David Macchia: Over time, the executive leadership in insurance has increasingly been comprised of individuals who have no sales background. I’ve always believed that experience in retail sales generally imbues such individuals with a lifelong added set of insights that can be consistently beneficial over the course of a career. Do you buy into that?Clifford Jack: Not really. You know, I think you can pretty much start anywhere and have a unique perspective. Frankly, I think in the financial services industry it’s incredibly important to try to get your arms around the side of the balance sheet that you may not have grown up with. If you came from a sales or marketing or distribution background, it’s incredibly important to understand product pricing, capital requirements and all of the other financial structures — because both make a financial-services company work. If you sell things that aren’t economically viable, you’re not creating shareholder value. You know, I’ve seen guys on both sides of the aisle cross over and be quite successful because they have had the desire and the aptitude to be able to learn the parts of the business that they didn’t grow up with.
Do you think it’s easier for the person who started in sales to cross over into the other competencies then it is for the person on the other side to cross into sales?No, I actually don’t. I may not be answering the question in the way that you would have expected. I’m responsible for a number of different components of our company. Insurance is one part. We have an asset management firm; we have a broker-dealer, etc. And I’ve seen people who have no sales and marketing background be excellent in their understanding and the transition to those types of responsibilities. Now whether or not they would be good sales people is very different than whether they would be good managers, if you will, of the sales, marketing and distribution functions. I have seen folks both inside our company and at other companies make the transition quite successfully.
There’s been a major focus on the development of insurance characteristics, including the GMWB type riders, which have allowed variable annuities to be repositioned as vehicles offering consumers a unique combination of risk hedging and upside accumulation potential. Do you feel that this continuing repositioning of VAs will induce advisors who have previously shunned variable annuities to begin to embrace the product?Yes and no. I think it will induce certain advisors to make the transition to — or consideration of — variable annuities as part of their portfolio, but we can’t bank on that.
As an industry we have been very lazy, in my view. We’ve been complacent as insurance carriers in that we have been happy to disintermediate from each other. And I think many are assuming that with the advent of the solutions for lifetime, guaranteed income, people will naturally flock to these products. I just don’t believe that that is the case. The real heavy lifting comes in gaining an understanding as to how advisors are positioning products to their clients, and the platforms and the methods of distribution they choose. And their choice is key. So if we don’t adopt and adapt to their policies, and create processes that are conducive with what they’re looking for, the power of the product alone will not gain us the market share that we deserve.
Is it ultimately self-destructive to the industry to continue to have such a high share of premium coming from exchanges?Yes. And that’s the short answer. The long answer is a bit more controversial. For those in the industry, and those companies that are looking to have a long-term opportunity, if we continue to simply disintermediate from each other in the form of 1035 exchanges, and if we don’t grow significantly the pool of advisors that consider variable annuities as part of their clients’ overall portfolios, then we are missing what is likely to be the biggest opportunity to gain a significant market share increase that any of us will see in our careers. We have been beaten by mutual funds, we have been beaten by ETFs, we’ve been beaten by other components in the financial services industry, and the reason we have been beaten is that, collectively, as an industry, and I point the finger to our company and everyone else, is this whole issue of complacency and the willingness to continue to do business in the way that we’ve always done; not handling the difficult objections, and not growing the pool aggressively.
It means that we as an industry have to do the tough missionary work, whereby you’re plowing the fields and instead of going to the advisor that already sells variable annuities and attempting to disintermediate, which might take one meeting… It’s a more difficult decision for a company to instead ask their sales force to go do the truly challenging meetings, which are with people who have never sold variable annuities. That’s an effort that may take three or four or five visits. But once you change behavior and ask advisors to adopt a new strategy into the spectrum of what they sell, or what they offer to their clients, then that’s when we grow the pool. Growing the pool of assets has been a theme around Jackson for a few years. We’re going to continue to carry that flag very significantly.
Financial liability is staggering in its potential during the distribution phase because an investing mistake can cause consumers to run out of income while they’re still alive. So the resulting liability potential is so high for advisors, for distributors and for product manufactures that I believe people are going to require confidence not just in the advisor, but in the products and solutions themselves. I wonder if you agree with the assertion I’m making?I do. You have pointed to something that’s critical, that the mistakes in your drawn down phase are magnified greatly versus the mistakes in your accumulation stage. And we talk about shifting the mistake, if you will, and the burden of that mistake from the back of the advisor to, in the insurance industry, to the balance sheet of the insurer. If you go to buy a product that is a target-date product, target-risk product, a draw-down product where the firm is not guaranteeing but hoping to provide a 4 percent, 5 percent, 6 percent, 7 percent drawn-down, and hoping that the markets and their investment prowess will be able to allow the consumer to reap the benefits of that for the rest of their lives, and their spouse’s life, the consumer still is taking the risk that in fact they will run out of money before they die. And this longevity issue is underappreciated, not discussed enough, misunderstood at the consumer level, and frankly also at the advisor level.
Because if you look at things on a stochastic basis, and you look at the mortality tables, it is a mistake for advisors to say, “Well, my average female client will live until X, and my average male client will live until Y. And so therefore I’m going to be conservative and invest their money with a five-year margin for error such that even if they outlive that for five more years, they will still be in good shape.” Well what if they live for 20 more years? And what if they live for 25 more years, because obviously with improving mortality and medicine and all of the advancements we’re seeing, that still shifts the risk to the consumer.
The insurance industry has the capability to provide these minimums, and that is misunderstood, and under-estimated in terms of its power and importance to individuals.
As for the next generation of variable annuities, do you see for instance continuing pressure to reduce costs? What do you see for the inclusion of ETFs, target-date investments? I believe that we will have a much wider spectrum of cost versus product value. And what I mean to say there is I think that you will see skinnied down versions of certain benefits and/or contracts, and then you will have consumers that would prefer to have much more coverage, and be willing to pay for those expenses.
I’m a huge believer that some clients and consumers should be willing to pay, and they would truly benefit from a Rolls Royce feature, if you will, and some should be buying whatever the economy version is because that fits their portfolio, and their risk tolerance. So I think a wider platform, or view of pricing, is likely to be consistent with trying to grow the pool. Already we’re starting to see the proliferation of ETFs inside VAs, and I think that that’s inevitable as people look to try to seek alpha, and pay for alpha, but look for cheap beta. ETFs and other types of index or strategies, if you will, are a perfect way to do that. Target-date funds I don’t believe will be a big component of the VA industry. Target-date funds in my mind are perfect investment vehicles for the less experienced do-it-yourselfer, or components of qualified plans. They are ideal for the qualified plan market space when individuals are trying to make their own decisions. VAs are mostly sold by advisors. Advisors generally are able to provide, in my view, much more personalized service, and would be less likely to sell a target-date fund because they know their clients, and they can construct their own funds based on their clients’ needs.
If you were not the head of Jackson National Distributors but instead could have any other job, including in any other industry, what would you do?I’d be a 44-year-old point guard for the Denver Nuggets — right now.
Well why not a 34-year-old point guard?Preferably if I could dial it back I’d be a 19-year-old point guard! Frankly my passions are business and sports, and if I weren’t working for this company I’d likely be doing something else in the financial services industry because I really am not very good at basketball, which is my passion in life.
As a 44-year-old you’re a long way from retirement, but if you think about your own retirement in its most idealized, perfect form, where would you be and what would you be doing? And again, I’d say playing point guard for the Nuggets. But I assume I can’t do that in my retirement. You know, it sounds like a bit of a clich?, but I doubt that I will ever fully hang it up. I love what I do; love the creative aspects of my job. I’ve got a great employer because they allow me to be creative — for instance, when we started our broker-dealers, and when we started our asset management firm and doing things that others hadn’t done before. So that’s what really turns me on. I think I’d like to find ultimately a balance between that and doing the travel that I haven’t done since I was a kid. And so some sort of combination of staying engaged, but spending some time with my wife and traveling the globe would be ideal.
How about the part of your life that some people may not be as familiar with — things like where were you born? Where did you go to school? What were your hobbies? Tell me about the path you traveled from where you were to the executive positions you hold today?I grew up overseas actually; my father was an administrator in international and military schools. Sort of split half way. We spent a grand total of 18 months on average in probably ten different locations throughout Western Europe. Then I came to the United States to go to school, started on the East Coast and then moved to the West Coast. I began my career in the financial services industry really as a fluke, because I was interning and had to pay my way through college. So, I was interning with Bear Stearns, then I became a retail broker with Dean Witter for a few years.
Then I ran into a group of people who were starting out a pretty interesting concept selling financial services related items through financial institutions, through banks. This is back in the day when these third party marketing companies started to proliferate. I did that and I rose through the ranks pretty quickly there, although that was relatively easy to do in light of the fact that there was so much opportunity and so much change. It was a very fluid environment, and I ended up running the West Coast of the United States for a company called Marketing One, which was one of the early adopters in financial services through bank business.
I went on to have a couple of different types of opportunities at organizations similar to that one, then joined a company called Sun America, which got bought by AIG. And then our president of Sun America at the time moved over to become CEO at Jackson, and I had the opportunity to move with here with him. It’s been 13 years or so.
People generally acknowledge Jackson as being a leader in the variable annuity business, a company that has been able to realize above average production increases. What’s it about the culture there at Jackson that makes this possible?I think that probably the most important thing for us is the willingness to stick to what we believe, and see it through. There is no quick fix in the VA space, or frankly in the other areas of the financial services industry that we participate in. You have to have a vision, and you have to have very, very diligent execution of that vision. And I’m not saying that you can’t waiver, because market circumstances change, and if you get too stuck in your ways then, people pass you by because they are more nimble.
But I would say that this combination of vision and execution is something that we’ve tried to really focus on, and while that may not separate us from everybody, it clearly separates us from some. And then there is this willingness to continue to invest and continue to make progress in the business. So over time, we’ve had the opportunity to combine vision with good execution and commitment. Collectively, that’s what has helped us get to where we are today.
I find what you say to be a refreshing take on where we are. You mentioned the issue of cross company disintermediation. It continues to be true that much of the sales activities for VA’s are generated by 1035(a) exchanges, and advisors may argue that exchanges are appropriate given the emergence of the new insurance benefits we just spoke about. But is it ultimately self destructive to the industry to continue to have such a high share of premium coming from exchanges?
What do you think about new forms of competition and what this may mean for the life insurance industry going forward? And what the life insurance industry must do in order to prepare itself for new forms of competition?It’s funny that you say that. I referenced being beaten by ETFs and mutual funds and other financial services products. If I had gotten more specific, structured products would be on that list, and pretty high on that list, in terms of both an opportunity and a threat to the insurance industry. Structured products have their own challenges, and I believe that the structured product industry in and of itself has some of the same components to it that the VA industry does. And I have great concern over that as well, but specifically there is this whole issue of potential. I’m in agreement with you, it is disappointing. We have historically as an industry underachieved considering our capabilities. We’ve taken the easy road, the easy path to immediate satisfaction as opposed to long term growth, and so I am in complete agreement with you that we will see competition in areas that weren’t viewed as competition before.
As an industry we still have unique advantages over other industries, other components of the financial services industry, but we have to do a much better job in meeting the needs of what our advisors and their clients want. And improve the delivery mechanisms in order to get that to them, because if not then we’re going to simply keep the pool of advisors as is. And we’ll continue this trading function through 1035 exchange, which I don’t believe in all cases is healthy for the industry.
Where do you see synergies between investment managers, structured product providers, and life insurance companies? And where can some life insurance companies grow their business by working in partnership with these firms?That’s a great question. I don’t know that there’s going to be much synergy in working in partnership with structured firms, and let me get a little bit more specific here. I really view many of the structured products as being competition and having some of the same challenges as the insurance industry. Trying to create a structured products you don’t need the benefit or the resources of an outside firm unless there is an investment management capability that you’re a big, big believer in, whether it be a firm that specializes in options or a firm that specializes in structured portfolios around reverse convertibles, and those types of things. But from our perspective we think that insurance companies have all the mechanisms, and then have advantages to go far beyond that. So most of the products that you see in the market place today on the structured side are some sort of guarantees of principle which meets part of the need because it allows in theory people to be more aggressively invested in having that insurance policy even though it’s not provided by an insurer.
You also have, the things hitting the street where folks are looking at the volatility and being able to try to create a structured product in and around these volatile times by providing various rates of return through knock in and knock out levels, and those types of issues. That to me is is more in line in some cases with say the fixed index annuity, or equity index annuity market place, but very different then where I think the variable annuity industry should be focused.
If you look at the world of retirement today our competition is mutual fund companies that are able to create income, not on a guaranteed basis, but income through a structure that would allow them to have equity draw downs, hopefully in a tax advantaged environment- the world of separate accounts either through UMAs or through traditional separate accounts and/or mutual fund wraps. All will be evolving to try to provide income during the draw down stages for clients, again not on a guaranteed basis.
I think our opportunity as an industry, and you’ll see the same thing by the way in ETFs, is to take it beyond that. And so the premise here is lifetime income, and that it obviously through the WBs and IBs. But where we really need to focus is on the delivery mechanisms and the perceptions, and the cafeteria style approach that I believe will be incredibly important. One of the things that you said earlier David is the complexity in our products is something that gives you great concern. I have this argument, and it is an argument, with people all the time, and I don’t know which side of this you’re on, but many in the industry would say we absolutely need to simplify our products.
I’m also chairman of our broker dealer network and I will hear, “It’s important to simplify the product such that the back offices of firms can keep track of it.” People can do diligence on it. I take a very different perspective, because I believe that the most complex products can provide the client the absolute best risk adjusted return, because it allows them to create, pick and choose what is important to them in conjunction with their advisors. If you dummy down the products, which I think is what most people are saying with respect to simplification, pick the two or three things that you think clients want, and create a product that meets that need. If you do that by definition you’re packaging things that clients are paying for that they otherwise don’t want, and you’re doing so to simplify the product itself. And so I’m a big believer in developing the most complex products that one can create with the end consumer in mind, packaged in a more simplified manner, and structured such that you spend all of your time and effort educating your advisors so that you don’t have to dummy down the product. You give clients what they really want, and you do so in the most price-advantaged structure possible. And so, you know, this is a discussion and a debate that will rage on, but I’m just a believer that we as an industry, if we get it right, if we’re going to win, it’s going to be by using the advantage of the lifetime guarantees that we can provide. And being smart enough to create structures, and there may be many, many structures, but create structures that get it to the clients the way that the clients want to see it, and buy it, and read about it, and absorb it into their portfolios.
The secret of future sales may be a superior context for the selection of VAs by advisors. So for example, rather than saying simply “Here’s a VA, this is the solution to your income needs,” it would be better and more compliant strategy to position the VA as a vital component in a larger, more strategic solution to long term income generation. Is this sensible?I do, and the difficulty in that David, is you are now focusing on a huge shift from what insurance companies have traditionally focused on, back to what we talked about earlier. Insurance companies have traditionally focused on variable annuity producers who understand the power of variable annuities, and will sell them, the approach that “our benefit” is better then “somebody else’s benefit,” and in many cases that’s true. The evolution of these products has become much more consumer friendly, there are very few people, I think, who would argue that.
What you are talking about though is growing this pool of advisors, and being very consultative in the way that you’re choosing to approach these advisors, and not taking the easy path but actually the path of most resistance because you’re trying to knock down the barriers and the walls around folks who have preconceived views and notions as to how they want to construct their clients’ portfolios. So I agree that it is important that we expand the pool through creating this superior context, as you say, and making sure that we do that in a way that is very appealing to those advisors. It’s a very difficult thing to accomplish. If we don’t, I think we fail. If we do, I think we reposition the insurance industry itself as part of the retirement equation.
Do you see for instance continuing pressure to reduce costs? What do you see for the inclusion of ETFs, target date investments? What do you see in the future?I believe that we will have a much wider spectrum of cost versus product value. And what I mean to say there is I think that you will see skinnied down versions of certain benefits and/or contracts, and then you will have consumers that would prefer to have much more coverage, and be willing to pay for those expenses. And this gets back to the complexity issue: if you dummy the thing down, you pick a price point in the middle, and you say “Well let’s push everybody to that price point,” you are actually raising costs for some.
I’m a huge believer that some clients and consumers should be willing to pay, and they would truly benefit from a Rolls Royce feature, if you will, and some should be buying whatever the economy version is because that fits their portfolio, and their risk tolerance. So I think a wider platform, or view of pricing, is likely to be consistent with trying to grow the pool. Already we’re starting to see the proliferation of ETFs inside VAs, and I think that that’s inevitable as people look to try to seek alpha, and pay for alpha, but look for cheap beta. ETFs and other types of index or strategies, if you will, are a perfect way to do that. Target date funds I don’t believe will be a big component of the VA industry. Target date funds in my mind are perfect investment vehicles for the less experienced, do it yourselfer, or components of qualified plans. They are ideal for the qualified plan market space when individuals are trying to make their own decisions. VAs are mostly sold by advisors. Advisors generally are able to provide, in my view, much more personalized service, and would be less likely to sell a target date fund because they know their clients, and they can construct their own funds based on their clients’ needs. I believe that that’s likely to continue.
Do you agree that the notion of introducing technology to help advisors better navigate through their sales process and prospecting activities is a smart thing?I absolutely do, but I don’t believe it can be done with any degree of significance at the insurance company level. And the reason I say that is, for instance, in our own broker dealers, and in many other BDs across the country, there are huge technological efficiency processes and projects underway, either having recently been completed or frankly to be worked on. Advisor efficiency is absolutely critical, particularly in the independent broker dealer space where a very large component of the variable annuity business are being sold. The problem with trying to do it from an insurance company stand point is you have to have your systems meet and mesh with the systems of the broker dealer, and I really believe that it’s the broker dealers that will power these efficiency projects as opposed to the insurance companies.
The insurance companies, and other vendors by the way, mutual fund firms and others, will have to comply with whatever standards the broker dealer industry chooses to set. Part of NAVA’s initiative with straight through processing is, I think, a perfect example for that in that no one insurance company can move the bar with respect to STP. It has to be a collaborative effort by the industry. And so while I agree absolutely with your premise, and the inefficiencies that we see in offices across the country are massive, and there’s huge opportunity, but I don’t believe it’s going to be led by the insurance companies.
If you could make any two changes you wanted to in the world of financial services, instantly, what would they be?The first would be true consumer education. And what I mean to say there is if you heighten the consumer awareness of the crisis that we have, not just in the United States but now at least in the matured countries and the developed countries, we have a huge issue on our hands and the consumer is ignorant to most of those challenges. And so one thing, and I’m not talking about one thing that would help Jackson National sales, or variable annuity sales, is that once you educate the consumer hopefully they would change their behavior.
I would like to see consumer education ratcheted up in terms of things that people are concerned about, and nervous about, and think about, and care about. And so consumer education would be one.
The second, and this is more specific to our industry, is transparency, I’d like to see full transparency. You talked about some of the lack of transparency earlier when you talked about the equity index markets. It’s not just the equity index markets, it’s all components of the financial services industry, and I think that if we were to be more transparent there would be power in that transparency because it would be ultimately in the best interest of the consumer. I think the pools and the piles of monies would grow, and while certain companies, certain financial services companies may view that as a threat, I would view it as a significant opportunity.
David Macchia runs Wealth2K, www.wealth2k.com, a financial-services media and marketing company focused on retirement income.