By Kim O’Brien
“Many organizational strategies focus primarily on monetary benefits to retain and motivate quality employees. However, pay often is not the most important reason cited [for] being satisfied…”
Recently, Sen. Elizabeth Warren (D-MA), requested an accounting of incentive programs from 15 companies surrounding their annuity sales. The media response from annuity competitors that came with the announcement was predictably negative using incendiary terms like “peddlers” and “sharks.” So you think the quote above comes from an annuity carrier incentive program, right? WRONG! It comes from the Federal government’s Office of Personnel Management handbook called Human Resources Flexibilities. We have two issues with Senator Warren’s inquiry.
First, we’re reminded of the story Miracle on 34th Street made popular with the 1947 movie starring Maureen O’Hara. Kris Kringle was on trial and the very existence of Santa Claus was being questioned. But if Santa’s lawyer could provide authoritative proof that Kris was Santa, they would win and Kris Kringle would be free. The lawyer brings forth mountains of letters from the US Post Office sent to Santa Clause at his North Pole address but redirected to the courthouse. He declares, beaming, that if the US Post Office, an arm of the Federal government, believes that his client is Santa Claus that is “authoritative proof” that he is.
Of course this is not in a holiday movie and consumers of insurance products must be protected from bad sales practices and bad sellers. However, we must also make sure that the marketplace for buying lifetime savings protection is competitive, comprehensive and affordable for middle and lower income Americans. There are real life negative impacts to the proposed Department of Labor Fiduciary Rule and we need to address those openly and honestly. To ensure consumers are served with affordable and accessible annuity products we must get beyond the “happy talk” rhetoric and beyond the politics to what are the practical implications both positive and negative. Some of the real life impacts and outcomes of the Rule will, if applied to annuities, have lasting negative impact on Americans saving for their lifetime goals and who choose to use annuities because of their insurance guarantees and protection. If the federal government, in over 30 pages of its 74 page handbook, establishes the purpose and usefulness of incentives and promotes them as a necessary part of providing a skilled and motivated work force, shouldn’t the same be true for non-government marketplaces throughout the United States?
Which brings us to the second issue. Why is the Senator only interested in annuities? If we are dealing with the multitude of products sold in the employer-sponsored defined contribution space, why not also ask wirehouses, broker-dealers, and other security firms about their incentive programs? It is common knowledge that distributors of securities and mutual funds offer incentive programs to increase sales. In a recent article in MarketWatch, the statement was made that the securities industry had long ago banned these incentives. Really? Ask any mutual fund seller and they will tell you they earn bonus compensation when they hit an asset under management goal. Edward Jones offers two trips a year or one “SUPER” trip. So, why is Ms. Warren’s inquiry limited to annuities? Who or what is motivating this targeted hunt? The answer may prove instructive but does not alter the fact that the inquiry is a made-for-media distraction from the real debate over the merits and defects in the proposed rule.
The reality of incentives in insurance sales is that they benefit consumers as well as those who sell them. They do exactly what incentive programs are meant to do – provide a healthy and productive sales/work force that strengthens the satisfaction of customers and the bottom line. In fact, a company called Blackhawk Engagement Solutions tells us that companies with incentive programs have 27 percent higher profits, 50 percent more customer loyalty and 155 percent higher stock returns! For life insurance companies, that means a strong and reliable industry less vulnerable to economic crises and market slumps.
And, the insurance company staff who must review the policy for suitability has no knowledge nor do they even care if the sale helps the producer qualify for the incentive. They are responsible for complying with that state’s suitability statute and protecting the company from the real legal liability of an unsuitable sale. Talk about incentives. What the fiduciary advocates fail to recognize or perhaps don't know is that fixed annuities (because variables follow FINRA suitability rules) are the only product in the financial and insurance industries that require EACH and EVERY sale be reviewed for a determination of suitability before the policy may be issued.
Most importantly for the insurance business model is that the concentrated premium gain at specified periods provides investing advantages, risk pooling, and solvency protection which all help to provide the most competitive and innovative products to consumers.
Can we strive to make improvements to ensure consumers are best served? Absolutely! Should we? Of course! But let’s focus on the real impacts of the Rule and not this smoke screen from the real debate -“squirrel” anyone? Let’s figure out the real impact to consumers of the rule’s prescriptions and selling dictates. While we have this very short period of time, we need to focus on the Rule’s practical impact and how it will work in today’s annuity marketplace so we are absolutely sure that the results continue to provide middle and lower income Americans access to affordable and professional insurance solutions like annuities.
Kim O’Brien, The Annuity Advocate, was president and CEO of the National Association for Fixed Annuities annuities for 12 years. Before then, she worked in the industry in many capacities, including product development. Contact Kim at [email protected]
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