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“It started on a mega-scale, with the mega financial institutions merging with one another. Now, its trickling down to planners.”

Thats how Raymond P. Donnelly, a principal at Advisors Resource Group Ltd. in Garden City, N.Y., describes the current status of financial convergence in the United States.

For this article, financial convergence refers to the melding of the three financial sectors–insurance, banking and securities–at provider, distributor, product, and service levels.

Producers, says Donnelly, “dont have a choice” about whether to work convergently or not–if, that is, they want to survive and compete with the “big boys like Merrill Lynch.”

Many experts are telling National Underwriter something similar. In the past year or so, they say, convergence eyes have increasingly turned towards the convergent sales activities at the grass roots, buyer-meets-seller level.

The cross-sector corporate liaisons, made possible by the Gramm-Leach-Bliley Financial Modernization Act of 1999, still make headlines, of course. But theyre no longer the only convergent game in town.

“No one is there yet,” says Richard C. Murphy, referring to fully integrated financial services operations. But he says “the brokers have made more progress than anyone.” Murphy is consultant to, and the recently retired senior vice president of, Fidelity Investment Life Insurance Company, Boston.

The market is becoming such that, if producers cant handle the multiple financial needs of clients, “they cant stay relevant,” he maintains.

This is especially evident in the retirement market, he says, where the demographic of aging baby boomers demands new approaches. As boomers near retirement, he explains, “they stop making decisions about how they will live and they no longer look for financial investment ideas. Instead, they start looking at building a financial plan, one that takes the whole picture– their home, travel, medical, income sources, and so on–into account.

“They want and need more holistic help.”

Producers therefore need to be conversant with various financial products, ranging from bonds and preferred stocks to rental properties, pensions, 401(k) distributions, IRAs, income annuities, CDs and more, he says.

“They need to be able to reach across sectors, not just across the kitchen table.”

Donnelly agrees. “We have to be able to work with multiple products, not just one. And we need either to build practices and alliances with professionals from different financial sectors or to develop networks for referrals to trusted experts in those sectors.”

His firm already does that. It houses two estate attorneys, two accountants, and two planners; has affiliations with a nearby mortgage broker and reverse mortgage company; and maintains an extensive list of referring professionals.

“We also have a full financial services marketing philosophy,” Donnelly says.

If planners dont take steps like this, they risk losing business to the large convergent companies that are now out looking for assets under management, he warns.

They also risk turning off customers, many of whom now prefer to work in a one-stop shop, he says.

“Our clients tell us we make life easy for them,
Donnelly notes. “They know they are not required or obligated to use all our services or professionals, but after meeting everyone here, many say they feel comfortable so they do all their business with us.”

At the corporate level, the same cross-sector sales issues are percolating. “Companies are starting to approach their markets by thinking about life events that need funding,” not about specific products to sell, says Kenneth Porrello, director of insurance practices at Deloitte Consulting-North America in Chicago.

Examples include retirement funding, long term care funding, and home purchase funding.

The next step, in convergent terms, will be to find ways to meet such funding needs by wrapping various financial products together, Porrello says. The integration will be such that the client can shift assets to meet his or her financial needs at different points in life, he says.

Something of the kind already occurs under a government-mandated plan in Switzerland, he points out. In the U.S., the structure would likely be a private plan, he notes, perhaps one purchased by employees at the worksite. But Porrello says the end result would be “one package, one underwriter, and one approach to take care of certain basic needs.”

Such a fully integrated program is not yet here, the consultant allows, but the holistic thinking about how to do it has already begun.

The leading players are already “studying their capabilities, determining the needs, and moving the pieces into place for creating new products and services” that could accomplish multiple funding goals, he says.

Some players, worried about todays thin profit margins, are not yet doing this “visionary” thinking, Porrello says. But if they wait much longer, their only alternative will be to become a niche provider in an increasingly small arena of niche providers, he says.

“That would be unwise. The market play today is to become a full financial service partner. This will help increase customer retention and ultimately profitability.”

Many convergent moves entail corporate strategies. For example, Allstate Insurance agencies in various areas can now provide consumers with information about opening bank accounts at Allstate Bank, as well as sell insurance.

Banking products and services “expand Allstate Financials portfolio of retirement investment products, which already includes annuities and mutual funds,” says Kevin Slawin, chief executive officer of Allstate Bank, Bannockburn, Ill.

Some providers have moved into convergence more deeply, by building new products for cross-sector packages. ING U.S. Financial Services is one example. It has designed an ING universal life policy that is to be sold with a premium finance loan from ING Bank.

Its strictly a high net worth product, having a minimum loan amount of $1 million, says James Gelder, president of individual insurance and specialty markets in INGs Minneapolis office. Rollout, set for this summer, will be through all ING distribution channels.

“The UL and the loan are dedicated products,” he says, meaning the loan can only be offered with the UL.

Premium financing is not new, Gelder allows, and such a plan could be developed with a non-ING bank. But, by working convergently, INGs insurer and bank can support one another under one corporate umbrella, he says.

That fits with INGs “top-down commitment” to promoting integrated financial services delivery throughout the organization.

That commitment is critical to convergence, he maintains, because it minimizes the traditional silo barriers that often “inhibit efforts to realize opportunity” and build revenue synergies.

Gelder goes so far as to conclude that, for convergence to work at the corporate level, “you absolutely have to have a top-down commitment.”

But a bottom-up commitment helps, too, he adds. That is, producers who see convergent opportunities can, and do, bring their ideas to a corporation for convergent implementation, he says. “If the corporation is receptive to the ideas,” it can work, he says.

No one would agree with that more than Bruce Hersh, a principal with Harris-Hersh Financial Services, Ltd., Buffalo Grove, Ill. He worked closely with ING in developing the UL-premium financing program.

The process of bringing the program to fruition was “very educational” and also “very frustrating,” he says. “We were dealing with actuaries and banking people and currency exchange rates and insurance contracts and collateral and exit strategies andit was complex.”

No one can bring out a program like this alone, Hersh concludes. And the people who do the work need to “be able to deal with all the players, including CPAs and attorneys.”

Producers need cross-sector skills even when working with many of todays insurance products, points out Murphy of Fidelity. Thats because many insurance products are already fashioned in convergent ways. For example, Fidelitys variable income annuity offers securities investments (through its subaccounts), an income guarantee for life, and also liquidity for the duration of the annuitants life expectancy, he says.

Producers who “get their acts together” on handling such contracts “can function in the convergent world,” he says.

But it will take some time before full convergence ever gets to strut its stuff, according to Barbara Lautzenheiser, principal of Lautzenheiser and Associates, a Hartford, Conn. actuarial consulting firm.

GLB notwithstanding, she explains, “the state insurance laws still sit where they are.” Marketers can do something about convergence in temporary ways, she concedes, but the state laws need to change before more convergent insurance products can ever come about.

Complicating matters is the fact that, where cross-sector convergence is concerned, the laws and regulators of the other sectors also have to be considered–those related to securities and banking, at state and federal levels.

Right now, Lautzenheiser says, “we have separate and distinct regulatory bodies trying to keep these things separate, at a time when consumers need something with all the functions.”

That is why cross-selling of products is what the industry is doing now, she says. Marketers “treat clients like the hub of a wheel, offering them separate and distinct products. Its converged service, not products.”

Lautzenheiser doesnt think the respective regulatory agencies will–or need to–change what they regulate. “Rather, they will merge the way they regulateso there is more consistency.”

This will be an evolutionary process, not revolutionary, the actuary predicts.

For now, the mood is one of dawning awareness of convergent potential. As Murphy puts it, “the single point of entry, the access to a menu of products, the ease of doing business–producers get excited about this.” In short, “distribution gets it. “


Reproduced from National Underwriter Life & Health/Financial Services Edition, May 27 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.