Many insurance agents are curious about exclusive distribution arrangements for indexed annuities but they also find the arrangements to be a bit of a puzzle.
That is even though exclusive arrangements have existed in the variable life and annuity market for many years, and in the broker-dealer community, too.
In the indexed annuity business, the traditional distribution model — where marketing organizations distribute annuities of multiple carriers through their advisor networks — was the only game in town for many years. But that changed when the exclusive model began to appear a few years ago.
Exclusive approaches are still relatively rare and the models do differ, but in general, an exclusive model in the indexed annuity market refers to the following. A product development or distribution firm sells one or more unique products through a limited number of marketing organizations. The products are typically “proprietary,” meaning the firm has designed the indexed annuities it sells through its network and it retains ownership of the design — even though the firm has partnered with a carrier that wraps and issues the policies.
Don Dady is aware that many producers are still not entirely clear about the arrangements, and that some even feel suspicious about them. But even though he co-founded an exclusive model company in 2006, Dady does not think that producer uneasiness is a bad thing.
In fact, says the co-founder of The Annexus Group in Scottsdale, “advisors should be suspicious.”
There are a lot of people who call on agents, offering new products to sell, incentives and other things, explains Dady. The biggest challenge for the agent is to evaluate all those offers, he says.
Do the due diligence
Rather than just going with a distributor because it offers highest indexed annuity cap or commission and then recommending that product to clients, Dady says, “advisors have to do their due diligence.” That helps strengthen value for the practice and the customers, he says.
On the other hand, failure to perform due diligence could result in “death by a thousand cuts,” he cautions.
For instance, say an agent doesn’t kick the tires on a plan to promote a product that pays the highest (most competitive) interest rate for the customer. If the advisor starts selling the product and but a “mistake” later turns up in the product that makes it impossible for the carrier to continue supporting the rate, the carrier may reduce the rate, Dady cautions.
“If the client then becomes unhappy, that will come back on the agent,” he continues. “Agents fear that, and they should fear that.”
Or, say the agent later discovers that the product has internal limits, chargebacks on commissions or penalties on clients for using a feature in a certain ways. Suddenly, selling the product with the highest rate can seem costly.
Problems of this kind have been the source of historical friction between independent distributors and carriers, Dady maintains. Some of this is “natural friction,” he allows, given the tendency of annuity distributors to focus on serving policyholders and of (stock) carriers to focus on increasing shareholder value.
But that natural friction has also led to “constant conflict” and “dysfunctional relationships” between agents, customers, distributors and carriers, he contends.
Much of that has to do with the race to offer the most competitive products. The competitive jousting has resulted in increasingly differentiated product designs. Although that has meant increased options for the buyer, it has also contributed to product complexity, Dady says. And complexity opens the door to product “mistakes” that later cause discord between producers and carriers, he continues.
Dady positions the exclusive model as an alternative. In his view, it better aligns the interests of all parties. He attributes this to the model’s combination of select wholesalers and carriers, specially designed proprietary products, intensive advisor training and education, and other services — rather than just one attribute.
In the indexed annuity business, Dady says, the exclusive networking model is not about peddling product. “It is about how to use indexed annuity products … and how to address a variety of customer needs and objectives. Innovative products are just one piece of that.”
Firms using the exclusive model do differ in particulars, such as product design approaches, methods, technologies, advisor educational opportunities and more. Since traditional distributors also differ quite a bit—in products, markets, sales support, and many other areas—it is easy to understand the agent head-scratching that goes on over the distribution models and available services.
That is why Dady encourages advisors to do their due diligence before making a decision.
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