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2015 Outlook: The changing of the guard

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A few months ago, I had the pleasure of hearing Brian Belski, of BMO Capital Markets, spew 2015 market outlooks and predictions faster than what most of the audience could absorb. One big phrase struck me and has stayed with me since. 

He said in the financial world “things are rarely different.” So when I was asked to write a 2015 industry outlook, I wanted to share this phrase. What can we expect in 2015 even if things are rarely different? Expect to see something that’s been occurring for years now. The Changing of the Guard in the insurance industry. 

2015 will be like years past: We’ll continue to see the persistent decay of captive shops and LTCi sales, while also seeing growth with independent advisors, greater index annuity sales despite lower interest rates, and potentially higher LIBR reserve requirements, and greater alliances between independents and other estate/financial professionals…oh and many off-the-cuff and incorrect pieces of advice from Dave Ramsey.

The annuities conundrum and how branding affects it

I was at a meeting a few weeks ago with a captive advisor. Our interaction confirmed what I had been noticing for years: The advice in the captive arena isn’t changing. I was in his office because a few years back, we had a client who came to us as a referral, we’ll call her “Betty.” She was heavily allocated into variable annuities, with high fees, and was worried about income, safety and gifting. It was her and her deceased husband’s goal to gift $50,000 to each of their five children. 

We built her a plan which utilized index annuities with income riders and a life insurance policy which would be owned by an ILIT. She never moved forward because she couldn’t bring herself to replace the annuities which her husband had purchased despite the greater guaranteed income, safety and lower fees. We understood and kept in touch. 

Recently, she asked us to meet with a close family friend who’s the rep in this story. She believed the advice she was getting must be top-notch because the firm he worked for was very recognizable and as she said, “They’re everywhere, so they must be good.” Not to digress, but that’s equivalent to saying that McDonald’s has the best burger in town because they’re everywhere.

Here I am waiting in the office located in a strip mall, sitting next to the giant green (hint hint) reception wall. The advisor has me come into his office, we’ll call him “George,” and he says, “Betty thinks her starting value will be higher with your proposed annuity, but her existing contract has surrender charges so I’m confused.” He had never heard of a bonus annuity. In fact, his regional manager doesn’t allow them to sell any annuities and he even asked me how does an index annuity work. 

I noticed on his notes he had written equity annuity (not even equity index) and when I later referred to it as a fixed index annuity, he was unaware we were using different terms for the same product. The rest of the conversation went this way. I suggested meeting with an elder law attorney to discuss getting some assets out of the estate, while he believed that was more risky than buying more LTC coverage.

We discussed safety and gifting and he said “growth was more important” and he had her “mostly in bonds,” so there’s little to no risk. Our encounter illustrated an important point which I stated above: things are rarely different. When I was in the captive world, I was told many of the same things. Today, it’s the same message.

Why has the captive world been stuck in “neutral” for so long? How can they have success with the same message even though things change (CD rates were 5%+ when I started and there was no such thing as the Great Recession).

Two words: brand equity! What’s so important about brand equity? Without brand equity, Betty wouldn’t be at this firm. She wouldn’t have given this firm the additional trust which she did not initially give us. You could argue she trusted the firm because of the family friend. However, her reasoning centralized around the fact he worked at such a well-known firm with almost more offices than Starbucks. 

Brand equity has kept our industry in neutral for years. There was a time when clients, like Betty, thought they had arrived when they had enough assets to work with the equivalent of a financial McDonald’s. Brand equity allowed the captive companies to play the same message over and over… and why not if it was working? 

Brand equity made independents dig deeper. Why? Because independents had to make up for the lack of brand equity. Our staff knows one simple truth: If we do what the “McDonald’s” of our industry do, but we do it just a bit better for a bit less money, then no one will do business with us. It’s not worth giving up the brand equity for just a small difference. 

We must do what they do, but do it much better. In 2015, look for independents to continue to add more services and alliances with other professionals…which we’ll touch on more later.

If you’re not branding in 2014, then you better start branding in 2015. Client’s used to have different expectations for captives and independents. It was ok for independents to not have the polished branding of the captives, the high-end office space with nicer furnishings, the support staff, the interactive website, an online presence or even coordinated marketing materials because independents were smaller and that’s how they kept costs down.  

Today, clients expect these things because other independents are giving them these items. Independent marketing organizations have made it possible for a rep to build a competitive brand. They do everything from creating branding pieces, logos, stationary and even scheduling public appearances. 

What’s the point? The independent advisor is getting the back office support that once was only available in the captive world. The problem? Independent advisors now compete in brand equity with both captive agencies and other independents. Today, in 2015, and going forward, the ability to competitively brand with a consistent message and quality message will be more important than ever.

Earlier, I mentioned that index annuities will continue to rise despite lower interest rates and most likely greater reserve requirements for lifetime income benefits. Lower guarantees should result in reduced sales. However, there’s been an ongoing migration from captive to independent. Some IA sales growth has been a result of greater sales from the B/D markets (don’t forget some of which are from the independent B/D space) but consider this: There used to be dozens of captive agencies in the world; now most are extinct. 

The ones that still exist are mostly a hybrid model allowing their sales reps to sell products not underwritten by the “mother ship.” Our industry at one point went through a contraction, but not any longer.  

We’ve got people new to the industry combined with more advisors leaving the captive space coming across the benefits of index annuities. I once heard that if a carrier wants $1B in annuity sales, “they must recruit 10k agents.” 

Things are rarely different … More agents can certainly mean more growth. What does this mean? As this migration continues, the negative stigma towards index annuities will continue to go by the wayside, making the decision to purchase the product less difficult, given more supportive resources and more places selling them. 

The lower guarantees will force advisors selling IAs and not already branding as a message of safety to revert back to the product’s original intent: higher potential growth than other lower risk assets such as CDs, money markets and fixed rate annuities combined with a guaranteed future stream of income. This is another factor that will drive 2015 IA sales to record highs. 

Don’t quite agree, maybe? Think of it this way: People don’t buy index annuities with a LIBR for the rollup rate … some reps think they do, but they don’t. Get rid of the “sizzle” feature. 

Case in point: Recently, we had a client tell us they were going to stick with their existing product despite the volatility, risk to principal, and fees greater than 2.5 percent because it had a guaranteed rollup rate of 5 percent. If you think most people understand the difference between rollup and interest, they don’t and neither did these people. 

We showed them the greater rollup rate of the proposed product, the lower fees, and greater safety. They replied, “We didn’t remember you mentioning a rollup rate, only the guaranteed annual income.” It was only after our conversation that they understood why we avoided the rollup rate discussion. As a whole, if we stop focusing on the rollup rate, which is confusing to most, and focus on the guaranteed income, this will increase the understanding of the product and therefore lead to increased sales despite lower guarantees. Thus, IA sales will increase due to greater acceptance from the growing population of independent agents and a refocusing on guarantees rather than projections.

About the incoming “LTCi storm”

“Things are rarely different.” LTCi sales have been declining, except for a stint here and there for the better part of a decade, so don’t expect this to change in 2015. LTCi sales will continue to decline almost as fast as the captive world — probably since they seem to be the major force pushing it. 

Sales are slumping because rates are not stable and will increase over time. Many retirees forgo this coverage considering most will have a declining asset base overtime, while incurring increasing premiums for LTCi, which makes the prohibitive costs more impactful. 

One argument for LTCi says that the rate increases are coming from more people using the coverage than expected, higher costs, and lower lapse ratios than anticipated. These are reasons why it’s a good planning tool. People need it. No, they need a plan which may or may not involve LTCi. This is not a cause and effect relationship.

Fewer lapses don’t necessarily mean people really like it once they buy it. It could mean the population of people who are unlikely to use it given health or assets aren’t purchasing it. They say if you pick the right carrier there will be rate stability as long as the carrier is committed to the product.

Hello! Wake up. Open a newspaper (I’m assuming those saying this decade-old message still read newspapers and not the Internet). Genworth had a large rate increase on their existing book of LTCi policies in 2014. They just posted an $854M third quarter loss and guess what they mainly attributed this to? I bet you know what it was … larger than anticipated LTCi claims. I’d say Genworth is committed to LTCi.

Meanwhile, combo products like Lincoln’s Money Guard continue to adjust their payouts and newer policies continue to get lower benefits. Carriers continue to abandon this space. Yet the captive world continues to promote this as singularly the best way to solve LTC planning needs. This problem will only get worse in 2015.

new york eve ball

One last thing before the crystal ball drops

This brings us to the last point for the coming year. In our industry not only will you have to brand more than before, you’ll also have to utilize other professionals more than ever before. Let’s go back to my conversation with George, the one who worked at the “financial McDonald’s.” In our meeting, George said that “someone has to be destitute” to qualify for Medicaid and if they do qualify for it, they better, “be prepared for greatly inferior care.”

Was this true at one point? I can’t honestly answer that. More importantly, are those statements true today? Not always and more often than not, no. I’ve seen plans where an “Elder law attorney” has funneled assets out of the estate and helped the client qualify for Medicaid more quickly, protected more money for the surviving spouse or the kids and even funneled money back to the spouse receiving care to be used in addition to Medicaid, so they received even better care.

As LTCi sales have plummeted, there are professionals who have found legal ways to pick up the slack. A few years ago, no one was doing social security planning. Now, it seems as though everyone is. It wasn’t too long ago that Roth planning was also non-existent.

George did something that shocked me though. He dismissed the idea of using these tools. To be frank, I asked George if he was a lawyer and he said no and then I told him he wasn’t qualified to talk about these tools. To stay competitive in 2015, advisors will have to leverage relationships with other professionals to provide the necessary advice in multiple areas.

2014 has been a great year. Independent marketing organizations have continued to help the independent advisor by providing the back office support once garnished only in the captive world. But things are rarely different. The captive world will continue on its decline to extinction, LTC sales will continue to disappoint, index annuities will continue to set new records, and Dave Ramsey will continue to make most of us scratch our head and say, “Really, Dave?!”  

(Image: Times Square New Year’s Eve Ball. AP Photo/John Minchillo)

See also:

Industry Survey 2014: Ten results you need to know

Solo advisor vs. partnership debate [infographic]

Calculating the real cost of income annuities