To judge by the opinions of experts I interviewed for my feature, Outlook 2013: Expect more tax-wise advanced markets sales, life insurance professionals can look forward to improved advanced markets sales in 2013. Meriting some credit for this is the American Taxpayer Relief Act, legislation enacted in January that makes permanent IRS provisions respecting taxes on income, estates, dividends and capital gains.
Advisors and their clients should thus be able to implement with greater confidence planning explored in the feature, including executive compensation arrangements, exit planning and wealth transfer strategies, plus retirement and charitable planning.
Advanced markets should get a further boost if, as I expect, more agents and brokers whose expertise is now limited to life insurance sales to mid-market customers move into this space. Advanced markets have, to be sure, long attracted advisors because of the more lucrative compensation, both in commissions and fees, paid to those catering to the high net worth.
Also, the need to specialize in a niche area, be it exit planning or wealth transfer planning, has been a running theme in the financial services community for many years. Without such value-added expertise, producers will be challenged to differentiate themselves from competitors. To survive in the marketplace, these agents and brokers have to depend on high volume sales.
That’s fine for those starting out, but a commodity-like sales model is hardly a long-term proposition, in part because it results in so much lost business: If an advisor is unable to help realize certain planning objectives, then affluent clients will take their business elsewhere.
A fee-based comp model is more consistent with the needs of advanced planning. That’s in part because the frequency of meetings in advanced planning engagements—advisors and their clients will often get together quarterly to revisit and update plans and asset performance—are sustainable in a fee-for-services model. Also to consider is product neutrality: Clients with complex planning needs want high-quality advice divorced of producer biases in respect to the sale of the product. To the extent that producers depend on commissions, freeing themselves from such biases—real or perceived—becomes a challenge.
The evolution from commissions to fees and fee-like commissions is likely to advance later this year when the Securities and Exchange Commission and the Department of Labor unveil their respective fiduciary standards, the SEC’s applying to investment advisors and the DOL’s to employee benefit plans. A report released this month by the market research Aite Group forecasts the standards will “likely lead to a leveling of advisor commissions” to reduce or eliminate advisor product bias. More advisors will also adopt a fee-based model, tied mainly to assets under management, to cover the higher costs of delivering fiduciary-level advice.
The AITE forecast is echoed by Doug French, a New York-based managing principal of the insurance services practice of Ernst & Young. French says the change to fees and levelized (or trailing) commissions will be driven in part by current cost pressures on carriers. Because of currently low interests, many insurers are unable to achieve the yields they enjoyed on their investment portfolios in past years. These diminished returns are reflected in poor-performing balance sheets.
To stay profitable, insurers are scaling back or eliminating once-generous product guarantees. Or they’re charging more for the guarantees (as, for example, in respect to guaranteed accumulation, income and withdrawal benefits attached as riders to variable annuities). To stay price-competitive, says French, producer commissions will also have to be “recalibrated,” either by cutting up-front (heaped) commissions or by levelizing them.
For those unable to survive on this new compensation structure, adds French, supplementing commissions with advisory fees may be the only viable option. But even if a commission-only model remains doable, there’s another factor to weigh—the advent of attractive, no-load products.
Case-in-point: Jefferson National’s Monument Advisor, a VA custom-built for registered investment advisors and other fee-based advisors. Devoid of guarantees, but offering access to some 400 traditional and alternative investment options, plus 3rd-party hedging strategies to guard against downside risk, the product touts a flat insurance of only $20 per month.
If more carriers follow Jefferson National’s lead, then the days of costlier commission-based offerings—and of agents and brokers who depend on such solutions—could well be numbered. Ditto in regards to life insurance professionals who, knowing only how to push product, fail to join their more specialized peers on the advanced markets bandwagon.