisors would embrace really got me thinking about how you put all of these ideas together.

And then the next piece of the LIA concept was stimulated by an article Bill Bengen published in the Journal of Financial Planning in 1994. I think that everybody who works in the retirement income space owes an enormous debt of gratitude to Bill Bengen. His research caused all of us, for the first time, to think more realistically about the magnitude of a safe and sustainable withdrawal percentage. Almost all retirement planning approaches today are based on his conclusion that 4% is the Rule of Thumb for an initial withdrawal amount. However, his real impact on my thinking was to make it crystal clear, for the first time, that the real threat was a potential down draft in equity markets during the first ten years of retirement, even the first 4 or 5 years. In short, the major focus of retirement planning was on “Worst Case Scenarios” and how to insulate retirees from the shock of another period like 1965-l975 or another Great Depression.

The more I started thinking about all of this it struck me that there were three major objectives: number one is the goal to create multiple levels of phased retirement income spending that gradually decrease instead of increase; number two is to insulate investments in the first ten years of retirement from market declines; and, number three, is that all retirement planning is focused on worst case scenarios, yet worst case scenarios only take place about 15% of the time.

It was at that point that I started to put together this concept that you use potential annuitization at age 85 as a hedge or an option like a put, as a way to allow yourself to recover from bad markets in the first ten years of retirement. I believed advisors would buy into this since the odds were pretty low they would ever have to commit “annuicide”, as Garth Bernard calls it. The reason the odds are so low is that half of those who started at 65 will be deceased by 85 and there is only a 15% chance the survivors will have lived through a Worst-Case Economic Scenario. As a result, the odds are only about 7.5% a retiree will ever have to consider annuitization. Moreover, half of those who survive to 85 are likely to be so ill that it wouldn’t make any sense to annuitize so that the odds are potentially 3-4% a retiree will ever actually have to annuitize. Yet, 100% of retirees can benefit from planning to use annuitization as a hedge since they will be able to draw out, on average, twice as much money at the beginning of retirement as the conventional method. In order to verify these concepts, I started to play around with all of those things and I started to run some historical scenarios so I could look at what would happen if you implemented these ideas.

Then, the next piece of it that fell in place for me was a better understanding of the dynamics of longevity for a retired couple, as opposed to a single individual. One day when I was working with one of our actuaries on life expectancy projections, we started talking about this issue of who’s going to live beyond age 95? Of course everybody has seen the statistic that says if you take all of the couples age 65, the odds are pretty high that one of them will live beyond the age of 95. In fact, for the whole population, about 25% of couples will have one member who lives to Age 95. If you take the healthy part of the population, it goes as high as 50%.

However, as we talked it struck me that it might be more interesting to look at the opposite side of that number. The question I wanted the actuary to answer was: If I take all of the couples starting at age 65 how many of them still have both people alive at 95? The actuary came back and said that it was a very small number; it’s less than 3/10ths of 1%. I asked how many at 85? He said that it was only 18%. I said that’s a huge, huge insight. We know with a fair degree of certainty that beyond 95 we’re only planning for one person.

In fact, in the majority of cases beyond 85 we’re only planning for one person. Even if I bought into the concept that you’re going to spend the same amount of money every year throughout your entire retirement, I know with a fair amount of certainty that beyond 95 you’re only going to be spending 75% of what you used to spend even if you’re spending at the same level, you’re traveling as much, you’re playing golf, you belong to the country club, and all of those things.

The combination of all of these ideas that had been germinating for several years caused me to start working on creating a hypothetical scenario so I could test how the math worked out historically. The final piece of the puzzle that finally came into focus was the issue of how you address the potential costs of health care. What if you need all of that extra money for health care? Some proponents of the conventional method said to me, “We agree with you. Consumable income will go down from 65 to 95, but people need all of that extra money because they will have to pay for long term care, out of pocket expenses, drug expenses, health care premiums and all of the things involved with aging.”

The more I thought about that, intuitively, it just didn’t make sense to me. Health care expenses are projected to increase 7 – 10% and inflation, historically, has increased at only about 3%. Consequently, you’ve got a huge mismatch between a revenue stream rising at a 3% CAGR to meet a liability stream growing at 7-10% CAGR. How can we be sure that the extra money that you’re not spending on consumption is enough to pay for health care premiums and health care costs?

It was about that time that I ran across an article sharing the research being done by the Employee Benefit Research Institute (EBRI) under the direction of Dallas Salisbury, CEO, and Paul Fronstin, who is their Health Care Expert. I’ve known Dallas most of my career and he and Paul were kind enough to sit down with me to talk about this health care issue. I thought these guys were just right on about calculating what it might be and about how it would look. Using their research, It didn’t take long to create a spreadsheet and a set of reasonable assumptions to demonstrate that, in fact, the conventional method is unlikely to generate in Worst-Case Scenarios enough to pay for healthcare expenses, even if we assume consumption declines by 50% beyond 85 and 60% beyond 95.

It was at that point that it suddenly began to strike me that when you do retirement planning you’ve got to break this apart. You can’t plan for both consumption and health care using the same set of metrics, the same investments, and the same strategy. They are so different, the inflation rates are so different, the potential costs are so different, that you’ve got to set up a different method or process for planning for health care. It was at that point that we started working on just exactly how much money will you need for health insurance premiums and out of pocket costs and long term care? How would you fund that? How much would you set aside? EBRI doesn’t really address LTC and uses an accurate, but conventional method of calculating funding that’s not designed to meet Worst-Case Scenarios. We elected to rely upon EBRI’s estimate of health care costs, but to develop our own funding approach that would incorporate Worst-Case Scenarios and would utilize both the leverage in the mortality premium of a lifetime annuity and the risk sharing features of LTC policies.

We did this because the estimated costs were potentially so high and so unpredictable. EBRI estimates that a couple at Age 65 who expect to live to 100 may need almost $800,000 just to cover health care costs. Once you add in the cost of LTC, vision, dental and hearing, the worst-case estimate can exceed $1 Million. Admittedly, it is not very likely both members of a couple will live to 100 and it is unlikely they will incur the max Out Of Pocket expenses each year. On the other hand, we have found that our affluent policyowners tend to be healthier than the general population and they like the concept of trying to protect themselves against worst case risks by covering all the bases. Obviously, these estimates need to be customized for each client.

We began doing a lot of work evaluating a wide range of assumptions and have concluded there is no simple, absolute or single correct answer. Depending on a retiree’s assumptions, wealth and tolerance for risk, the number that needs to be set aside to fund healthcare and LTC could potentially fall anywhere between $1 million to as low as $160,000, per couple. Given the wide disparity in estimates, It became clear to us that the calculation has to take place apart from and before you deal with retirement income spending. As that fell into place, it became very clear to us that there was a hierarchy or priority in terms of how you solve these problems.

It was then that I hit on this concept that the real things that ruin your retirement happen at the end of retirement not at the beginning. You really need to start at the end, you need to say, “How do I address long term care? How do I address heath care? How do I address out of pocket expenses? How do I address longevity?” We do those first and we then work backwards. The minute we started doing that, we started running examples and 95 seemed like the logical place to begin because there is a fair amount of certainty that we are probably planning for only one survivor beyond that point.

We then began running all kinds of scenarios to identify the most effective way to address the objective of creating financial security with the least amount of assets. It quickly became clear that using the leverage of the mortality premium and the power of risk sharing made sense because these risks tended to occur at the end of retirement and were so large and so difficult to predict that shifting some of the risk seemed the most efficient and elegant way to plan for these potentially catastrophic events. Co-insurance is a concept that seems to resonate with affluent clients

We began working backwards in 10 year increments on how much money you would need from 95 to 105 and beyond that. How much do you need from 85 to 95? And of course what we discovered was that it was possible to save a lot of the money that the conventional method set aside for those periods and move it to the front end of retirement, especially in our network where we’re dealing with many affluent clients who by and large are pretty heavily insured. And we sat down and asked the question, “What if we have somebody who is very affluent and is very heavily insured?” We looked at an example of somebody with $6 million that they could turn into retirement income and $3 million of permanent cash value life insurance.

You then ask the question, “How much money does that couple have to set aside beyond age 95?” The current odds are that 99 and 7/10ths percent of the time there will be only one person left, which means that the person who survives will have received either a $3 million payout from their insurance policy or they will have $3 million in cash value. It’s pretty clear that the heavily insured individual needs to set aside less money to fund the period beyond age 95. All of a sudden, all of the money set aside by conventional retirement planning methods to generate income beyond Age 95 can now be pushed forward to use earlier in retirement or can be set aside as a reserve. Of course, we also discovered we can fund the same amount of money at Age 85, in a worst scenario, using a lifetime annuity income with half the assets, which means the other half can be pushed forward to the front end of retirement.

Macchia – Chuck, where do I begin? Let me ask you a couple of questions. The strategy that you outline with great articulation and detail clearly would run counter to strategies that are developed more in harmony with the conventional wisdom that plans for income that gradually accelerates, ideally according to an inflation assumption over a long period of time. Why do you feel that more people- including many smart people, have not looked at this issue in the same manner that you have?

Robinson – I think you’ve hit on the key factor, which is intuitively people would look at that concept and say you’ve got it all backwards. We have been taught, we have been coached, that you save for that rainy day. I think the second reason that more people have not focused on this concept is that most retirement planning has been done by people with a background in investments.

If you read most of the articles and most of the research, these are folks who spent their careers as investment advisors or spent it in the investment advisory sector of the financial services industry. There are far fewer people who come from the life insurance or risk based side of the business. Most advisors don’t even think about lifetime annuitization or lifetime annuities or LTC Insurance as being arrows in their quiver, or tools they would use to solve for retirement.

Most investment advisors would readily admit they are unprepared to advise their clients regarding Medicare/Medicaid or projected retiree health care costs. Moreover, most do not handle LTC insurance. They may outsource it to a strategic partner, but they don’t have that expertise or background. In general, investment advisors have been comfortable relying on the widely accepted (but misguided) conventional wisdom that the affluent (more than $1 Million in investable assets) don’t need LTC insurance and are generally wealthy enough to self-insure for both healthcare and LTC.

Macchia – Do you think there’s a chance that a strategy like yours is given less attention than it deserves because it’s coming from a life insurance company?

Robinson –It’s possible. However, I should point out that, other than a few trade association presentations, we really haven’t done very much to publicize this concept outside our own distribution network prior to this year. Nonetheless, I personally think there may be a nugget of truth in your observation, David. I can tell you that I just had an article published in the Journal of Financial Planning in March, 2007. There was some concern prior to publication that the article might be dismissed as “ just another life insurance company trying to come up with a way to sell high priced and expensive products that most investment advisors would never offer to their clients.” There was also some question as to why the Journal would publish an article from an Executive of a Life Insurance Company about “a proprietary method that might preclude independent advisors from realizing any value from the concept.” What is so interesting about these viewpoints is that prior to publication, the article was submitted for peer review to several investment professionals. The response was overwhelmingly positive and the feedback I’ve received since publication has been uniformly favorable. One reviewer commented, “This is the best article I’ve ever reviewed for the journal.” Another reader said, “My gosh, we should get this on the agenda for our retreats and for our conferences. We should be talking about this and debating it and thinking about this.”

Macchia – Perhaps because it reflects my own experience and background having entered through the life insurance door, I’ve always felt that people who begin their careers with some years of experience working with retail clients carry through their careers a lifelong advantage in having a sensitivity and a perception of how products and strategies pertain more in the practical, real world sense, as opposed to a more sterile, academic view. Do you put any credence into that?

Robinson – It’s an interesting observation on your part and certainly in my career it’s been a huge advantage that I’ve had that field experience, and I had it with a company that was in the insurance space because there is no question that I never could have developed this strategy without having had that background. Number one, I had the experience of sitting across the table, face to face with literally hundreds of people planning for retirement, so I had done a fair amount of consumer research sampling, admittedly unscientific and not very statistically accurate.

However, I had a pretty good idea of what people wanted and what was important to them in retirement. And secondly, I don’t know if it’s because I worked for a company in the insurance business, because I was always in the investment division of the company, I was not someone who was a big life insurance producer. However, I didn’t automatically reject the idea of life insurance and annuities. I was exposed to a lot of background, education, and understanding of the importance of insurance products. I never bought into the concept that was so widespread back in the early eighties that you buy term and invest the difference. I just never believed affluent people would not need permanent life insurance protection beyond age 65, based on my understanding of what their needs would be as they got older.

Macchia – Perhaps the main reason that today I’m so passionately focused on improving communications, and improving the ability of organizations to explain their value to consumers in language that they can understand, comes out of years of frustration; frustration in seeing some of the truly unique and valuable products that insurance companies offer, and understanding their inherent value, and seeing them poorly appraised and misconstrued so often to the detriment of consumers and advisors, and the insurance companies themselves. I think the responsibility for this state of affairs rests primarily with the insurance companies who 25 or 30 years ago, and this is not true for all companies, but for most companies, reverted to the stance that, We’re going to manufacture products and not worry about anything else.” The development of sales people, the development of good, concept-grounded educational tools, the development of good communication strategies, was largely sacrificed n favor of a focus of just manufacturing product after product after product. Thus, a vicious cycle was ignited that culminates in the commoditized world that we have today, where insurance products fight an uphill battle to gain recognition and acceptance.

Insurers actually attempt to combat this syndrome through self-destructive, retrograde product development; certain products types become progressively less consumer oriented over time as insurers have only newer product with higher compensation with which to compete for distribution. Do you feel that this is an apt description?

Robinson – David, I think that is an incredibly insightful, if not brilliant, analysis of why insurance products have not been more widely accepted. It mirrors my 25 years of experience in the business, spot on. Insurance companies’ home offices are filled with incredibly bright actuaries, attorneys, and product development specialists, but by and large, with a few exceptions, there are very few people who really understand how to market, communicate and explain these products in a way that not only meets the needs of the consumer, but that resonates with them so that they are motivated to enjoy the benefits of the product. Most companies focus on features instead of benefits. The most successful insurance companies have been those that recruited, retained, developed and valued executives with the background and/ or insight to develop consumer friendly marketing programs that focus on providing solutions to consumer needs.

Macchia – And/or advisors.

Robinson – That’s right. Even when they are selling to their intermediaries, they don’t know how to explain it to the intermediary.

Macchia – Let me push this analysis a bit further then, because the result of this concentration on manufacturing has created another vicious cycle that I see. You can see this reflected in certain product lines, like say, indexed annuities where over the past ten years what was a very pristine idea and relatively consumer oriented in design became progressively more opaque, more complex, more cost latent and more anti-consumer.

I lay the blame of this syndrome again at this same division 25 years ago to abandon everything but manufacturing, because what happened is, the advisors and agents of the world were not given the tools they needed to properly explain products. They were able to engage fewer and fewer customers and they had to resort to tactics that sort of camouflaged their true agenda. Because they were engaging fewer customers, it became more important to maximize the compensation on each of their declining number of sales on an annual basis. Hence the attraction to higher and higher commission products, with the carriers feeding into that by meeting a perceived need of the advisors by manufacturing even higher commission products, resulting in the cycle of regulatory problems that we have today. If you agree with this, how does this phenomenon potentially impact retirement and a life insurance company’s role going forward?

Robinson – It’s a great question, David, and I think you raise a really huge issue about how the insurance industry is going to respond to the retirement opportunity and the retirement challenge. I go to a lot of conferences around the country every year and I hear people speak like Chip Roame at Tiburon, the folks at McKinsey, and people like Moshe Milevsky. These are really bright people talking about the retirement challenge.

Most of these independent experts have made the observation that most of the major issues in retirement are really in the risk based insurance area. Several have suggested that this is the insurance companies’ game to win or lose, and yet, I hear a lot of people talking about the investment portion of the industry as the leader in stepping up to the challenge. In my opinion, there are some visionary and perceptive executives on the investment side of the business who may take this away from the insurance industry in much the same way they took 401Ks and defined contribution plans away from them.

It’s just fascinating that some of the investment companies have moved so rapidly to integrate annuity products, for example, and in some cases even life insurance. I look at some of these companies and can’t help but be impressed. I look at someone like Fidelity who is one of the top sellers of lifetime annuities and was one of the first companies to address the issue of funding retiree healthcare expenses. I look at somebody like Merrill who is putting together some tremendous programs that integrate annuities, insurance and investments. And, it’s also true of some of the banks. I look at a bank like Wachovia who I think has made tremendous strides in integrating all of those. Admittedly, there are also some insurance companies such as Genworth, Hartford and AIG that have done a wonderful job of manufacturing products that resonate with intermediaries and consumers.

In many cases, however, the investment companies and banks have stepped forward to take insurance products and use them more effectively than many of the companies in the insurance industry. I think it goes directly to your point and your issue of product manufacturers that don’t fully understand how to market, how to position this with the consumer and how to do it in a way that creates benefits for the consumer, the intermediary and the insurance company.

Macchia – I wish that I could put all of the insurance company presidents in a box and shake it in order to get their attention on this. Let me get back to the phased income approach. Tell me about your experience at Northwestern. When was the program introduced? How has it been received? And what are the results that you are finding?

Robinson – We started to introduce the phased approach back in 2004, so we’ve now had about 3 years where we’ve been talking about this concept at a very high level with advisors and the response has been overwhelming. The field intuitively grasped the importance, the advantage and the usefulness of this particular concept. However, the task of building out all of the supervision, compliance infrastructure, the technology platform, the training, the products, the services to be able to deliver it completely, is a pretty big issue for us. We anticipate that it will take several years to develop a robust capability to fully deliver our comprehensive vision of retirement planning. I don’t think that reflects the fact that the company doesn’t think highly of the concept or the opportunity. Obviously they’ve spent a fair amount of money applying for patents on the process, but I think it reflects that a project this big simply takes time.

Macchia – You say that the company has spent a lot of money applying for patents.

Robinson – They’ve spent a lot of money and a lot of support has been allocated. We have a high level, cross functional team that is working on this, but you’ve also got to remember that for the last two years we have had a major focus on transitioning financial representatives from being registered representatives to being investment advisors. These regulatory changes had an exclamation point put on them as a result of the court ruling that vacated the Merrill-Lynch exemption and Rule 202. Thank goodness we’ve spent a huge amount of resources and time to prepare for that. We’re in a pretty good place to respond to it.

Macchia – Are most of your reps now functioning as IARs?

Robinson – We have about 1300 who are advisors. 300 of them are Wealth Management Advisors who can charge a fee to do investment advisory or financial planning work. We have approximately another 1000 who are investment advisors who can use software that provides a comprehensive financial plan, but they don’t charge for the plan. That’s out of a total field force of a little over 7000. You might see a little more migration somewhere in that balance as time goes on. However, we think that ratio is about right. We’re huge believers in a network of specialists and we’re not sure that all of our reps need to become, or should become, an investment advisor, but they should have access to investment advisors for joint work in order to meet both the risk based needs and the investment advisory and financial planning needs of their clients.

Macchia – Is there any concern that some of the life insurance planning that the typical representative is doing can be deemed across the line into planning?

Robinson – Well, there’s no question that you always have to be focused on putting policies and procedures in place to make sure that doesn’t happen. We feel pretty comfortable that it’s manageable based on the current regulatory framework and environment. Obviously, that can change going forward. We think that the needs based solutions approach on the life insurance side is so focused that most financial representatives do not have to be Registered Investment Advisors. We’ve spent a fair amount of time educating inside the network as to what they can do, what they can say and how they can hold themselves out to the client. I

n the case of older, extremely successful life insurance representatives, they frequently prefer referring investment advisory work to one of our specialists in order to avoid the distraction, time and money required to build out their own investment advisory practice. In the case of younger representatives, with less than five years of experience, they are generally focused on building an insurance practice with younger policyowners who haven’t yet reached a point in their careers where their assets match the profile for investment advisory services. When they do run across someone who meets the profile, they can also do joint work with one of our investment specialists.

At the risk of oversimplifying the issues, I think the essence of the FPA lawsuit against the regulators is that we have way too many people holding themselves out as advisors when in fact they are sales people. I think that is the crucial point that the FPA has tried to make, and legitimately tried to make; that when I’m a consumer and I engage a financial professional, it should be clear to me whether they are acting as a salesperson or serving as an advisor with a fiduciary responsibility. I think the dispute over the last couple of years between the FPA and the SEC has helped to clarify that distinction. It has meant a huge amount of change and it has not been easy or inexpensive to turn around a ship as big as Northwestern Mutual or any of the other distribution systems, but I am guardedly hopeful that it will end up being a good thing for consumers and for the industry. However, the risk and cost of delivering a fiduciary standard of care is significantly greater and, as a result, there is no question that many consumers will end up paying more for advice and/or some segments of the consumer market may be underserved. In the long run, I would not be surprised to see industry and consumer groups seek legislative relief.

Macchia – Let me ask you about something we talked about a moment ago. You mentioned the loss of the 401K business. I remember 30 years ago, when I came into the business in 1977, and the insurers owned the pension business. Then they progressively lost it to the mutual fund complexes. Now we’re staring at this great opportunity of Boomer retirement security. If you were to give it odds on the basis of 10% to 100% that the insurers will get it together and seize the day, and take back the prominent role, how would you evaluate the odds?

Robinson – I was on a panel a couple of years ago and they asked that question and they had people on there from all of the major distribution channels. The panel was composed of representatives from the wirehouses , discount brokerage firms, banks, insurance companies and independent RIAs. Everyone was asked to respond to the following question: “Who do you think is going to win the race to acquire the Baby Boomer retirement assets?”

My response was that everybody is going to win. This is so big. The assets are so large that each of those various distribution networks are going to get a very large piece of it. However, I think what you’re really asking me is a slightly different question which is, “Will the insurance companies increase their market share or stay the same or will it decrease?” Everybody’s opinion is probably valid here and I have no particular crystal ball, but if I had to guess, my guess is that the insurance industry, as a whole, will not increase its share of Baby Boomer retirement assets.

Of course, there will be a number of insurance companies that will hold onto their share, maybe individually they will even increase it a little bit, but I don’t see across the board the insurance industry making the same kind of organizational, marketing, communication and platform changes that I see at companies like Fidelity, Merrill, Wachovia and others, especially the Independent RIAs. Every marketing survey I’ve seen indicates the consumer views the RIA channel as the one that is best positioned to address their retirement needs. Over the last ten years, the number of RIAs and their market share has steadily increased. Some financial services companies have moved quickly to organize themselves to meet this challenge and to position themselves to capture Baby Boomer assets. In my opinion, the insurance industry, with a few notable exceptions, has tended to lag behind the other distribution channels.

Macchia – I have said many times publicly, and continue to believe, and I’ve been called a romantic for believing it, that those organizations which will succeed in Boomer retirement will not be those with the “best” products, but rather will be those that are the best communicators, those able to compliantly communicate their value to a large and fluid pool of customers. I’m curious to know if you agree with my belief?

Robinson – I buy into it completely. I think that you are absolutely right, I think that you have loads of examples of that, and I also believe that this is one of those cases where retirement planning is so complex that it is difficult to comprehend. The consumers are so puzzled and confused that they are going to gravitate to those distribution networks that have a clean, clear message and that simplify these issues for them and explain the challenges and how to solve them in very simple, direct language that consumers will understand.

I think there are still large numbers of companies whose approach to the market is so complex, whose products are so complex, that not only do the consumers not understand them, but the intermediaries representing them don’t fully understand them.

Macchia – I so much agree with that. I try to get people to understand that effective communications equals clarity in the consumer’s mind, equals confidence, equals conversion. It’s too bad that you and I weren’t 20 years younger.

Robinson – I say that all the time, David, and I say it when I’m speaking with audiences of younger people entering the financial services industry and certainly younger groups of representatives at Northwestern Mutual.

For 25 years this has been one of the greatest runs that I can imagine. However, I wake up every day and think that the prior 25 years pales in comparison to the career opportunities to capture assets that young people have today. I’m like you. I wish I was 20 years younger.

Macchia – Thank you for your time and insights. I really enjoyed it.

Robinson- I did too, David.

©Copyright 2007 David A. Macchia. All rights reserved


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