Why guaranteed lifetime withdrawal benefit election rates continue to rise.
By Linda Koco
How national broker/dealers and banks decide which annuities to offer may be a bit surprising to independent annuity sellers.
At recent meeting in Chicago, two panelists — one from a national broker-dealer (B/D) and one from a national bank — named automated transaction capabilities, “fit” on the firm’s platform and ease of doing business as among the leading factors that influence their decision to sell one annuity over another.
By comparison, independent annuity professionals often say they choose annuities that offer good performance for the customer, competitive (and sometimes innovative) features, strong ratings (of the carrier) and suitable compensation.
It’s not that customer value and policy features are not important, the speakers indicated during a session at the recent annual LIMRA meeting. Those factors are top of mind too. But without the electronic capabilities and certain efficiencies, an annuity doesn’t have a prayer of getting shelf space at their firms.
At Edward Jones, for instance, the annuity carrier must allow its products to be traded via the insurance platform of the Depository Trust & Clearing Corporation (DTCC), said Merry L. Mosbacher, principal-insurance marketing at the St. Louis, Mo., B/D. The firm uses that for things such as tracking licensing, trading, financial activity reporting, daily positions, commission flows. The firm also uses other systems, such as AnnuityNet, for trading.
The bottom line, she said, is “we need to eliminate paper and place our orders electronically.” Where annuities are concerned, “we supervise every annuity transaction before the order goes to the carrier, and we rely on the technology interface for that.”
At Wells Fargo Retail Retirement, automation is also critical, said Bernard T. Garcona, senior vice president and director of annuities at the Charlotte office. “We won’t write any annuity off platform,” he said. “Everything we do is automated.”
A key reason is efficiency in processing, but he said it also helps from a regulatory perspective. When there are audits, he explained, the firm can get requested data to the regulators “in a matter of days, when otherwise it would take weeks.” It’s important from a suitability perspective too, he added, since “we disclose everything we need to disclose to our clients.” That includes annuity fees, M&E charges, subaccounts, riders and their fees, surrender charges, etc.
Standardization is an important consideration, too, said Mosbacher.
The traditional products that reps sell at B/Ds are securities, she explained. Stocks, bonds and mutual funds “are fairly standard, and mutual funds do not change,” so that’s what the firm wants to see in annuities and insurance products as well.
That preference can present difficulties, however. “The insurance industry seems to want to change,” Mosbacher observed. “That’s good for you but it’s terrible — terrible — for us, because every time a product changes, we have the challenge of re-training 12,000 advisors.”
As a result, Edward Jones tries to limit the product lines it offers, and it tries to drive the standardization of the product structure and features, she said. “The fewer the moving parts and the more generic the product, the better it will be in our system.”
In the annuity space, she said, “we have a standard design we like to have our carriers offer. We also ask our carriers to give us permission for a line item veto.” That enables the firm to offer what it wants, and to support those offerings with marketing and training, she said.
“We go through the products contact by contract, by every clause of every contract. We want to have a good understanding of the product and how it will be presented.”
At Wells Fargo Retail Retirement, a wide variety of annuity and life insurance products are available, says Gacona. The firm is a retirement planning business of Wells Fargo & Co., a financial services company providing banking, insurance, investments and other services.
Ever since the downturn four to five years ago, the firm has put new products through an extensive review process before deciding whether to make them available on its platform, he said. It is especially careful with annuities, particularly variable annuities, he added. That is because it the firm considers annuities to be “high risk products,” he said.
That “high risk” categorization means that Wells Fargo puts annuity products through a review by no fewer than five committees. This is a lengthy process that could take three to six months, depending on complexity of the product, Gacona said.
The appellation of “high risk” may surprise some variable annuity professionals, who consider the strong sales of the products in recent years as an indication of growing public acceptance of, and confidence in, variable annuities. (According to LIMRA, variable annuity sales in the first half of 2012 reached an estimated $75.4 billion, down some from 2011’s $80.7 billion for the same period but up from 2010’s figure of $67.4 billion.)
However, Gacona said that Wells Fargo has decided annuity products are high risk “because they represent a “reputational risk,” in that they “have not been well received by the press” over the last decade.
In addition, he said, variable annuities have “gotten complex.” And Wells Fargo has received a higher number of complaints from clients who purchased annuities over the years in comparison to other products. “The complaints run second compared to mutual funds,” he said.
The approval process gets bogged down if an annuity carrier develops a product and files it before ever asking Wells Fargo to sell it, he indicated. “Some carriers will come to us and say, ‘here it is, sell it,’” he said. The problem is, “we may not want to sell it.”
To be a good partner, the firm will try putting such products through the approval process, he said. “But it (getting approval) is a challenge.”
A more effective approach is a “true partnership,” where the carrier first consults the firm and gives it a chance to make some suggestions that might benefit the design, Gacona said, explaining that “we know what will work in our system and what will not work.”
As for what works, he named two key elements: The product must provide value to the client, and it must be somewhat easy for client and advisor to understand.
What about commissions
Mosbacher says Edward Jones does look at commissions, but in the sense that they need to be fair. For instance, in protection products, “we want to work with companies that price their products for the end consumer with fair compensation for the producer, but not the other way around.”
Gacona said that, in the annuity space, “we cap our commissions at 6 percent. But in todays’ environment, I think 6 percent is possibly higher than it needs to be. I think we should be looking at a world where commissions will be somewhat reduced, more in line with investment products,” and where the excess goes into more value for the client.
The size of the carrier: “If you overlay $300 million to $400 million on the company, can the insurer handle it?” asks Mosbacher.
Set-up for national accounts: “We need one single point of contact,” she says.
Education: With the complexity of annuities, “we live and die with education,” says Gacona. In 2013, all financial advisors at Wells Fargo will have to pass a required annuity course with a score of 80. “If they can’t pass the course, they can’t sell annuities.”
The speakers aimed their remarks at the insurance company executives who were in the audience. But the information may also prove useful to advisors inside those two channels, for the sake of understanding the why-and-wherefore. In addition, it may prove valuable to independent advisors outside of those channels, for competitive reasons.
It may also help increase the understanding of onlookers who have noticed that the annuity and life insurance sales in the two channels are no longer inconsequential. In 2011, full-service national broker-dealer (B/D) and bank sales of annuities exceeded $62 billion, according to LIMRA. The channels also sold $2.5 billion in total new life insurance premiums that year.
Linda Koco, MBA, is a contributing editor to AnnuityNews, specializing in life insurance, annuities and income planning. Linda can be reached at firstname.lastname@example.org.
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