Macchia: It’s difficult to find positives in the economic meltdown. In terms of retirement income planning, however, I’m wondering if there may be one long-term positive. That is, many financial advisors are beginning to look at investing for income generation as both more nuanced and more complex than they had previously thought. Do you agree? And do you think that over time this may be beneficial for both advisors and their clients?
Blunt: Yes, I think it will be a long-term positive for both advisors and clients. I like your word nuance a lot. I think what they’ve figured out is that the process for generating income and the old rules of thumb are radically different than they were in the accumulation phase, and more complicated.
I also think you’re going to see a greater appreciation for guarantees and some form of partial annuitization. Obviously, as an insurance company, we’re trying to position ourselves for exactly that development. Having said that, for the longest time, what appeared to be intuitive to both the academics as well as the students of financial planning, that is the use of annuitization to offset longevity risk, ran headlong into the business model of most advisory firms.
We are all shaped by what we were taught when we first started in the financial services business. I started my career as a financial advisor with Shearson Lehman Brothers in ’86 and they pounded into everybody’s head: accumulate assets, and put clients in fee-based accounts. And the industry got pretty good at that.
Macchia: Your comments imply a more thoughtful appreciation for the products offered by insurance companies. But think about recent decades. It’s clear to me that life insurers lost the competitive battle to the investment management industry.
Now that the weaknesses of asset allocation have been exposed, and considering that many investors may now crave stability over gains, do you think we’re at an inflection point? One where insurers may win back market share?
Blunt: We are. I’d say absolutely yes to both. I’ve positioned this opportunity to our board of directors by saying that I believe we’re going to look back on this and say this was one of those two or three monumental inflection points for our industry. And I do think it bodes well for insurers, but we also have some challenges. As insurance companies, we’ve got an inherent product edge, in that we can make guarantees and offer risk pooling to clients. But I think part of the challenge for the insurance industry has been a distribution disadvantage.
As you and I both know, distribution is king in financial services. And so I think for insurance companies to truly take advantage of the opportunity, a big part of the challenge we’ve got is to convince distributors that they need to think about the business a bit differently.
One of my biggest frustrations of watching this whole retirement-income industry develop, has been that too many of the providers viewed it through the lens of their existing product set and tried to retrofit their existing accumulation products into a one-size-fits-all retirement income solution.
In the money management business, you’re talking a lot about Monte Carlo analysis, and systematic withdrawals and 90 percent confidence levels. If you are a big variable-annuity writer, you talk about living benefit riders as the answer for all the baby boomer’s hopes and dreams. And in our case, we’ve led with immediate annuities because we thought that was the purest, most elegant, true income solution. The lesson we’ve hopefully all learned is that there is no one answer to providing individuals true retirement income security.
What clients most need is a process. And there’s a place in everybody’s portfolio for everything we just mentioned. And the real key is, are we viewing it through the lens of the client? Are we seeing it through the client’s eyes with a model that we can all step back and agree will get consistent results? But also, is it one that we can actually communicate clearly? Sometimes when you stretch for that last 10 percent of perfection on the product itself, you can introduce too much complexity and therefore the client doesn’t completely buy into the solution.
Macchia: The notion of reliance upon an insurer’s lifetime guarantee to provide continuing retirement income is, perhaps, more questionable today in the minds of potential buyers, given the failure of AIG and the concerns over the health of some insurers that have seen their share process drop off a cliff. How does New York Life successfully differentiate itself in the present environment?
Blunt: I think there are two things going on. One, I would absolutely agree with your statement that clients are becoming more aware of the fact that all insurance products are essentially an IOU, and as such, you should be very careful about who you accept that IOU from.
If you think about it, the best analogy to annuitization is a pension. Unfortunately for all the wrong reasons, people are realizing that not all employer pensions are “money good.” Our biggest frustration over the past few years was that there was very little differentiation made, particularly in the broker-dealer world, between insurance companies.
Now we’re seeing that advisors and their home offices are realizing that there really is a difference. When everything’s going great; it’s hard to see a distinction between a single-A-rated company and a triple-A-rated company. It’s generally when things get rocky that that difference becomes apparent. But the other thing that we’re starting to see now is an appreciation for something that we’ve been talking about for 163 years, and that’s mutuality. While it’s not impossible, it’s a difficult challenge to run a company in an industry like insurance that’s got a 30-year time horizon, and at the same time, keep Wall Street happy, which is looking for results every 30 days.
You know, if your mom is dependent on a company for a good portion of her retirement income for the next 20 or 30 years, you should care a ton about who’s standing behind that guarantee. I’d love to think that we’re brilliant and we’re smarter than everybody else in financial services. I don’t think we are. But one of our key competitive advantages is that we’ve only got to serve one master — our clients.
Our mission is simple: to make sure that this company is around and solvent 30 years from now to keep paying claims as it has been for the last 163 years.
Macchia: Mutual insurers should be seeking to artfully and convincingly convey that point. Arguably there is competitive advantage in mutuality and in exactly the way you describe it. But the mutual companies haven’t effectively leveraged the advantage, in my judgment.
Blunt: Yeah, and so much of it comes down to timing. We ran an ad in the midst of the crisis and, the ad basically said: “We’re Main Street Not Wall Street.” And a few of my friends said gee, you’re taking swipes at Wall Street. And I said we’re absolutely not taking swipes at Wall Street.
Wall Street was created with a very specific purpose in mind, and that was to take risk, to free up capital for investment, to innovate, etc. Yet, insurance companies are different, and mutual companies are particularly unique. We have a very, very different role to play, and our role is permanence, solvency and stability. We’re that portion of your assets where you say I can’t afford volatility here. I can’t afford to have these assets completely go away.
Frankly, the insurance industry has been a punching bag for the last 20 years. We’ve let the investment firms and the brokerage houses just pummel us, on this whole topic of buy term and invest the difference.
I’ve got to tell you right now, we’ve got millions of people that are absolutely thrilled they own good old, stodgy whole life insurance and fixed and immediate annuities. You know they’re getting 4 percent to 5 percent returns on their money, tax deferred with zero volatility. And, at the same time, they have permanent insurance coverage.
David Macchia runs Wealth2K, www.wealth2k.com, a financial-services media and marketing company focused on retirement income.