The variable annuity industry kicked off its annual meeting with a call to “do the right thing.”
During the course of the annual meeting of the National Association for Variable Annuities here, speakers offered their take on what the right thing is.
For Charles Halderman Jr., president and CEO of Putnam Investments, Boston, “putting investors first must be a mindset.” The reason, he explained, is that “too often, we have put the interest of selling funds ahead of the obligation to make sure the investor is better for the long term.”
He cited three ways to advance this goal:
==Stop focusing on funds in a narrow asset class during and after a run-up in that sector;
==Disclose information to investors; and,
==Stop advertising high rates of return in a short time frame and in narrow asset classes.
These actions need to be taken, Halderman said, because watching narrow fund classes and advertising higher rates of return each discourage diversification. Disclosure needs to be practiced because it encourages investors to hold funds longer, he added.
These steps might help address one of two problems that baby boomers face: not investing properly. Coupled with boomers’ low propensity to save, this trend may result in many boomers not having enough money in retirement, he continued.
As evidence of this trend of not investing properly, Halderman said boomers and other investors are making mistakes such as switching to different funds at the wrong time and not holding equities at all. For instance, he told NAVA attendees that according to Investment Company Institute data, among the 20-30 age group, 38% had no exposure to equities. And, he continued, half of those in the 50-60 age range had either none or all of their investments in equities, a “bipolar finding.”
The industry, according to Halderman, needs to provide consistent and dependable returns because volatility encourages investors to move money among funds, an action that is not helpful for long-term savings.
Considered with other factors such as health care costs that are rising 5 times faster than the overall inflation rate and increasing longevity, the VA industry will be doing the right thing by investors by helping them alter these patterns, he said.
For Glenn Schafer, vice chairman of Pacific Life Insurance Company, Newport Beach, Calif., the right thing consists of several actions. First, Schafer said consumers need to be told that the VA is a good product. He cited product attributes such as the VA’s death benefit, which he called a “valuable commodity.” And, he said that other features such as principal guarantees also offer value.
In order to “do the right thing,” according to Schafer, the VA industry needs to put a limit on commissions and on maximum surrender charges. These are actions that “are not going to kill anyone.”
Another message delivered by speakers throughout the NAVA meeting was a simple formula: baby boomers plus tremendous need equals great opportunity. But, acting on that opportunity is where the variable annuity industry is currently falling short, many suggested.
Keith Millner, a senior vice president with Nationwide Financial, Columbus, Ohio, said that those in the industry need to think of themselves as coaches.
Listing about 25 financial advisor designations, Millner noted that many of them begin with the letter “C” but none of those letters stand for “coach.”
“Consumers need trained professionals to act like coaches instead of commissioned salespeople,” he added. “People are in denial, particularly the baby boomer generation. They are not engaged in behavioral change and they need help.”
Millner was referring to a steady stream of statistics and trends discussed during the conference suggesting optimistic retirement expectations and troubling economic trends such as savings rates and the future availability of funds from social programs such as Medicare.
Noting the “increasing divide between the ‘haves’ and ‘have nots,’” Millner told NAVA attendees that the focus is currently on consumers who have the most money. But, he asked, “What about the rest of the population? It doesn’t mean that there is any less need. It means that we have to be more creative in reaching those individuals.” If the industry can reach this middle market, “there is money to be made,” he said.
Achieving this goal may require a different business model and more of a focus on points such as transparency, he said. Transparency is important if the industry is going to be a coach, Millner said, because a key effort over the next 5-10 years will be to build trust.
Training will also be important, he continued. “Many investment professionals don’t have the training or the interest in changing the way they talk to consumers. It is the responsibility of the manufacturer to focus on training and not on closing.”
Millner noted that switching approaches may be expensive but should be looked at as an investment.
Other speakers also discussed new approaches to old questions. For instance, in response to the question, ‘Which is better: an immediate variable annuity or a guaranteed minimum withdrawal benefit for life?’ one speaker recommended an approach that relied on product convergence.
Rather than an either/or situation, Garth Bernard, a vice president of annuity product management with MetLife, Inc., New York, made the case for integrating both into a client’s retirement strategy. Bernard spoke during a breakout session on annuitization. He explained that a GMWB is a safety net for future income and at the appropriate time, annuitization using an immediate variable annuity offers “income now” and going forward. So, he said, the question is not if to annuitize but when and for how much.