Workers expect their defined contribution plans to play a greater role in their retirement income than annuities.
By Steven A. Morelli
EDITOR'S NOTE: This is an extended version of the Perspectives interview featured in April's InsuranceNewsNet Magazine.
American College President Larry Barton is known for his straight talk from his perch as the head of insurance’s leading educational institution. He was in top form when he spoke at his college’s online town hall earlier this year, where he said he was very concerned about the industry and companies in particular. In a discussion with InsuranceNewsNet, he discussed what is concerning him about the industry and how independent insurance producers can thrive in today’s economy.
INN: In your Town Hall presentation, you seemed to have some concern about companies. Why is that?
BARTON: I think our country is in the middle of a colossal failure when it comes to protecting financial literacy, and specifically building financial strength for the future when it comes to products. And the reason is, obviously, you have broken social security systems. You have Medicare, which is extremely complicated for the average consumer. The good news is that roughly a quarter of all working people are still covered by a traditional DB (defined benefit plans). And you have about three-quarters of workers that are involved with some type of 401K or 403B. So you have some people that are in moderately good shape. But we know we have tens of millions of people at high risk because their primary source of income is Social Security or SSI.
I’ve never worried, nor do I think any sane person should worry, about the ultra-affluent. They have the tax advisors, the products, the structures, and the tax shelters to help them, and most important of all, they are diversified. They’re savvy people in terms of being able to invest in real estate or gold or mutual funds or whatever it might be that protects them. I’m more concerned about the middle and lower class where the products are often priced at a point that is difficult to attain. We’re in the middle of this very serious quagmire where a couple of interesting things are going on.
First, the actual cost of product has come down when it comes to life products, which is something that the industry has done a lousy job of advertising. A term policy is somewhere between 30 and 50 percent cheaper than it was 10 years ago. Cheaper!
INN: Do companies not advertise term because they don’t want to sell more?
BARTON: That certainly plays a role in it. But the reality is that a term product is appropriate for many people. Secondly, there are huge exceptions, but the industry could be far more aggressive in talking about the benefits of whole life. We have somehow become intimidated, maybe by legislative pressure, to not talk about the benefits of tax-free buildup. But the benefits of tax-free buildup largely benefit the middle class and the people at risk. We should rally around and celebrate the fact that they can access that money, that it does grow over time and that it is forced savings.
We have one month a year now called life insurance awareness month, and they do a pretty good job, but it’s only one month of the year. This is not the Jerry Lewis Telethon. We should be out there not once a year – there should be a yearlong massive effort to say to the country that there are life and annuity products that can help you. Because if you rely upon the government to take care of you in your golden years, they will not be golden but copper, and you’re going to be lucky to get copper.
INN: What are some of the other challenges in life insurance, particularly in sales?
BARTON: You’ve got Suze Orman in Business Week saying “I am the personal financial expert of the world.” I admire her personality, but I find this statement arrogant.
Now my question for anybody to really ponder is this: What are we fighting? We’re fighting the generalist who somebody will call and say, “Here’s my problem, how do I solve it?” Suze Orman tells you how. She doesn’t have compliance on her back. She doesn’t have to go through a Monte Carlo. She doesn’t have to sit and do a risk tolerance. She just sits and spouts out generalizations, and does it in a very appealing manner. And I appreciate her bravado, but I’m not sure she’s a personal financial expert for the world.
I worry about that element. And I worry about the bank teller and branch manager, where customers walk in and say, “This is what’s happening and I need your help.” Here’s where I think that independent advisors have an opportunity -- looking to the banks as partners. Because the assistant branch manager at most banks has a better perch on the financial health of that community than arguably anyone else. They are the only ones in the community who see what goes in and what goes out. No one – insurance agent, financial advisor, minister – nobody else sees that.
Bank tellers are usually not credentialed; they usually don’t have designations; they typically don’t study with the American College two to three years of their lives, or any college. They just go through company training and spit out the company product. I don’t think that helps the middle class. I know it doesn’t help the people at risk.
INN: How do insurance companies fit into all this?
BARTON: Our country is deeply dependent upon the health and well-being of our insurance companies. If you really look at what happened since 2008 – the banks, the Lehman Brothers, hedge funds -- there’s been a hemorrhage of capital and of good will. People don’t trust a lot of these big institutions – that was not true of the insurance companies. There were exceptions, like AIG, but that was an outlier. For the most part, insurance companies are still paying death claims; they’re still taking care of everyone’s annuities. They’ve done a remarkably competent job of holding the fort while all of the soldiers around them were struggling and running out of ammo. Why? There’s only one reason – because they’re long-term investors. They invested their money a long time ago in lots of different assets, and because of NAIC and requirements that they be highly capitalized, they’re strong.
INN: So, why are you concerned about life insurance companies?
BARTON: The low interest rate environment is paralyzing the opportunity for the insurance companies to invest in the future. And at a point where companies made guarantees of 3, 4, 5, 6 percent on fixed annuities, they did so because of strong historical records of sound investment. But no one anticipated a Fed that would freeze rates effectively close to zero for potentially three years. Now, will these companies be able to continue to pay annuities? I guess they will. But they will have to be ultra conservative in being able to offer anything meaningful in terms of opportunity for a generation that’s already at risk.
So, call today and try to find an annuity, guaranteed, that will pay you 4 percent. Good luck. By the way, if you do, Steve, you call me right back, OK?
INN: Right -- these days, just doing a point above CD rates is considered great.
BARTON: Exactly. What are you getting on your checking account? Go to Citizen’s Bank, what are you going to get? .40 percent, if you’re lucky. So the insurance companies are healthy, strong and prudently managed. But, some made promises and guarantees that are causing them strain. I believe that the Fed is being imprudent by a policy of continuing the stagnation. At some point we have to raise interest rates, we have to loosen the economy, and that will be to the benefit of not just the currently invested, but of the next generation, because this is a very tenuous situation.
We need to make sure that the independent advisors explain the landscape to their clients. This is what they can do; say, “Typically I would recommend an annuity that’s guaranteed but interest rates are low. You may want to wait a couple of years until interest rates stabilize and go back up. In the meantime, look at this alternative.” But right now, all advisors are kind of in a pickle. They don’t know what to say.
INN: So what do producers do at this point?
BARTON: I think a smart advisor today is going to open the kimono and they’re going to be willing to talk about the options available to the client. Because so many for so many years were selling basically one or two ponies, they were not versatile in looking at some of the other products that are out there.
INN: Does that mean that insurance producers need to get a securities license?
BARTON: It may mean that they should consider it, even merely to hedge their career and to have opportunities in the future. I don’t think it should be mandated to have a securities license but if insurance agents want to move into that, it would be a wonderful time to start looking at it. Ultimately, there will be fewer companies in the insurance space. There will be fewer banks. There will be fewer mutual fund companies. We are seeing a shrinkage and consolidation and that is only going to accelerate. You have companies that are pulling out of the United States, and you have others that are doubling down on the United States. And that’s why if you have bet the farm on basically one or two products, you’re missing out on an incredible opportunity to help that client.
INN: Do you think the typical insurance producer is aware of the consolidation dynamics that you described?
BARTON: I’m astounded at how little people read. Yesterday, I spoke to a company at its annual meeting, and I asked this question, “How many people in this room read The Wall Street Journal in the last week?” And maybe it’s 10 percent. Shame on those insurance agents. Because you know who’s reading The Wall Street Journal? Their clients.
Those agents are out of touch because they’re getting inundated by the chief marketing officer pumping them up with the newest product and sales numbers but they’re not looking at the news. They’re not paying attention to the Fed. They don’t even capture at all what’s going on in Business Week or Fortune. And if you’re not looking at InsuranceNewsNet, how can you be relevant? You’re not going to be relevant if you’re not reading this stuff.
INN: What do you think of the discussion about moving to a fee-based system?
BARTON: I’m very concerned about a fee-based environment. I’m very concerned when the Certified Financial Planning (CFP) board says to Washington that the fee-only planner is the solution. The reason is that the average fee-only planner charges $2,500 a plan, and that’s before any product is purchased. I haven’t come across anybody who checks out groceries or anybody working at Costco who can spend $2,500 for a financial plan before they buy an annuity, or before they buy an LTCi policy. I admire financial planners for what they do, but ultimately it is about product. That’s why we need to be saying the fee-based model is just that – you’re paying a fee for insight. But ultimately you need product, you need distribution, you need underwriting and you need competent agents who know how to sell. And God bless them for making a commission, because cold calling and sitting with clients for hours is often a struggle -- and often a joy. For many people, it’s a challenge.
I understand why some people want fee-based, but for the most part, they are affluent, and that’s something that Washington is not hearing. It’s just the CFP board pounding their chest saying, “The fee-only planner is the answer to our nation’s problems.” It’s not. It’s one Band-Aid, and we’ve got a patient that needs a lot of help.
INN: When we interviewed Robert Miller, the president of National Association of Insurance and Financial Advisors, he said his members are sometimes the only people providing any kind of financial guidance in some small towns. And if you tell them to be fee-based, then many people won’t have anybody for financial advice any more.
BARTON: Exactly. And you know what they are going to do? They’re going to be turning to their HR departments, and I can already see it happening. The HR department is where they get their Aflac plan, their 401K. The HR department is becoming the pseudo financial advisor. And those people aren’t licensed. To my knowledge, most of those people don’t have any designations. They might belong to the Society for Human Resource Management, but that’s about policies, benefits, recruitment trends.
Some in Washington are considering a requirement that you cannot give any counsel on an IRA to an employee without having fiduciary responsibility. HR managers in this country do not have a fiduciary standard to those employees to be financially literate.
If people have an issue with an IRA -- they want to build one, buy one, cash it out, change it – they should call a financial advisor. They should call a professional insurance agent. But the people in their HR department are not financial experts, nor should we expect them to be.
INN: Looking ahead at the year, what is going to affect independent agents’ business?
BARTON: Look for potential changes in products as the companies realign to this new reality. Look for potential mergers and acquisitions, because smart companies are right now on the prowl for companies that might be weaker but have had good margins in the past and a great field force. So look for your company or whoever you write your business with to potentially be in an M&A position. This will be a year of some significant mergers. And look for your clients to continue to be anxious. They are, and will continue to be.
INN: In addition to that, what about the discussion at the federal level regarding fiduciary responsibility? It’s been a couple of years since financial reform and they really haven’t defined things. Will anything happen this year or will it remain in neutral?
BARTON: Great question. In my opinion, there will be very little progress made this year on those issues, primarily because it is an election year and there were atomic-like efforts by the CFP board and others last year to race through some very hastily thought out proposals. In their prudence, the SEC, FINRA and the General Accounting Office – and I provided testimony to all of them – stopped and said, “We need to think this out.” And I’m delighted they did, because we can’t have another health-care [fight] when it comes to people’s savings and insurance. So I will be surprised if there are huge quantum leaps this year.
Steven A. Morelli is editor-in-chief for InsuranceNewsNet. He has more than 25 years of experience as a reporter and editor for newspapers, magazines and insurance periodicals. He was also vice president of communications for an insurance agents’ association. Steve can be reached at firstname.lastname@example.org.
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