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How Distribution Strategies Are Evolving

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In order to create distribution strategies that can help financial services companies compete in an evolving marketplace, it behooves them to know where the industry is headed, Lucian Lombardi said at a workshop here at LIMRAs annual meeting.

Lombardi, corporate vice president, product and distribution research, LIMRA International, presented results of research done recently with McKinsey & Company, a management consulting firm. The research is useful not only in identifying trends, but also growth opportunities in the distribution of products meant to accumulate and protect income, he said.

Lombardi identified seven distribution strategies currently in use: advice-driven and event-driven, which are customer-centric strategies; direct sales force and independent sales force, which are producer-centric strategies; institutional and worksite, which are sponsored-market strategies; and multi-channel strategy, which is a diversified strategy. Some companies use more than one of these strategies, but most are known for using one or two, Lombardi said.

Four components of distribution, which Lombardi defined as “delivery of a product and service in a manner consistent with the companys strategy and the preferences of its target market,” are market, point-of-sale, intermediation and manufacturing.

The market component has to do with the size, growth, needs and preferences of a companys target market. The point-of-sale component has to do with where the customer will transact business and who will assist them. Intermediation involves who provides sales support and business development assistance to channel participants. And, manufacturing has to do with how the organization, operation and economics of product delivery will evolve.

The point-of-sale component is emerging into a tele-underwriting sales implementation process, says Lombardi. The phone isnt a way to generate leads now, but its a way to close sales and will likely take a bigger role in distribution in the foreseeable future, he said. The worksite and the Internet are also emerging points of sale.

Currently, the most common online activities are checking account balances, such as at a bank, stockbrokerage or mutual fund, according to the research. However, regarding financial transactions, the overwhelming majority of Internet users continue to want face-to-face interactions, Lombardi said.

“This becomes apparent with insurance,” he said. “They want a local office and to deal with someone they know by name.”

Lombardi said these findings suggest that although use of the Internet is an emerging trend in distribution, financial services companies still need to offer multiple channels to satisfy the needs of a range of customers.

Account penetration is the ultimate goal of the customer-centric distribution models, Lombardi said. The first step in cross-selling, or financial diversification, is at the producer level, he said. The ideal position for a producer to be in is to be able to expand his product offerings and have the skills with which to do it, Lombardi said.

Advice-driven strategies will continue to be popular with financial services customers, he said. People generally arent sure how to distill the information they gather from the Internet.

To emphasize this point, Lombardi showed a video of a meeting where a Merrill Lynch broker said his recent experience with clients has been, “people want to listen, they dont want to do it themselves.”

In fact, LIMRA research suggests that interest in and use of professional advice has increased in affluent households.

When using customer-centric strategies, a company should continually shape products to fit an increasingly refined definition of the customer in order to build long-term loyalty, Lombardi said. This strategy can be centered around advice-driven means for the individual who seeks guidance from a planner; or, it can be centered around the event-driven process for customers who are interested in completing their own transactions. More than 65% of the affluent and middle-income markets are event-driven, or transaction-oriented, according to the research.

Lombardi pointed out a finding concerning the secondary advisors with which wealthy customers supplement their professional financial advisors. If the advisor is a certified financial planner, he is typically supplemented with a certified professional accountant, a stockbroker and a life insurance agent. If the advisor is a stockbroker, he is supplemented by a CPA, a lawyer or a life agent. If the advisor is a CPA, a stockbroker, a lawyer and a life agent supplement him.

“One common theme is a life insurance person is always involved,” Lombardi said. Each advisor has a skill set, but wealthy clients feel they need to work with a team, he said.

Independent financial advisors and planners are positioned to offer the best advice, whereas bank representatives are poorly positioned to offer advice, according to the research. The IFA and IFP have the most experience and many have graduate degrees. Bank representatives have the least experience with advice and generally lack formal education when compared to IFPs and IFAs, Lombardi said.

Bank marketing also suffers from lack of customer awareness regarding life insurance products, according to the research. Only a slight majority of consumers know that banks sell life insurance. Among those who do, only half would consider buying life insurance from a bank, the research shows.

The implication is that banks will be slow to capture life sales and will need to adopt different strategies from those currently used, Lombardi said.

“Build awareness, put it on ATM cards,” he advised.

Reproduced from National Underwriter Life & Health/Financial Services Edition, November 4, 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.


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