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m m BOLD BOLDsolutions solutionstotohelp help Securian Financial Group, Inc. Secur in.ancomFinancial Group, Inc. www. s ecur i a Business Business Owner Owner Life-stage Life-stage Design Design (BOLD) (BOLD) is our is our marketing marketing system system thatthat provides provides www.securian.com
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Insurance products are issued by Minnesota Life Insurance Company in all states except New York. In New York, products are issued by Securian Life Insurance products are issued by Minnesota Life Insurance Company in all states except New York. In New York, products are issued by Securian Life Insurance Company, a New York authorized insurer. Both companies are headquartered in Saint Paul, MN. Product availability and features may vary by Insurance Company, a New York authorized insurer. Both companies are headquartered in Saint Paul, MN. Product availability and features may vary by state. Each insurer is solely responsible for the financial obligations under the policies or contracts it issues. state. Each insurer is solely responsible for the financial obligations under the policies or contracts it issues. 400 Robert Street North, St. Paul, MN 55101-2098 • 1-800-820-4205 BoldAdvisorGuide.com. 400BoldAdvisorGuide.com. Robert Street North, St. Paul, MN 55101-2098 • 1-800-820-4205 ©2014©2014 SecuriSecuri an Finaancin FianlanciGroaup,l GrInoc.up,AlIlnrc.igAlhtlsrirgeserved. hts reserved. OurOur BOLD BOLD strategies strategies address: address:
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APRIL 2014 » VOLUME 7, NUMBER 4
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IN THIS ISSUE
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INVESTMENTS
42 42 A New Role for Fixed Index Annuities: Inside 401(k)s By Linda Koco Changes in federal regulations have opened the door for employers to offer fixed index annuities inside retirement plans.
HEALTH
46 C lients Clamor for ‘Mediclarity’
INFRONT
22 The Psychology of the Affluent Buyer
10 A nnuity Sales in 2013: Sunny with a Bit of Haze By Linda Koco Total annuity sales experienced overall growth last year, including the largest quarterly percentage increase in 11 years.
FEATURES
By Linda Koco The big case market is not just about evaluating net worth, making the sale and collecting commissions. It’s about building relationships and knowing your prospect.
LIFE
By Andrea Koretz and Craig Ritter The aging of the baby boom generation means a greater need for help from advisors who understand the Medicare marketplace.
FINANCIAL
52 Chasing Performance Can Lead Investors to a Calamitous Fall By Craig L. Israelsen When it comes to your client’s investment portfolio, boring is best.
BUSINESS
54 12 12 P eople Tools for More Sales
An interview with Alan C. Fox You wouldn’t use an axe to pound a nail into a two-by-four and you wouldn’t use a hammer to chop firewood. Dealing with people is no different – you need the right tools. In this interview with InsuranceNewsNet Publisher Paul Feldman, Alan C. Fox, author of People Tools, shares his secrets for cultivating business and personal relationships.
2
InsuranceNewsNet Magazine » April 2014
32 Why Overfunding Life Insurance Makes Retirement Sense By J. Leland “Lee” Davis “Overfunded” life insurance policies, in addition to a diversified portfolio of investments, can help clients achieve a future stream of tax-advantaged income that can be turned on when they retire.
ANNUITY
38 R egulators Refocus Scrutiny on Group Annuity Market By Linda Koco Changes in the retirement plan market could have an effect on the future of the group annuity business.
54 How to Build a Pipeline of Client Evangelists By Dan Weedin Gaining strong referrals and testimonials is an art and a science. Here are some strategies to receive both.
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ALSO IN THIS ISSUE APRIL 2014 » VOLUME 7, NUMBER 4
INSIGHTS
56 SOCIETY OF FSP: The Right Team Approach Can Make 2+2=6
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58 L IMRA: On Choosing Baseball Bats and Life Insurance
By Barbara Crowley Gathering the right information, choosing the right carrier and managing client expectations are all crucial steps to bringing in the big case.
By Scott R. Kallenbach The insurance industry must adapt to an increasingly consumer-centric environment.
64 The Last Word: From M&A to LTCi: Seven Topics That Crossed My Radar Screen
60 MDRT: Rank High on HighNet-Worth Clients’ Go-To Lists By John J. Demboski How do you successfully engage the high-net-worth client? Here are five steps to help you work successfully in the affluent market.
By Larry Barton A collection of quotes from industry meetings provides insight into the latest “buzz” on a variety of topics.
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14 INN 04.14 April 2014 » InsuranceNewsNet Magazine 5
WELCOME
LETTER FROM THE EDITOR
The Rich and the Rest “L et me tell you about the very rich. They are different from you and me.” That was from The Rich Boy, written by F. Scott Fitzgerald in the mid-1920s, when the rich were getting richer and the poor also thought the rich were getting richer. The legend has it that those sentences were part of a conversation between Fitzgerald and Ernest Hemingway. But academics argue whether an exchange between the two inspired those lines or whether a reply from Hemingway in his own short story inspired the legend of the conversation. Either way, you know the fabled response: “Yes, they have more money.” Like most glib responses, it was simple but specious. In this month’s main feature, Contributing Editor Linda Koco shows how affluent clients are different, in their needs and in how they operate. This is an increasingly relevant guide as the ranks of the wealthy grow. As we know, just like in the mid-’20s, we are in an era where the rich are getting richer. Besides helping people keep their net worth, the challenge is in helping the middle class get richer as well. It is common knowledge that life insurance distribution focuses on the wealthy at the expense of the middle class, which is drastically underserved. Some companies, associations and producers have been changing that strategy. LIMRA helped propel that movement by ringing the alarm bell, having released the often-quoted statistic that a lower percentage of households have life insurance today than at any other time since World War II. That is just the start of the grim statistics. Between 2000 and 2010, median wages in the United States dropped 7 percent, according to a Wall Street Journal analysis, pointing out that it was the worst 10-year performance since similar records were kept in 1967. The analysis also showed that the trend will not improve between 2010 and 2020. And that assumes the United States does not endure another deep recession during that period. Keep in mind that global wealth doubled in that decade, growing to $241 trillion in 2010, according to Credit Suisse. That report also said that within two generations, billionaires will be commonplace and the world will have 11 trillionaires. 6
InsuranceNewsNet Magazine » April 2014
Meanwhile, the middle class is struggling with stagnant wages and an unclear path for retirement. This problem will not just clear up on its own. If anything, it can only get worse. As 10,000 baby boomers turn 65 each day, they will wade into the adventures of old age. Odds are good that they will need some kind of long-term medical assistance if they live long enough. The industry of the aging is excellent at keeping people alive, but not as good at keeping them healthy. That’s up to individuals, and we know how well they’re exercising and watching their diet. A quarter of seniors today have no income but Social Security – and they retired in the era of rising wages and generous pensions. What will tomorrow’s seniors have? Will Social Security even be there? Here are your calls to action:
» Boomers are inheriting quite a bit of
money, $11.6 trillion altogether, according to the Boston College Center for Retirement Research. About 66 percent of boomers can expect something, but what will they do with it? Will it be like lottery winnings, which go as fast as they come?
» Retirement accounts have accumulated
wealth but, like inheritances, most of that wealth is concentrated at the top end of the wage and affluence scale. According to one of the more dire estimates, 75 percent of Americans approaching retirement age have less than $30,000. Others estimate higher, but no one is saying that the majority of the population is set for a happy, secure retirement.
» Long-term care will devour household
wealth in the next few decades at the rate we are going. We in the business know that people are not buying long-term care insurance. One estimate has it that 70 percent of people will require at least three years of care. That is long enough to gobble up most if not all of the wealth successive generations were expecting. The rest of us get to pay for their care through Medicaid at that point. Our industry has answers for each of these problems. Therefore, you are this nation’s greatest hope.
When President Barack Obama unveiled the myRAs, the low-cost individual retirement accounts, the announcement was met with a grand head-slap. They will be safe, but pay lousy returns. They will accumulate very little, $15,000 at max – hardly enough to retire on. All true. But we have two choices in this matter: Ignore the whole thing, or use myRAs as they were intended, as starter retirement plans. These are intended for people who will save nothing and eventually, it will be up to the wealthiest to pay for them in taxes. The wealthy will be all that is left of the tax base. So, myRAs are not wonderful by any means, but they are something that lowerwage people can start with. After all, many individual plans require a minimum initial deposit, often $1,000, and many struggling families have trouble freeing that cash. If these lower-wage people start with a myRA, younger agents and advisors can be there to help them to the next level when they have to roll the myRA over. As those clients prosper, so do the advisors. Naïve, maybe, but a guy can dream. Then there is the rest of the middle class, which is suddenly responsible for its retirement and long-term care. They need help. That’s our job. I have met many agents and advisors who take this task seriously. Yet I have heard many others disparage the lower and middle classes for their lot. Typical things such as, “Yeah, they can’t save to open an IRA, but they can have a TV the size of Montana in their living room.” True, many people make bad choices. But they need you to help them see the value in making better ones. You are the one who can help those families and thereby help fortify this nation’s foundation. In this month’s edition of the magazine, we focus on how to understand and care for the wealthy. That is also what we do. We help the successful stay that way. That’s a good living. But helping everybody else become successful – that’s a calling. Steven A. Morelli Editor-in-Chief
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April 2014 » InsuranceNewsNet Magazine
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INFRONT
TIMELY ISSUES THAT MATTER TO YOU
Annuity Sales in 2013: Sunny with a Bit of Haze A look at last year’s annuity sales figures brings some surprises.
Total Fixed Index Annuity and Variable Annuity Sales, in Billions, by Year
By Linda Koco
L
et it not be said that a relatively unknown annuity product cannot make major headway in sales. The object of the lesson here is the deferred income annuity (DIA). In terms of yearover-year sales growth, this product line jumped 113 percent in 2013, according to the year-end annuity sales estimate report just released by LIMRA Secure Retirement Institute (LIMRA SRI). This happened in a year when total annuity sales experienced overall growth, including the largest quarterly percentage increase in 11 years, LIMRA SRI said. By premium volume, the DIA is still a diminutive player, producing just $2.2 billion in sales for the year, compared to the previous year’s $1.1 billion. In an industry where total annual sales run into triple-digit billions, that’s chump change. But considering that DIA products did not even get a separate line on the researcher’s year-end 2012 sales chart, and considering that these fixed-annuitiesthat-delay-payouts-for-many-years did not have much of an industry life before 2012, the sales news for these products spells one word: Popular. The sales news for 2013 was remarkable for some other products as well.
Fixed Index Annuities
Take fixed index annuity (FIA) products, for example. FIAs closed the year with estimated sales of nearly $40 billion, according to LIMRA SRI. That’s nearly half (47 percent) of the $85 billion total for all fixed annuities (which also rose in 2013, increasing by 17 percent over total fixed annuity sales in 2012). The 2013 FIA sales were also up by a healthy 16 percent from 2012’s year-end FIA total of $33.9 billion, according to the report. 10
InsuranceNewsNet Magazine » April 2014
Source: Data extracted from sales results reported by LIMRA SRI, Windsor, Conn.
In the fourth quarter alone, FIAs brought in $11.9 billion – a big 40 percent increase over fourth quarter 2012 and yet another quarterly record for this index-linked fixed product line. Improved interest rate conditions helped make the FIA product offerings more attractive, LIMRA SRI assistant vice president Joe Montminy said in a statement. So did continued product innovation, he added. But those weren’t the only factors. Organic growth in the banking and independent broker/dealer channels contributed to FIA sales too, he said, pointing out that this growth was “additive and not at the expense of the independent channel.” In fact, the independent channel didn’t do too shabbily either. The channel’s fourth quarter sales increased by 24 percent year over year, earning it a 71 percent market share, Montminy said. On a five-year basis, the LIMRA SRI figures show that FIA year-end total sales increased every single year. The 2013 sales were up 31 percent from 2009.
Variable Annuity Sales
Variable annuity (VA) sales had a surprising year too – or at least it will likely be surprising to those who had expected the sales to tank dramatically in the wake of deliberate efforts by a number of carriers to rein in or control sales in various ways. VA sales did drop in 2013 compared to the year before – to $145.3 billion from $147.4 billion in 2012, according to the LIMRA SRI figures – but the decline was by just 1 percent and the fourth quarter saw a 4 percent increase over the same year-earlier quarter. Viewed against 10-year results, the 2013 variable annuity sales were off by 21 percent compared to the 10-year high of $184 billion in 2007. However, the 2013 performance was 13 percent above the 10-year low of $128 billion in 2009. Onlookers might view the 2013 variable annuity decline as worrisome given that these annuities are securities products and that this decline happened in a year when the leading securities indices soared. The
ANNUITY SALES IN 2013: SUNNY WITH A BIT OF HAZE
Annuity Sales Estimates in Billions: 2004 – 2013
INFRONT
$38 billion. This suggests that overall production was free from the seismic change predicted by some VA detractors. The changes that did appear to reflect normal quarterly jockeying, as may be seen by comparing the 2013 quarterly results with 2012’s quarterly results:
Total Annuity Sales Source: U.S. Individual Annuities Sales Survey, LIMRA SRI
Dow, S&P 500, and NASDAQ all leaped ahead of 2012 by roughly 26 percent, 29 percent and 38 percent, respectively. But it’s unlikely that carriers will be worried. For many, the relatively flat 2013 sales (compared to 2012) will be seen as a positive sign, i.e., that their companies are writing the amount of variable annuity business that they can comfortably support as they recover from the economic stressors that followed the recession of 2008-2009. As the analysts at LIMRA SRI put it, “Companies continue to carefully manage their VA business.” The analysts also have posited that “VA sales are no longer tracking with the equi-
ties market.” That certainly appears to be the case for 2013 and even 2012. Whether that will continue, once most of the carriers have solidified their new portfolios and strategies, remains to be seen. About those re-shaped portfolios, the analysts noted that “More emphasis on accumulation VAs appears to be an emerging trend. In 2013, more companies introduced these types of products into their portfolios as they shift their focus to tax-deferred products with alternative investment options and index-linked VAs.” Worth noting is that VA sales fluctuated from quarter to quarter in 2013, but they stayed within a range of $35 billion to
A final note about the annuity year that was: Total annuity sales – variable and fixed combined – reached $230.1 billion in 2013, according to the LIMRA SRI sales estimates. That’s down 13 percent from the 10-year high of $265 billion in 2008, but up 6 percent from the 10-year low of $217 billion in 2005. It is also up 5 percent from the $219 billion annuity total in 2012. Overall, the annuity sales year of 2013 could be described as quite sunny with a trace of haze over part of the sky. Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda may be reached at linda.koco@ innfeedback.com.
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April 2014 » InsuranceNewsNet Magazine
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PEOPLE TOOLS FOR M
RE SALES
Want more sales? Get better people skills.
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e have all had head-shaking moments when we just don’t understand why people behave the way they do. Why did that client back out of a deal that made so much sense? Why did I struggle to communicate with that prospect? Why are people so hard to figure out? A manual on how people operate would be helpful in these cases. Alan C. Fox provides one in his book People Tools. This book is a collection of the skills he developed throughout his varied career but mostly from his experience in founding a commercial real estate company that owns and manages more than 70 properties in 11 states. In that capacity, he has cultivated relationships with investors as well as maintained the many responsibilities of real estate management. Real estate management was just one of Alan’s careers. His resume also includes degrees in accounting, law, education and professional writing. He was also a tax supervisor in a national certified public accounting firm. He has an artful side also, which he expresses as the founder, editor and publisher of the literary magazine Rattle. He brings all that to bear in People Tools, which he promises to be the start of a series. In this discussion with InsuranceNewsNet Publisher Paul Feldman, Alan explains how he uses his tools to win in business and in life. FELDMAN: An important quote and concept that you build on is “Know Thyself” from Socrates. Is that the foundation that people need in order to begin? FOX: Absolutely. You have to know what your abilities are and what they 12
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are not, and to use your strengths. Each of us is unique. Your needs, life experience and resources are different from mine, so we each start from a different place. It makes sense that your choice of tools often will be different from mine, which means that Socrates is the single tool that each of us needs in order to effectively rummage in our toolbox. You have to know who you are, what you like and what you dislike. For example, I find that I like communicating with people by email because it’s more efficient. I can answer five emails in a minute, whereas telephone calls are, “Hi, how are you?” and you have to get acquainted and then say good-bye, etc. So you should know your strengths. People would say to me, “You’re a great businessman.” Let me tell you something: Put me behind a retail counter, and I wouldn’t be too good. In sales, you have to tailor your approach to what you’re good at. Are you good in person? Are you really good at writing? Are you really good over the phone? You have to evaluate yourself, and you do that by observing what you do. FELDMAN: A prevalent tool throughout your book was “The Belt Buckle.” Could you explain that and where it came from? FOX: I interviewed someone who was an All-American defensive football player in college. I asked him how someone takes on the greats like Jim Brown and Gale Sayers – this was a while ago. He said, “Look, they can fake with their eyes.
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FEATURE
PEOPLE TOOLS FOR MORE SALES
They can fake with their head. They can fake with their shoulders. They can’t fake with their belt buckles. I just watch the belt buckle.” I take that to mean “pay attention to what people do, including yourself.” Very often, there’s a difference between what people say and what they do. That is really the best way to figure out what I need. If I say I like action films but I always end up watching romantic films, well then do I really prefer movies that are more romantic? FELDMAN: Throughout your book, you also write a great deal about efficiency. Time is the most valuable resource on the planet, and creating efficiencies can result in huge breakthroughs in sales. FOX: Absolutely. People don’t pay enough attention to efficiency, particularly in prospecting. You have to realize that you have a limited amount of time and energy and you have to make every moment count as much as you possibly can. On your days off, what do you most enjoy, and what’s the most efficient way to go about it? I see life as a matter of how efficient you are, whether it’s in spending your money or in allocating your time; and how efficient you are in being with people who will do you some good, whether it’s business or personal. FELDMAN: That also relates to the “Sunk Cost” tool. You’ve put time and money into making something work, and you keep doing it even though it’s not the best or most efficient method of achieving your goals. FOX: I was talking this morning with someone who has a business partner who is making bad decisions but still wanted to be named chief executive officer. He said, “What do I do? I put a lot of time and money into this, but it’s not working out.” I said it doesn’t matter how much time, effort and money you put in. What is important is that you have other opportunities that would be more productive. If you have to cut it loose, cut it loose. I do that with the people in my life. Some people turn out to be toxic. They’re 14
InsuranceNewsNet Magazine » April 2014
“It’s better to end 10 minutes early than one minute too late.” just no fun to be with. They’re downers. If I’ve known them for two days, two years or 20 years, it’s not cost. Although, after 20 years I’ll give them a little bit more of a tryout and talk to them about it. FELDMAN: The “Sunk Cost” tool is especially true in chasing prospects. Many salespeople keep trying to sell prospects even after getting burned. Is that because they figure they’ve invested too much to turn back? FOX: Oh, absolutely. Let me tell you a little story. I have a rule that if I talk to you about real estate and you say you’ll invest, and for whatever reason you don’t buy, it’s
OP PE LE
SUNK COST TO O L S
“If you fail to move on, more than your cost will be sunk.” absolutely not a problem and we can both walk away happy. But my rule is, I will never try to sell you real estate again. My business partner had me send a contract to somebody not too long ago. A week goes by and I call politely with my first approach, which is, “Did you receive the contract?”
“Oh, yeah, yeah. I’ll get around to it.” No problem. Another week goes by and nothing. I ask my partner, “Hey, what’s going on with this guy?” And finally a week later, the guy says, “Oh, things have come up and I’m not going to invest.” I say that’s fine, and I ask him to send back the contract. Six months later, my partner says the same guy really wants to invest in this new thing. I say no, I have a policy. He says, “Please? He refers people. He’s wonderful. Please, please, please?” I think to myself that this is a good chance to test my policy, because I haven’t tested it in years. So, I send out a contract. Well, you can guess the end of the story. FELDMAN: Proving your point that “Patterns Persist”? FOX: Yes, exactly. Patterns persist. If I go to a buffet restaurant, I’m going to eat too much 99 times out of 100. My solution is either I don’t go to the buffet restaurant or I go but I tell my wife, “You go to the buffet. Here’s what I want – low carbs, mostly protein – and only once and don’t go back.” I get around my pattern. When you detect a pattern, believe it will continue. Take basketball coach Phil Jackson. People said he was successful in Chicago because he had Michael Jordan. Then Jackson went to the Los Angeles Lakers and people said, “Ah, can he do it again?” Guess what? He did. Patterns persist. FELDMAN: Another breakthrough for more sales is what you call “Target Practice” and “Expanding Your Target.” How does that work? FOX: Any goal in life is a target. I want the job. I want an invitation to the party. I want to win the game. Often, when the goal is especially important, the target seems to shrink to a tiny dot. This is much like the apple resting upon the head of his young son as William Tell was forced by the Austrian governor to prove his prowess with a bow and arrow. You can approach archery either the hard way, like William Tell, or the easy way. The hard way is to practice, practice, practice, taking greater and greater risks
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April 2014 » InsuranceNewsNet Magazine
15
FEATURE
PEOPLE TOOLS FOR MORE SALES
under more and more challenging conditions. Certainly practice and challenge are useful tools. But there is another type of “Target Practice,” which yields a bountiful harvest. Expand your target. When I think about “Target Practice,” I see my target becoming larger. Instead of using a minuscule bull’s-eye, I aim at a target as big as an IMAX screen. If you want to be more successful, expand your target. Make it larger. In sales, in insurance particularly, maybe you want to have more products. I mean, my goodness, there are so many different permutations of life insurance. The more products you have, the bigger your target becomes because maybe one of them will stick with a prospect, whereas the others won’t. Also, expand your target in terms of the type of people you approach. Expand geographically, expand to other markets or add new services. If your pattern isn’t working as successfully as you think it should, then expand your target and have a bigger range, and I think that will be more successful. FELDMAN: I was intrigued by “The 80 Percent Solution” and how it applies to employees and partners. How long have you been using that tool? FOX: I came up with “The 80 Percent Solution” with my business partner 45 years ago, and we’ve been in real estate together ever since. It means that if my business partner is meeting 80 percent of what I think would be ideal or practically perfect, that is good enough. It doesn’t have to be 99 percent. Think of it in terms of your life partner or spouse. I think that there are 10,000 women in the world who I could be perfectly happy with – and I don’t know if my wife is No. 1, No. 10,000 or No. 300, because I can’t possibly give 10,000 tryouts. The overriding thought that led to my conclusion was this – if a person meets 80 percent of my ideal, then I will stick with him or her and will not spend one second thinking about a replacement. A later refinement of that thought is if the person’s “score” is between 60 percent and 79 percent, I could be out looking. Below 60 percent and I’ll get them out of 16
InsuranceNewsNet Magazine » April 2014
OP PE LE
TARGET PRACTICE TO O L S “When I think about Target Practice I see my target becoming larger. Instead of using a minuscule bull’s-eye, I aim at a target as big as an IMAX screen.” my life, the sooner the better. Now, if I’m getting brain surgery, I’d rather have somebody who’s 99 percent because that’s life or death. But for most purposes, for friends and employees, it’s good. I don’t have a single employee, including me, who hasn’t made mistakes. So I don’t hold mistakes against people. Otherwise, you’re going to spend a lot of time looking for perfection and not achieving it. If you want to set your sights at 85 percent or 90 percent, OK. If you want to settle for 70 percent, it is totally subjective. FELDMAN: That leads to another chapter, which is “Get Past Perfect.” Would you tell us about that? FOX: When I started out in business, I
OP PE LE
THE 80 PERCENT SOLUTION
TO O L S The proper question isn’t, “Is he or she perfect?” The useful question: “Is he or she good enough?” And if he or she is good enough, then magnify his or her positives and minimize their less-important negatives.
was a failed perfectionist. In those days before computers, when we actually typed letters, I insisted that not only were letters perfect, they also had to have no erasures. I had a secretary typing a letter 20 times, and that’s very inefficient. So you have to get past that and do what’s practical. When I look back in my life, there’s not a single day in which I haven’t done something that I would have liked to have done differently or better. You can aim for being perfect, and then you get what you get. The first sentence in my book says, “If you have enough joy in your life, what else do you really need?” And as a spoiler, it’s also the last sentence. If I’m enjoying every day, what else do I need? I don’t need more money or more friends or more anything. FELDMAN: Your “Shrink the Glass” is a great way to maintain the positive. Rather than ask “Is the glass half empty or is it half full?” just shrink the glass and make it the right size for what you have. FOX: I have a great personal example – I don’t like going to weddings of people I don’t know. My wife knows lots of people and wants to go to weddings. So from time to time I find myself at a wedding, and I don’t want to be there. I can either groan to myself for three or four hours, or I can say, “Wow, this is such a nice place. I’m enjoying the wind on my face. It’s really nice. The food is great.” At one wedding I didn’t want to go to, I met a guy who made me $20 million in a business transaction. If you’re there, you might as well enjoy being there, because grumbling about it is not going to do anything but make you less happy. FELDMAN: One of your tools is “The Picture: Function over Form.” How does that apply in sales? FOX: In sales, you have to get to the essence of what you are trying to sell. In real estate, I am selling cash flow. So my clients can have a certain percentage of cash return, which I distribute monthly, and that’s the essence of what I’m selling. The form is real estate, and I give people
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April 2014 » InsuranceNewsNet Magazine
17
FEATURE
PEOPLE TOOLS FOR MORE SALES
nice pictures because I want them to have some confidence that it looks good. But my father taught me that, in real estate, “Don’t go see the property and fall in love with it. It’s the numbers. If you want property to earn and profit, you look at the numbers first.” That’s the essence of it. So in sales, you have to determine what your clients or prospects really want. When I was in college, I was approached by a life insurance salesman and I said, “Once I’m dead, I really don’t care.” Well, that was true, but not totally true. I certainly cared about my wife and my children. So, my hot button – the function – was for me to feel good providing security for those I loved. And the form of it, whether it was insurance or real estate or whatever, didn’t really make too much difference. FELDMAN: How did that work out with the life insurance agent?
OP PE LE
THE BELT BUCKLE TO O L S “It’s simple,” the all-star defensive lineman explained. “The great ball carriers like Jim Brown or Gale Sayers fake with their eyes. They fake with their heads, fake with their shoulders, and some can even fake with their knees. But they can’t fake with their belt buckle. Wherever that’s going, that’s where they’re going. I just watch their belt buckle.”
FOX: Well, I bought life insurance! This life insurance salesman was really very pleasant, and it was kind of a test for me to say that I really don’t care. A lot of salesmen would have tried the hard sell or disagreed with me. He reframed it and said, “I absolutely understand that you wouldn’t care once you are dead. But do you care what happens to the really important people in your life, like your wife and children? Wouldn’t you like them to have a decent life?” So he was applying continual assent. He was agreeing with me and then showing me how his product, in this case life insurance, was going to help me get what I really wanted. He was a nice guy and I liked him, which I think is an important part of sales. When I travel, I like to shop, but if I walk into a shop and even if they have something I really, really like, and the salesperson is horrible, I will walk out without buying a thing. Other shops I walk into, and frankly there’s nothing much that appeals to me, but the salesperson is so nice I just try to find something to buy. So, in the insurance case, I really liked the guy, and I found myself wanting to help him out.
FOX: Leverage is important but I think about leverage probably a little bit differently than most. Leverage is what I think. I remember sitting in my office with a prospective investor and his last question was, “Well, if I want to invest what do I do?” I didn’t say, “I am desperate. Today is Tuesday. I’ve got to close this escrow on Friday, and I desperately need $10,000!” I never would say that. I said, “You can tell me now. You can tell me tomorrow. You can tell me next week. Whatever is comfortable for you is actually fine. I will say, though, that this is first come, first served, so when I run out, I run out.” Now, I didn’t have any real leverage at all. I was desperate. But I convinced myself that I would take care of the problem, and I was just as calm as could be. So to me, leverage is what you think you have, and you have to be comfortable. In many transactions, I’ve told people this is not going to change my life. I mean we’ll do the deal or we won’t. You won’t waste time with me, but I’m certainly not desperate here. So I think you have to convince yourself first, and that’s really the heart of it. Obviously, if I have some real leverage, I will use it. If I don’t, I will create it.
FELDMAN: How do you get leverage in a sales situation with clients?
FELDMAN: You also talk about how “Showbiz” is important in sales, always
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leaving them wanting more. You don’t want to give them too much. How do you find that balance? FOX: When you’re trying to sell, it’s kind of nerve-wracking, and you tend to overdo it. People have a sixth sense when someone else is trying too hard. I always want to figure out what is enough and then do less. We recently saw The Wolf of Wall Street. I remember the book and I enjoyed the movie. But it’s a three-hour movie. I would have liked it better if they had taken 20 or 30 minutes off, and it would have left me wanting more. With a sales presentation, if you think half an hour is exactly the right amount of time, then make it 20 or 25 minutes. It’s better to end 10 minutes early than one minute too late, when you’ve lost your prospect and they’re bored and they wish you’d get out of there. Don’t let it get to that point. Leave them wanting more. Leave yourself wanting more for your own life. FELDMAN: What’s the best piece of sales advice you can give someone? FOX: No. 1 is smile. Let me tell you why. I think we all like to be around people who are happy. I used to think that when you’re happy, that’s when you smile. And interestingly enough, recent research in psychology indicates very clearly that we become happier just by the physical act of smiling. If you turn up the corners of your mouth, you feel better and more endorphins come into your brain. That’s very clear in the research. So, in sales you should smile and you should be energetic. I’ve done a number of book signings and the last one didn’t go quite as well as I would have liked. Before I started the signing, I forgot to say to myself, “Now Alan, amp up your energy.” We like to be around people who are enthusiastic and let us know it by smiling and showing us they are enthusiastic. That’s the real road to success in sales.
Find out more about Alan Fox and People Tools and follow Alan’s blog at www.PeopleToolsBook.com
Stop Throwing Your Marketing DollarsHOW Down The Toilet Every Time You Host A Dinner Seminar TO ACE ALL THE PRESENTATIONS OF LIFE FEATURE
What If Everything You Knew About Hosting Client Attracting Dinner Seminars Was Wrong? WARNING:
When you put these time tested and proven celebrity marketing systems into your dinner seminars, you will no longer be seen as another financial salesman, but as a trusted advisor and Celebrity Expert® with zero competition! My name is Greg Rollett and along with my partners, Emmy Award Winning Director, Nick Nanton, and Billion Dollar Sales & Marketing Expert JW Dicks, we have been quietly disrupting the same ol’ song and dance many advisors like you have been running for years. After running thousands of our own events, in virtually every major city across the country and working with over 2,100 clients, we are finally pulling back the curtain and literally giving you our seminar success blueprints. You see, right now I know you are great at using your hard earned revenue to put your target market into seats at a classy restaurant with a high-perceived value; and that’s great. You have a good presentation that commands attention. You are good on the spot and can connect with your audience. That’s great too. And, let’s say you are great at what you do, and on average, you close half the buying units at dinner to meet with you one-on-one. But what about all the folks that got your invitation, got dressed, hopped in their car and attended your event…but didn’t book an appointment? That is quite literally the million-dollar question. Let’s say you average 20 attendees at each of your seminar events. You host a great event and book 10 appointments. If you host just one of these events per month, you are leaving 120 potential clients on the table over the course of a year. With two events per month that total is 240. That is a big hole in your profit bucket that needs to be filled. Then what about those that come in for appointments and never close? That’s another 60-120 waiting for you to be their expert and help them. And these were people that actually raised their hand to be contacted. Now multiply that number by the number of years you have been hosting these events. I’ll remind you again, how much does it cost you to put that person in that seat? And you just go and ignore them? You left money on the table!
Greg Rollett Nick Nanton JW Dicks
It’s time you take back control of your seminars. It’s time you conditioned your RSVP’s to respect you as the financial celebrity in your market. It’s time you stepped up to the plate as an elite advisor who is no longer on the same playing field as those just barely getting by or spending more on invitations and steaks than in their own paychecks! It’s time to change the economics of your business that you didn’t even know was humanly possible. And to help you today, I want to invite you to a complimentary video training series. In these three videos, Nick and I will help you to become the financial celebrity in your community, which just so happens to be hosting a “can’t miss event.” After the event, you then show up like a celebrity in their inbox and mailbox by following up with everyone based on their actions at the event. This Celebrity Expert® Seminar System will allow you to close every single, capable buying unit and destroy your perceptions of what is possible at your dinner seminars. To claim your three Free Videos in this training series, as well as a copy of our Best-Selling Book, Celebrity Branding You, simply visit cbaadvisors.com or call 888-775-6885 today. These three videos will open your eyes to the financial tragedy you are putting yourself into every time you host a seminar without this system in place. Today I literally want to give it to you. It’s my gift, so you can succeed the way you deserve to succeed. Visit cbaadvisors.com or call 888-775-6885 to go through our brand new complimentary video training series and see how the Celebrity Expert® Seminar System will end your current frustration and give you new hope for your seminars, your business and your own financial independence. April May 2014 2013 » InsuranceNewsNet Magazine
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NEWSWIRES
U.S. Senate takes aim at senior poverty. bitly.com/qrpoverty
ACLI Warns on Fed’s Insurance Oversight The American Council of Life Insurers (ACLI) is warning of dire consequences if the Federal Reserve Board imposes banklike capital standards on too-big-to-fail insurance companies. Since Dodd-Frank reforms required the Fed to oversee systemically risky insurance companies, the agency has been looking for appropriate measures to assess the health of these companies. Two insurance companies, Prudential and AIG, are on the list, which we will call systemically “important,” because that sounds a whole lot better than the “whoa-there-feller-are-you-OK-to-drive?” implication of systemically “risky.” The Financial Stability Oversight Council is reportedly looking into putting Berkshire Hathaway on the list because of its position as the world’s biggest reinsurer. Some argue that the companies on the list are mammoth holding companies involved in far more than insurance. They warn that these conglomerates can hide behind insurance regulations when in fact they are doing much more than that, including getting involved with really “interesting” financial instruments. ACLI and others argue that insurance standards held up pretty well in the financial crash and only a few carriers ran into trouble. Compare that to the more than 400 banks that failed since the 2008 crash and you can see that they may have a point there.
SUPPORT THE TROOPS? WELL THEN, SUPPORT THEM!
A new survey by First Command Financial Services finds that members of the nation’s armed services who work with a financial advisor put away as much as $2,000 more per month than those who don’t, a trend that is expected to continue over the next several months. Military families put away as much as $4,018 a month in short-term, longterm and retirement savings compared
with $2,016 for families without a financial advisor, the First Command Financial Services Financial Behaviors Index survey found. The survey also found that military families are anxious about the effect of government cuts. DID YOU
KNOW
?
20
IT’S NOT ALL ABOUT MONEY FOR ADVISORS
A common thought in insurance circles is that it’s all about compensation when it comes to independent agents, but LIMRA’s Patrick Leary has data that says otherwise. A recent LIMRA survey of nearly 1,000 independent insurance professionals found that compensation is only a factor. In fact, a greater percentage of professionals agreed on other factors, said Leary, the assistant vice president for distribution research. For instance, more than 90 percent of those surveyed said the criteria they use when selecting carriers to include on their shelf include meeting client needs, ease of doing business and financial strength. More than 80 percent named product selection, underwriting flexibility and
“EVERYDAY EXPENSES” such as energy costs, food, clothing and transportation were cited by more than half of consumers surveyed as limits on their ability to save for financial goals. Source: LIMRA
InsuranceNewsNet Magazine » April 2014
QUOTABLE Indeed, who has ever benefited during the past 237 years by betting against America? — Warren Buffett
brand. Compensation came in after that,
with only 67 percent of the professionals naming it as a carrier selection criterion.
FEWER EMPLOYEES USING ADVISORS
3
%
Last year, the number of employees with 401(k)s using advisors for rePercent drop in tirement-related advice employees with 401(k)s dropped for the first who used an advisor time since the economic crash. The Mercer Workplace Survey found that 33 percent of employees with 401(k)s used an advisor, down from 36 percent in 2012. The percentage of em-
ployees using an advisor had been rising steadily since 2007, when 24 percent of 401(k) plan participants used an advisor. Advisors are still “far behind” plan sponsors and providers as a source of 401(k) investment information, the survey found. But, of course, it’s the smart folks using advisors. They tend to be more highly educated, earn higher incomes, maintain higher 401(k) balances and defer at higher rates than the rest of the 401(k) population.
BANKS MANAGING MORE WEALTH
Odds are that you haven’t gone into a bank branch in a while, but the next time you do, listen carefully. That sound you hear just might be the noise of two palms rubbing together in eager anticipation of relieving you of some of your money through fees.
Most bank executives expect revenues from their wealth management practices to grow 25 percent or more
in the next five years, primarily from fee income, according to a Fidelity Investments study. Key traits among “pacesetter” banks identified in the survey
[NEWSWIRES] include a commitment to focus on wealth management from leadership, tight integration with other bank lines of business, comprehensive and holistic wealth management services, using the network of registered investment advisors (RIAs), and outsourcing noncore banking activities. Banks also hold the payroll deposit relationship, and billions of dollars flow through banks by virtue of that connection. Another lucrative connection is with baby boomers who, as a group, hold billions of dollars in certificates of deposit. It’s an opportunity for wealth managers to convert the investment into an annuity. So, those selling annuities would be wise to market their message before retirees cash in their CDs and fall into their bankers’ eager, fee-grabbing clutches. In the spirit of healthy competition, of course.
YOU ARE WHAT THE DOCTOR ORDERED
Advisors prospecting for new clients might want to check with their doctor. Even physicians, some of the highest paid salaried professionals in the nation, could use help when it comes to retirement savings projections, a new Fidelity Investments study finds. Doctors, who earn an average of $299,000 annually, are on track through their employer-sponsored retirement plan, personal savings and Social Security to replace only 56 percent of the income they need in retirement, a study by Fidelity Investments has found. So, there’s opportunity. But, remember, no needling. That’s the dentist’s job.
GEN X, GEN Y, OR GEN $?
Apparently the slackers are gaining on the hippies in the retirement savings game. Generation X and Y savers are elbowing out baby boomers when it comes to defined contributions (DCs),
at least with MassMutual. DID YOU
KNOW
?
Don’t Bet the Farm The Oracle of Omaha has spoken, and the rest of us mortals are left treasuring the gems Warren Buffett gives us in his annual letter to Berkshire Hathaway stockholders. One of the items making the rounds is likely to be a keeper. It’s about a couple of investments, including a Nebraska farm. In it, Buffett explains that he bought a farm, mostly for his son, at a fire-sale price after a real estate bust in the 1980s. He saw that the returns were going to be good, factoring in the good and bad years, and that he would never be under pressure to sell in bad years. So, over the long haul, it would be profitable. In fact, returns tripled and the value increased fivefold in the ensuing years. The lesson was to hold on through the good and bad years. He, of course, compared it to the stock market, but he took it a step further. The equities investor had an advantage over the farmer. Investors are given a minute-by-minute val-
uation for their stocks, but the farmer does not receive the same for the value of his farm.
“It should be an enormous advantage for investors in stocks to have those wildly fluctuating valuations placed on their holdings – and for some investors, it is,” Buffett wrote. “After all, if a moody fellow with a farm bordering my property yelled out a price every day to me at which he would either buy my farm or sell me his – and those prices varied widely over short periods of time depending on his mental state – how in the world could I be other than benefited by his erratic behavior? If his daily shout-out was ridiculously low, and I had some spare cash, I would buy his farm. If the number he yelled was absurdly high, I could either sell to him or just go on farming.” The carrier found that in the fourth quarter of 2013, 58.4 percent of total DC participants are in the Gen X and Y group, while boomers were just 38.5 percent. Boomers are still hogging the assets, with 60.2 percent of the total, while Gen X and Y have 34.2 percent, but that is up from 31.9 percent at the end of 2012.
BOND, ADVISOR BOND
The closer the bond between financial advisor and retirement plan participant, the higher the retirement plan balance and the greater the chances of better investment outcomes later.
AMONG THE TRIGGERS TO SHOP FOR LIFE INSURANCE, 41 percent of recent shoppers say life events (marriage, children, buying a house, etc.) motivated them to shop for life insurance. Source: LIMRA
The connection between the depth of the relationship and the account balance may also help explain the recent growth in the number of “managed accounts” through employer-sponsored retirement plans, along with the increase in the assets held within those accounts. Employ-
er-sponsored retirement plans that work with a professional retirement plan advisor report higher contribution levels than plans that do not, according
to a recent industry-sponsored survey by the Retirement Advisor Council, an advocacy group for employer retirement plan advice. More than four out of five plans – 83 percent – that enter into a partnership with a specialist retirement advisor have seen deferral rates improve in the past two years, compared with only 65 percent of respondents who reported an improvement in deferral rates with all other advisors, the survey found. April 2014 » InsuranceNewsNet Magazine
21
INHERITANCE
The
RETIREMENT
INCOME
Psychology of the
WELL-BEING
RISK
ASSETS
INVESTMENTS
Affluent BUYER Agents and advisors are always looking for insight into selling big cases, but it’s knowing the big case client that really earns the business.
I
nterest in getting into the big case market is ramping up. At least that is how insurance distributor Bill Levinson sees it. His firm, Levinson & Associates of Coral Springs, Fla., has been getting calls from agents who want help in breaking into the high-net-worth and wealth markets. “They want to know which products to use and how to get started,” he said. Many of the callers had been selling to small businesses successfully, but they were looking to grow business with new opportunities, and they figured the wealth market would be a good place to turn. According to upscale market experts, these agents are spot on. The wealthy market teems with opportunity. For instance, the wealthy household pie has grown bigger in recent years. Data from 22
InsuranceNewsNet Magazine » April 2014
By Linda Koco
Chicago researcher Spectrem Group indicates that the market numbered 24 million households in 2012, up by more than 26 percent from the 10-year low of nearly 19 million in 2008. But while the growth is significant and the potential dollars may dazzle, breaking into the market is not a shoo-in. Success here is not about selling to the money, experts say. It’s about acquiring a deep understanding of the market, building relationships and earning trust.
Who Is “Rich?”
To get started, it helps to identify who is rich. Time was, maybe in the 1950s and 1960s, when the term “millionaire” was synonymous with being incredibly rich. But no more. A survey by UBS Wealth Management Americas found that only 28 percent of investors with $1 million to
$5 million in investable assets considered themselves rich. Even so, people with half or even a quarter of that sum often show up in surveys on the wealthy. That’s because these households do have assets squirreled away and they may be on a wealth-building journey. In addition, depending on circumstance and geographic location, some may already be comparatively free from financial worry and so may be considered wealthy in the comparative sense. The contradictory perspectives can create a mishmash for producers. At national conferences, for example, some talk about wealthy customers as having millions while others put the number at a half-million or so. Researchers and demographers have been trying to sort things out by dividing the wealth market into various segments.
For instance, Spectrem Group divides the wealthy into three main net-worth segments: mass affluent ($100,000 to $1 million), millionaire ($1 million to $5 million) and ultra-high-net-worth ($5 million to $25 million). These figures are “NIPR,” or “not including primary residence.” “We’ve added a new segment, too,” Spectrem president George Walper Jr. said. “We call it $25M & Plus.” Spectrem also subdivides each market category into more discrete segments. For instance, almost half of millionaires (46 percent) have between $1 million and $1.9 million in net worth. The remainder have $2 million to $2.9 million (27 percent) and $3 million to $4.9 million (28 percent). Some producers use segments like these to help identify which wealthy customers they might be able to serve. Jeff Wilson, cofounder of Netstreet Brokerage, Nashville, Tenn., said that, in his view, the high-net-worth market ($5 million in investable assets) is the only place where life insurance producers can make money in individual and business sales today. What about the mass affluent? It’s hard for producers to make $75,000 to $100,000 a year by selling life insurance to this market unless the agent has “significant infrastructure,” he said. “But then, infrastructure involves significant cost.” What about the ultra-rich market? “There are only 110,000 families in that market,” Wilson said, referring to those with $25 million or more in net worth. “Very few insurance agents will spend their time and resources chasing that.”
More Approaches
Relying on market segmentation has its limits, though. Producers are noticing that experts identify different segments in different ways, use different terms and create different suggestions for wealth management approaches, products and practices. As a result, producers find they must unravel multiple terms and definitions before deciding which part of the market, if any, to serve. Here is a fairly simple case in point. A 2012 Northern Trust survey defines the mass affluent category as starting at $250,000 in investable assets (not $100,000 in net worth, as in Spectrem’s
WHO EXACTLY ARE THE WEALTHY? LIMRA research identifies four segments of net worth that define the more well-off households in the U.S.
MegaHigh Net Millionaires Worth $3.5 million or more
$1 million to $3.5 million
The Affluent
Mass Affluent
$500,000 to $999,000
$250,000 to $499,000
Source: Spectrem Group, Chicago
WHAT DO THEY HAVE IN COMMON? A Spectrem Group survey found that wealthy people share a number of common characteristics. They include: They have high education levels: 97 percent of the ultra-high-networth segment ($5 million to $25 million) graduated from college and 39 percent had an advanced degree; 88 percent of millionaires had a college degree. They rely on advisors for investment decisions: Of the UHNW, 32 percent consult regularly with an investment advisor; 27 percent rely on advisors for special needs. They are entrepreneurs and business owners: The top occupations among UHNW investors are entrepreneurs and business owners, followed by senior corporate executives.
April 2014 » InsuranceNewsNet Magazine
23
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FEATURE
THE PSYCHOLOGY OF THE AFFLUENT BUYER
analysis) and going up to $1 million (as does Spectrem). It calls the $1 million to $4.99 million segment the affluent (not millionaire). But its high-net-worth category is the same as Spectrem’s, at $5 million or more. At LIMRA, researchers analyzed Federal Reserve Board data on older Americans, retired and not retired. Out of that study came four segments that identify the more well-off households based on financial assets: mass affluent ($250,000 to $499,000), affluent ($500,000 to $999,000), high net worth ($1 million to $3.5 million), and mega-millionaire ($3.5 million and up).
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assets until they sell the firm, explained Norm Trainor, president and chief executive officer of Covenant Group, Toronto. For this market, focus on net worth, he said. Net worth. This refers to assets minus liabilities. In reference to individuals, this often includes the value of the family residence since it is an asset and it may entail a liability (an outstanding mortgage, for example). But some studies and financial experts do exclude the home value when talking net worth, so it pays to check. Annual income. Some experts reference annual income, not investable assets. For instance, Mark Rank, a pro-
Lawyer 9%
Dentist 11%
Key Terms
It helps to bone up on some key terms for measuring wealth, such as the following: Investable assets. The financial services industry, including dual-licensed insurance practitioners, often views the wealthy in terms of “investable assets.” This refers to the money or assets the client has available to invest. It’s liquid. Most firms exclude the equity value of the household residence because they consider it an illiquid asset. For the same reason, some also exclude the value of retirement accounts, particularly those associated with guarantees, as well as collectables and other such assets. Then again, using investable assets as a measure of wealth can be iffy. Clients who are business owners typically plow almost everything they have into their business, so they may have comparatively little to show by way of investable 24
InsuranceNewsNet Magazine » April 2014
Women are more likely than men to report they trust their financial advisor: 35% vs. 22% Ages 30-55 are more likely than those 66-80 to trust their financial advisor: 36% vs. 22%
Source: Charles Schwab Independent Advisor Outlook Study High Net Worth Investor Study - April 2012
fessor at Washington University in St. Louis, defines a category he calls the “new rich.” This refers to people with annual household incomes in the $100,000 to $150,000 range and who have reached $250,000 or more in income at some point during the working years. There are off-shoots on this, too. For instance, Fidelity Investments has blended assets and income to create a wealth category it calls the “millionaires of tomorrow.” These are people with the potential for becoming millionaires. According to Fidelity, this market segment has average household assets of $800,000 and an average annual income of $150,000. Incidentally, Fidelity reports that the average age of these “millionaires of tomorrow” is 51. Financial assets. These are intangible assets (as opposed to tangible assets such as a house or a piece of real estate). They
THE TAX SURPRISE
FEATURE
FEATURE
THE PSYCHOLOGY OF THE AFFLUENT BUYER
have value due to contractual relationships. They are considered to be liquid or at least reasonably liquid. Examples include stocks, bonds, bank deposits, certificates of deposit, etc. The term is less widely used than, say, investable assets, but because the term focuses on the contractual value of the asset, it is sometimes used in lieu of investable assets. Knowing the nuances between terms and measurements will help advisors assess their customer base, a referral or a lead list for potential opportunities, according to wealth market experts. It will also help in evaluating suggestions from providers and marketers on which products, services and approaches to pair up with which market segment.
Look Beyond the Assets
Don’t just focus on assets, income or net worth, Spectrem’s Walper said. It’s also important, if not more important, to study key demographics within the segments, such as age, employment and education. “I publish information about net worth
One Shocked Millionaire It’s not just producers who wrestle with whether a millionaire is rich. Tom Hegna, president of TomHegna.com, a Fountain Hills, Ariz., agent training and consulting firm, recalls how a 47-year-old widow came face-to-face with the very same issue. The woman had visited Hegna to give him a heads-up about her new “millionaire” status. She was soon to receive $1 million from the life insurance policy of her late husband who had died in a car accident, she explained. Then she recounted her many plans for the money, including building “a custom house on the lake” for herself and her two daughters. Hegna listened for a while, but then stopped her. In today’s interest rate environment, he said, a million dollars will not support such a luxurious lifestyle. She was “absolutely shocked,” he said.
segments because advisors want to see that,” he said. But understanding the characteristics of the segments – such as age, education and dependency upon advisors – will help the field get a better sense of market possibilities based on needs and values, he said. For instance, in a 2013 survey, Spectrem found that:
» Wealthy people are educated. All three wealth categories had a very high proportion of college graduates, for example. Among the ultra-high-net-worth, 97 percent graduated from college and 39 percent held advanced college degrees. Among millionaires, 88 percent had graduated from college and, among the mass affluent, 80 percent had done
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InsuranceNewsNet Magazine » April 2014
THE PSYCHOLOGY OF THE AFFLUENT BUYER the same. Presumably, then, the wealthy value education. » The wealthy use advisors. All three segments do use investment advisors but in different ways and to different degrees. In the ultra-high-net-worth segment, 18 percent rely on an advisor to make most or all of their investment decisions, 32 percent consult regularly with an investment advisor and 27 percent use an investment advisor for specialized needs even though they make most of their own decisions. By comparison, millionaires come in at 13 percent, 29 percent and 32 percent, respectively, and the mass affluent at 11 percent, 18 percent and 34 percent. So, the value placed on advisory services appears to increase with wealth. » The wealthiest people are owners. The top occupation among ultra-highnet-worth investors is entrepreneur/ business owner (14 percent) followed by senior corporate executive (12 percent). By comparison, the top occupation
among millionaires is manager (17 percent) followed by educator (12 percent). Agents and advisors can use information like that, in combination with other information, to develop a way to approach and serve their target market effectively, Walper contended. For instance, the survey found that senior corporate executives use advisors the most. This suggests that this particular occupational group should be easier to reach than previously thought, Walper said. “These executives are used to using advisors at work so they tend to do the same when they purchase individual products for themselves,” he explained.
FEATURE
the world of competition. “The focus turns into finding the next latest and greatest life insurance product for the wealthy person, the annuity with the hottest rate, the term policy with the most liberal underwriting or the investment that delivers the best year-end results,” Treskovich warned. The danger to the advisor? The wealthy client might start looking around on the Internet, consulting other advisors or demanding spreadsheets and other products, he said. The advisor could end up being replaced in the process. Some advisors rely on traditional approaches, he added. For instance, they will offer to address estate tax problems. “But that’s not catching fire in today’s world,” he said. “The cheese is moving, and no one knows where it’s going to end up.” He points to the decline in estate tax filings as an example. They plunged 87 percent from 2003 to 2012. What will work, then? Innovate around the wealthy client’s problems, needs and wants, he said. To illustrate, Treskovich cited some
Don’t Sell by the ‘Slots’
Success in the wealthy markets is not a matter of slotting clients by net worth and then selling them the products that someone says fit the category, said Matthew A. Treskovich, chief financial officer and wealth advisor at Creekmore Insurance Group, Oviedo, Fla. The slot approach takes control from the hands of the advisor and puts it into
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April 2014 » InsuranceNewsNet Magazine
27
FEATURE
THE PSYCHOLOGY OF THE AFFLUENT BUYER
surprising findings from a U.S. Trust survey of the wealthy. Among those having more than $3.5 million in net worth, 84 percent attributed their success to focus and hard work. In addition, 50 percent attributed it to intellect, and 45 percent to personal values. As for how they want to use their personal wealth, the main answers were to build financial security and create financial freedom. In view of that, he said, advisors will get more interest from people in this market segment by talking with them about their goals and values than, say, about taxes and net worth. He suggested that advisors concentrate on building relationships in this market. “Find out their problems. Perhaps draw upon your own challenges for ideas about issues they too might be facing, especially with those who are in a similar life stage or circumstance as you.” Often the wealthy will have relationship issues, he said. Although an ultra-wealthy person might have specialists who help with those problems and a team of advisors who help in other areas, “the person might still want to talk with someone else about other relationships.” Covenant Group CEO Trainor sees that happen. He noted that financial advisors often become the most trusted advisor to wealthy clients, who reveal intimate details of their lives and relationships. For instance, one advisor that his firm works with had a very wealthy client who had a 17-year-old grandson with addiction issues. “The advisor was able to connect the family with a specialist in adolescent addiction. The grandson received the help he needed.” This is a connections economy, he concluded. “The best advisors create a web of connections that add value to the lives of clients.”
The Needs of Entrepreneurs
In the United States, about 83 percent of people with $10 million or more in net worth are first-generation wealth, Trainor noted. “They are immigrants to wealth, and the vast majority is made up of entrepreneurs from lower- or middle-income households.” This is the market where Trainor sees the most opportunity for insurance, in28
InsuranceNewsNet Magazine » April 2014
Ways of the Wealthy What do wealthy people do with their money? What do they value? What do they want? What do they think about? Researchers constantly probe the wellheeled to find out. Here are a few tidbits. Freedom: Fifty percent of those with $250,000 or more in investable assets (and half with at least $1 million) define wealth as having “no financial constraints,” whereas only 16 percent say it means “surpassing a certain asset threshold” and only 10 percent define it as “never having to work again.” Source: UBS Wealth Management Americas Wealth transfer: Among individuals in families with an average net worth of $20 million or more, 80 percent expect to pass on their wealth to direct family members, yet only 46 percent have a wealth transfer strategy or plan in place and only 38 percent have prepared a will but nothing else. Source: SEI Where they live: The states of Maryland, New Jersey, Massachusetts and Connecticut have the greatest density of millionaire households. Source: Phoenix Marketing International Inheritance: Less than half of investors with a net worth of $3.5 million or more say that leaving a financial inheritance is important. Source: U.S. Trust Advisor consultations: Among members of Generation X and Generation Y who have $1 million or more in investable assets, 61 percent make their own investment decisions but work with at least one advisor. Source: Fidelity Millionaire Outlook Multiple services: Wealthy clients are now seeking a mix of services and the ability to access and interact with their portfolios and financials online, on their own and in collaboration with advisors. Source: Aite Group Risk worries: While millionaires of tomorrow have a grip on financial basics, they are not comfortable taking on risk to maximize returns. Source: Fidelity Insights on Advice Investments: Those having $1 million or more investable assets plan to commit 50 percent of their asset allocation to equities in 2014, and they feel bullish on financial services, health care, industrial and the consumer discretionary sectors. Real estate: Around 3 percent of the world’s total real estate value, or $5.3 trillion, is owned by the world’s 200,000 ultra-high-net-worth individuals with net assets of $30 million and above. Source: Savills, with Wealth-X
vestment and wealth advisors today. “The people who grew up with wealth already have advisors in place, but not so the first-generation wealthy,” he said. “After they sell their businesses and come into $10 million to $200 million, they must suddenly move from being a wealth creator to being a wealth steward. Their lives become more complex, and they often struggle to deal with the wealth they created.” This opens up opportunity for the advisor because many of these former business owners now need advice on what to do with their millions. Unfortunately, it also creates a dilemma for advisors, he said, because “many entrepreneurs are not used to letting someone else manage things for them.” Many advisors get hung up on the disconnect, Trainor said. “They don’t understand the psyche of the entrepreneur,” and they don’t know how to build the trust that will bridge the gap. Trainor’s suggestion is to identify which types of clients represent the firm’s most valuable relationships. Then focus on educating and informing clients in this category; that’s a big part of the role of the advisor in this market, he said. “To get buy-in, you need to give these clients what they want. And what they want is freedom from worry, financial independence, security and time for personal pursuits. Then to keep these clients, you need to give them what they need.” That’s where setting up the wealth management plan comes in, he said. The advisor will need to make recommendations for protection, risk management, estate preservation, etc., then implement, and then “track to ensure success.” The big case market is not just about evaluating net worth, making the sale and collecting commissions, Trainor emphasized, echoing points raised by Walper and Treskovich. “It’s about building relationships with the clients. That’s where trust is critical, and it reveals the advisor’s real value proposition – advice, dependability and a profitable relationship over a lifetime.” Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at linda.koco@innfeedback.com.
THE TAX SURPRISE
FEATURE
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April 2014 » InsuranceNewsNet Magazine
29
LIFEWIRES
College for Financial Planning takes over LUTCF program. bitly.com/qrlutcf
Insurers Add a Dash of LTC to Enhance UL Fewer companies are selling long-term care insurance as a stand-alone policy. Instead, they are incorporating long-term care riders onto life policies. Life insurance sales, battered by low interest rates, are more attractive when they have a little extra to offer, such as a longterm care or chronic illness rider. Nationwide and Variable Annuity Life have recently included riders onto their basic life insurance platforms. In addition, John Hancock announced it was making a long-term care rider for its life insurance products more flexible. The John Hancock rider provides policyholders with more coverage for retirement planning and helps with estate planning.
Total annualized premium for universal life, variable universal life, term and whole life was flat at the end of the third quarter of 2013 compared with the
third quarter in 2012, according to the U.S. Individual Life Insurance Sales Summary Report issued by LIMRA. Face amounts declined 2 percent over the same period. The total number of policies in all categories dipped 3 percent, with face amounts declining 2 percent over the same period.
COMING TO A TABLET NEAR YOU!
If you have been waiting for the killer app that will move life insurance selling to the mobile world, MetLife would like you to consider its latest offer.
It’s an app for iPads to help agents and advisors explain the benefits of whole life coverage. It’s the
latest example of a major life carrier moving to mobile-based platforms in an effort to capture the attention of consumers with a “dynamic” analysis of the advantages of life insurance. “Through its interactive capabilities, the app allows financial professionals to bring their conversations with clients to life by showing how whole life products can help clients meet their individual financial goals,” said Matt Quale, vice president of U.S. retail marketing for MetLife. OK, so it’s not Angry Birds, but it could make for Happy Clients. DID YOU
KNOW
?
30
NEW BAND FORMS FOR DEATH MASTER FILE
A new coalition is on the scene to help implement a new law governing the access to and use of the Death Master File (DMF). The Death Master File, besides being a great heavy metal band name, is the Social Security system created in the 1930s to provide basic information on the deaths of American citizens. It seems that some people thought that insurance companies were not diligent enough in using those records to ensure
the payment of death benefits. The coalition of insurance companies, pensions, credit rating agencies and charitable organizations along with others that use the DMF aim to ensure the records are accurate, accessible and secure.
STOLI REARS ITS HEAD
In case you were missing the days when stranger-originated life insurance
THE NUMBER OF ACTIVE LIFE INSURANCE COMPANIES peaked at 2,323 in 1988. At the end of 2012, 868 life insurance companies were in business in the United States. Source: American Council of Life Insurers
InsuranceNewsNet Magazine » April 2014
QUOTABLE My wife and I just took out life insurance policies on one another, so now it’s just a waiting game. — Bill Dwyer
(STOLI) was the biggest controversy, the Illinois Department of Insurance issued a warning about it. The department did not describe any of the “several” STOLI cases “being reviewed” but it called the deals “viaticals,” which is a term used in the case of an illness that would shorten a life span. Maybe it’s a scam involving peo-
ple who were diagnosed with something serious or maybe the department was just throwing the word around. In any case, clients might ask about them, particularly with a life settlement.
E-SIGNATURE REVOLUTION
It is difficult not to think it’s the end of an era when John Hancock announces it is accepting electronic signatures for life insurance customers. But it is another sign of changing times as the latest major life insurer meets the demand of advisors and customers to automate core products and services.
Forms that customers and brokers can complete online using electronic signatures include name and address changes, dividend withdrawals, beneficiary changes, payment plans, loan requests, and policy and ownership changes, the company said. The e-signatures shorten the process and improve service. “Customers today want seamless, self-service online processes,” said Mike Doughty, president of John Hancock Insurance. Can they at least automate it so it comes out as a graceful, flowing thing of beauty?
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April 2014 » InsuranceNewsNet Magazine
31
LIFE
Why Overfunding Life Insurance Makes Retirement Sense A massing large sums in a life insurance policy can create a remarkably efficient income stream for the right client. By J. Leland “Lee” Davis
T
he power of life insurance death benefits inside a comprehensive wealth management plan is well understood. But today, the power of insurance cash values to create a retirement income stream is becoming more and more apparent. Most advisors understand the concept of leveraging comparatively small life insurance premiums to produce an inordinately large, tax-advantaged insurance death benefit. The concept of “discounted dollars” is well documented and is forever compelling. In the right circumstances, though, perhaps even more compelling is the concept of tax-deferred accumulation and tax-advantaged distributions that exist in today’s stunning array of life insurance policies. Accumulating large sums in modern life insurance policies can create remarkably efficient income streams for the right client. In our wealth management practice, we routinely use “overfunded” life insurance 32
InsuranceNewsNet Magazine » April 2014
policies in addition to a diversified portfolio of investments in order to help clients achieve a future stream of tax-advantaged income that can be turned on when they retire. Let’s take a real-world look at one of our professional clients, a 45-year-old man we’ll call Fred. He earns a significant income and therefore is able to afford to maximize his various investment programs. Because of Fred’s large income, he has a combined federal and state income tax rate slightly in excess of 45 percent. He wishes to save or invest an additional $25,000 per year for the next 10 years as a portion of his overall investment plan. He has a wide range of options that can be compared. For this particular comparison, we will include the following: a tax-deductible retirement plan (TDRP), an equity account and a taxable bond fund. To keep a relatively level playing field, we will use an average annual return rate of 6.5 percent for our bond fund. (Yes, we know, good luck finding those bond returns today. But for long-term comparison purposes, please indulge us.) In addition, although longterm stock-based investing historically has yielded higher average annual returns, we’ll use an average of 7 percent yearly for
the equity fund and lop off a 1 percent management fee. Taxes will be applied as they would normally occur. For example, the tax-deferred retirement plan grows tax-free, but when distributions begin, income tax is taken out, assuming Fred remains in his current tax bracket for life. For Fred’s potential life insurance policy, we will use a commercially available indexed universal life insurance policy, linked to the S&P 500 stock index (with other indexes available) and assume a return of 7 percent annually. The initial death benefit is $1.13 million, based on Fred’s preferred health status. The policy premiums are structured to comply – just barely – with modified endowment contract guidelines, so as to preserve the tax-free internal buildup of values under current tax law as we understand it. In plain words, we want as high a premium as possible within these rules. Look at the results for the next 20 years prior to Fred’s retirement (see chart 1 on page 34). As we can see, life insurance policy values compare exceptionally well with the other alternatives over 20 years. The $1 million-plus life insurance death benefit is a nice advantage over other investments.
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LIFE
WHY OVERFUNDING LIFE INSURANCE MAKES RETIREMENT SENSE
CHART 1 20 YEARS PRIOR TO FRED’S RETIREMENT AFTER-TAX VALUES OF IDENTICAL ALLOCATION TO VARIOUS FINANCIAL ALTERNATIVES
LIFE INSURANCE
Year-End After-Tax After-Tax After-Tax After-Tax Cash Flow Cash Flow Life Cash Flow Value of From From After-Tax Year-End Year-End Insurance From TDRP if Taxable Taxable Equity Equity Policy Accum Surrender Death Year Premium TDRP Distributed Bond Fund Bond Fund Account Account Loan Proceeds Value Value Benefit 1 25,000 0 26,235 0 25,890 0 25,958 0 20,742 0 1,113,149 2 25,000 0 53,766 0 52,702 0 52,912 0 42,517 12,518 1,113,149 3 25,000 0 82,657 0 80,468 0 80,899 0 65,539 36,152 1,113,149 4 25,000 0 112,975 0 109,223 0 109,959 0 89,904 61,742 1,113,149 5 25,000 0 144,791 0 139,001 0 140,134 0 115,717 88,779 1,113,149 6 25,000 0 178,178 0 169,840 0 171,465 0 142,973 117,259 1,113,149 7 25,000 0 213,215 0 201,776 0 203,997 0 171,905 147,416 1,113,149 8 25,000 0 249,982 0 234,849 0 237,776 0 202,756 180,103 1,113,149 9 25,000 0 288,566 0 269,100 0 272,851 0 235,774 214,958 1,113,149 10 25,000 0 329,056 0 304,570 0 309,270 0 271,008 252,029 1,113,149 11 0 0 345,312 0 315,413 0 321,127 0 288,789 272,259 1,113,149 12 0 0 362,370 0 326,642 0 333,439 0 307,890 294,421 1,113,149 PREMIUMS END 13 0 0 380,271 0 338,270 0 346,223 0 328,420 318,013 1,113,149 14 0 0 399,056 0 350,313 0 359,497 0 350,594 343,859 1,113,149 15 0 0 418,770 0 362,784 0 373,279 0 374,449 371,388 1,113,149 16 0 0 439,457 0 375,700 0 387,590 0 400,039 400,039 1,113,149 17 0 0 461,166 0 389,075 0 402,450 0 427,428 427,428 1,113,149 INCOME BEGINS 0 483,948 0 402,926 0 417,880 0 456,780 18 0 456,780 1,113,149 19 0 0 507,855 0 417,270 0 433,901 0 488,197 488,197 1,113,149 20 0 46,185 484,476 46,185 384,296 46,185 402,581 46,185 521,852 472,942 1,064,239
CHART 2 10 YEARS INTO FRED’S RETIREMENT 21 0 46,185 459,943 46,185 350,148 46,185 370,059 46,185 557,970 457,265 1,012,443 22 0 46,185 434,197 46,185 314,784 46,185 336,291 46,185 596,801 441,244 957,592 23 0 46,185 407,180 46,185 278,162 46,185 301,229 46,185 638,495 424,850 899,504 24 0 46,185 378,829 46,185 240,235 46,185 264,822 46,185 683,307 408,147 837,989 25 0 46,185 349,077 46,185 200,958 46,185 227,019 46,185 731,537 391,233 772,845 26 0 46,185 317,854 46,185 160,284 46,185 187,767 46,185 783,493 374,201 703,857 27 0 46,185 285,090 46,185 118,160 46,185 147,010 46,185 839,639 357,288 630,799 28 0 46,185 250,707 46,185 74,538 46,185 104,691 46,185 900,495 340,776 553,430 29 0 46,185 214,626 46,185 29,362 46,185 60,749 46,185 966,596 324,944 471,497 30 0 46,185 176,762 46,185 -17,422 46,185 15,122 46,185 1,038,612 310,193 384,730
But the real advantage is likely to come as Fred enters the “distribution phase”. That’s the time Fred can begin to withdraw money from the various alternatives. This illustration uses a $46,185 annual withdrawal amount, net to Fred. A look at the next 10 years, when Fred is between the ages of 65 and 75, is enlightening (See chart 2). By the time Fred is 75, the taxable bond fund has gone to zero and there are no more distributions available. The same is true of the equity account. 34
InsuranceNewsNet Magazine » April 2014
Zero. The tax-deductible retirement plan (TDRP) still has $176,762, enough to provide income for an additional four or five years. By contrast, the life insurance policy surrender value is still $310,193, and allows for at least another 10 years of $46,185 annual payouts under the original set of assumptions. Also, the life insurance death benefits are still in force, at $384,730 in year 30. To be sure, a widely diversified set of strategies and investments is a good idea
for Fred in regard to saving for retirement. An overfunded life insurance policy might just be chief among them. J. Leland “Lee” Davis, LUTCF, is a Top of the Table member with multiple Court of the Table qualifications over his 25 years of MDRT membership. He and Jeremy L. Davis, CFP, ChFC (a Court of the Table qualifying MDRT member) are partners in the Colorado-based wealth advisory firm J.L. Davis Financial Corp. Lee may be contacted at lee.davis@innfeedback.com.
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To learn more about how you can help your clients expand their choices, contact your BGA, visit www.myprotective.com/icul4 or contact our Life Sales Desk at 877.778.3500, option 1 The S&P500® Index is one of the most commonly used benchmarks for the U.S. equity market. It is a market capitalization weighted index of 500 of the largest U.S. companies and includes a representative sample of leading companies in leading industries of the U.S. economy. This index is based on the stock prices of these companies and does not include dividends. Premiums allocated to the fixed account do not involve the S&P 500 Index. The S&P 500 Index is a product of S&P Dow Jones Indices LLC (“SPDJI”), and has been licensed for use by Protective Life. Standard & Poor’s®, S&P® and S&P 500® are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and sublicensed for certain purposes by Protective Life. The Protective Indexed Choice UL is not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates, and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability for any errors, omissions, or interruptions of the S&P 500 Index. Life insurance products issued by Protective Life Insurance Company, Birmingham, AL. Policy form numbers, product features and availability may vary by state. Consult policies for benefits, riders, limitations and exclusions. Subject to underwriting. Up to a two-year contestable and suicide period. Benefits adjusted for misstatements of age or sex. In Montana, unisex rates apply. 1
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ANNUITYWIRES
New Products Springing Up The past month has seen some new products appear on the annuity landscape. Here’s a rundown. Nationwide partnered with fixed index annuity designer and marketer Annexus on the launch of a new annuity called Nationwide New Heights. Annexus will market and distribute the New Heights fixed index annuity through independent marketing organizations (IMOs). Features include two optional riders for an additional cost: a lifetime income benefit rider and an enhanced death benefit rider, each available with a purchase payment bonus option. Security Benefit added a Morgan Stanley dynamic allocation index option to one of its fixed index annuities. Security Benefit has added a new interest crediting option for its Secure Income Annuity, a flexible premium indexed deferred annuity. The option is a two-year point-topoint account based on the Morgan Stanley Dynamic Allocation (MSDA) Index. Variable Annuity Life Insurance Co. (VALIC) announced its deferred income fixed annuity for 401(k), 403(b) and 457(b) deferred compensation plans. The annuity, branded as IncomEdge, offers employed participants the opportunity to arrange a fixed income stream they can rely on once they retire. VALIC is a retirement plan provider for health care institutions, K-12 school districts, higher education institutions, governments and other nonprofit organizations. The IncomEdge annuity is meant for those whose retirement is at least one year away. Annuitants can choose from among several payout options, which include receiving lifetime income only, lifetime income for a fixed number of years, lifetime income with an installment refund, lifetime income with a cash refund and a joint life option covering two people. Manhattan Life introduced a new multiyear guaranteed fixed annuity product line. The Preferred Choice Series is a single premium deferred annuity line offering guaranteed periods of three, five, six and seven years. The Preferred Choice Series five-, six- and seven-year products offer a 15 percent calendar year free withdrawal provision available in year one. Minimum premiums are set at $3,000 ($25,000 on Preferred Choice 6) with issue ages between 0 and 84. The Preferred Choice 3 product can be issued from ages 0 to 99 and offers interest-only withdrawals. The Phoenix Companies launched the Phoenix Personal Retirement Choice annuity, a single premium fixed index annuity with an optional guaranteed lifetime income benefit rider. Designed for individuals approaching or already in retirement, Phoenix Personal Retirement Choice is offered exclusively through a group of distribution partners working with Saybrus Partners, Phoenix’s distribution subsidiary. First Investors Life announced its Single Pay Longevity Annuity. The new single premium deferred income annuity offers individuals the opportunity to receive guaranteed future retirement income in exchange for a single purchase payment.
WHAT’S YOUR NUMBER?
Your retirement number, that is. The Transamerica Center for Retirement Studies says only one in 10 people knows how much money they need in savings to achieve a comfortable retirement. Not knowing “the number” is one reason why most Americans have 36
InsuranceNewsNet Magazine » April 2014
accumulated a nest egg that can replace only 60 percent or less of their income during retirement. Financial advisors generally agree that retirees need to replace 80 percent or more. More than half of Americans report having less than $25,000 in savings and investments, according to the Employee
QUOTABLE Almost every economist you ever speak to says you want to have your money in a life annuity with survivorship benefits. But no one ever wants to do that. — Harvard Business School senior lecturer Bob Pozent
Benefit Research Institute. The EBRI also reports just 13 percent of workers say they are “very confident” they will have a comfortable retirement.
CARRIER SEEKS TO RIDE THE RISING INTEREST WAVE
In a possible sign of a trend, Symetra Financial plans to push even harder to sell fixed and single premium annuities through banks and broker/ dealers in 2014 to take advantage of rising interest rates. “On income annuities, we’ll drive more sales of our single premium immediate annuity (SPIA), which we sell through the same banks and broker/dealers,” said Symetra president Tom Marra. “As more baby boomers look for short-term retirement income solutions, we see attractive opportunities for shorter-duration single SPIAs.” Fourth-quarter sales for the company’s retirement division shot up to $818.3 million, from $358.4 million in the year-ago period. Full-year sales for the retirement unit reached $2.45 billion, up from $1.4 billion in the year-ago period.
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1 in 4 Older Workers Has No Plan for Their DC Plan Assets Once Retired A new LIMRA Secure Retirement Institute (LIMRA SRI) study found that 27 percent of U.S. workers ages 55 to 64 say they do not know how they will use their defined contribution (DC) plan savings after they retire. bitly.com/qrnoplan
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37
ANNUITY
Regulators Refocus Scrutiny on Group Annuity Market E mployers that still have pension liabilities are showing renewed interest in group annuities. By Linda Koco
C
hanges are afoot in the retirement plan market and those changes could impact the nature and future of the group annuity business – as well as annuity practitioners who work in and around that business. Group annuities are fixed or variable annuities used in employer-based retirement plans on both the defined benefit (DB) and defined contribution (DC) sides of the insurance business. In the 401(k) market, the growing focus on fiduciary responsibility is behind much of the change that Charlie Massimo of Deer Park, N.Y., is seeing. As chief executive officer of CJM Wealth Management, a registered investment advisor (RIA), he works with a lot of plans and plan fiduciaries. The high-buzz rule that the Department of Labor (DOL) implemented in mid-2012 is putting pressure on fiduciaries to be “completely transparent” and to put plan participants’ best interests first in ways that many had not done before, he said. Now called Section 408(b)(2) of the Employee Retirement Income Security Act (ERISA), the rule says the fiduciary must “act prudently and solely in the interest of the plan’s participants and beneficiaries.” It spells out disclosure obligations for selecting and monitoring service providers and plan investments. Included are requirements for plan fiduciaries to perform benchmarking, plan and cost disclosure, and “reasonable” compensation assessments, among other things.
A Rule With Teeth
Fiduciaries that don’t comply can be held personally liable and face big penalties, Massimo said. Specifically, they 38
InsuranceNewsNet Magazine » April 2014
can be slapped with an excise tax of 15 percent of the amount involved, and it can go higher, on up to 100 percent, if not corrected in the taxable period. As a result, fiduciaries’ eyes are opening up “very wide,” Massimo said. Fiduciaries are increasingly scrutinizing fee levels, conflicts of interest, investment choices and costs, and doing benchmarking and conducting other research so they can support – and document – their plan decisions. This scrutiny is shaking things up, particularly at the small and midsize firms, which tend to favor group annuities over mutual fund-based plans. The fiduciary at such plans is often a bookkeeper, a relative of the owner or someone else with little plan experience, Massimo said. Many have relied on a commissioned captive agent for plan recommendations, so they don’t know much about plan details and aren’t accustomed to receiving or providing complete transparency on costs, fees, disclosure and related matters. Further, he said, they don’t know if their plan is in the best interests of the participants (the fiduciary standard) or is “just suitable” (the suitability standard). Due to the new regulations, however,
demand is rising for just that kind of information. If a group annuity provider and the agent do not provide it, plan fiduciaries will turn to competitors, Massimo predicted. These could include mutual fund providers or other group annuity providers, other captive agents or independent agents and advisors, other cost and fee structures, etc. In response, some carriers may change their products and/or distribution approaches while others may fold their 401(k) operations. Agents who work with group annuity clients will have their hands full keeping up with disclosure demands from employers and product changes from carriers. Some may need to change their business models or leave the business if they cannot provide the information and services required.
Another Development
Another fiduciary-related development that could trigger change in the 401(k) market hovers in the wings. This is the possible release of two sets of fiduciary regulations for advisors. Reportedly, the DOL would require that the fiduciary standard be applied to advisors who guide consumers on retirement plan accounts, and the Securities
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39
ANNUITY
REGULATORS REFOCUS SCRUTINY ON GROUP ANNUITY MARKET
and Exchange Commission (SEC) would expand the fiduciary standard (which currently applies to registered investment advisors) to include broker/dealers, which now operate under the suitability standard. If such rules are eventually implemented, the 401(k) market could end up operating in a full-circle fiduciary environment. Brokers and advisors would make recommendations in the best interests of the client, as do RIAs, even as plan fiduciaries make decisions in the best interests of plan participants, Massimo said. Critics – primarily those in the insurance sector – have repeatedly warned that the regulations will increase costs for advisors, force many to adopt feebased business models in lieu of commissions, and cause some carriers to reduce plan offerings or leave the market. The regulations may also squeeze small and midsized employers due to onerous fees and limited product selection, they add. Massimo, who is an RIA and therefore already subject to the fiduciary standard, thinks alternatives will emerge and that there will be “huge opportunities” for independent advisors who learn how to take advantage of the new fiduciary rules, whatever shape they take. It could be a while, though. Earlier versions of the proposals met with immediate push-back for a myriad of reasons, and the DOL and SEC both pulled their initial efforts. Many observers predict that both federal bodies will bring out new, “harmonized” versions this year – but observers said that last year and it didn’t happen.
Pension Liability Market
On the DB side of the business, predictions are circulating that employers will step up efforts to transfer their pension liabilities to group annuity carriers. In fact, Deloitte Consulting is predicting that this will help create a “new group annuities market.” This new market will feature “more capital-efficient products and services than carriers might be able to market to individual buyers,” according to Deloitte’s Life and Annuity Products Outlook for 2014. Most agents and advisors won’t be directly involved in the transfers. But if the 40
InsuranceNewsNet Magazine » April 2014
transfer deals offer choices or lump sum payouts to plan participants, advisors might start getting questions from customers wanting guidance on the choices or the lump sum, said Sam Friedman, lead author of the Deloitte report. The group annuity products in this market are fixed annuities, noted Friedman, who is research team leader at Deloitte Center for Financial Services. In the group annuity heyday, the 1950s and 1960s, corporations that had once offered self-managed DB pension plans increasingly linked their plans to the group annuity structures of the day. But that business waned as many employers, especially in the private sector, dropped their DB plans and shifted to DC plans.
This scrutiny is shaking things up, particularly at the small and midsized firms, which tend to favor group annuities … Today, employers that still have pension liabilities are showing renewed interest in group annuities. They want to shift their funding liabilities over to group annuity carriers that have the requisite expertise to manage the accounts and risk exposure, Friedman said. In the process, they can get themselves out of the business of meeting pension obligations, and that is something a lot of employers want to do. They recognize they are not experts in this business, and “they don’t want the responsibility,” he said. For their part, insurers want the volume – “cash they can manage in one shot,” he said. As for the retirees, “they will have the certainty that they will get their guaranteed retirement income from a regulated carrier that specializes in this.” Other factors may be at work too. Where private sector plans are concerned, Pension Benefit Guaranty Corp.
(PBGC) premiums are expected to increase “dramatically,” according to consulting firm Mercer. The 2014 premiums are $49 per participant (indexed with wage growth), but will rise to $57 in 2015 and $67 in 2016, Mercer said. In addition, new mortality tables may increase plan liabilities by 2-3 percent by 2016, and interest rates may rise, Mercer pointed out. So making the transfers sooner rather than later may make financial sense for private sector firms. As for the public sector, which has the majority of active DB plans today, it may get involved in transfer activities of sorts later on. The SAFE Retirement Act of 2013, proposed last year by Sen. Orrin Hatch, R-Utah, would create a new pension plan, also using fixed annuities, to help public sector plans deal with their own pension funding issues. Backers say it would eliminate pension plan underfunding prospectively while delivering lifetime retirement income to employees.
About Risk
There is always risk around the private sector living up to its promises, Friedman observed. Then again, pensions have risk too, due to the potential for developing underfunded liabilities. But carriers do underwrite, they will require a “big amount of cash” to take on the obligations, and the plans will be subject to PBGC oversight, he said. “I think it will be more the norm for the private companies to handle these things than for the employers themselves – because most employers, in the private or public sector, want to get out of their pension obligations.” Agents in the individual annuity market who do not also work in the benefits business may not give much attention to these DC and DB market developments. After all, there is already plenty of annuity change on their plates. But it may pay to keep an eye out, because developments in the retirement plan side of the business may reverberate on the individual side – and/or open up new opportunities. Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda may be reached at linda.koco@ innfeedback.com.
RETHINKING BIG CASES
FEATURE
April 2014 » InsuranceNewsNet Magazine
41
ANNUITY
New Role for Fixed Index Annuities: Inside 401(k)s The upside-potential, downsideprotection message resonates with small- and medium-sized employers. By Linda Koco
C
ould a fixed index annuity (FIA) with a guaranteed lifetime income rider become a viable retirement income option inside a 401(k) plan? And can independent agents interest employers in offering these products to employees?
Independent brokerage general agent Jim Pedigo has been researching questions like this for two years and his conclusion is yes. In fact, he is working on setting up a couple of such cases right now. These will be his first in-plan accounts. The approach could open up some new opportunities for FIA specialists in the independent distribution channel, said Pedigo, who is a retirement planning consultant with Financial RateWatchers$ in Lake Mary, Fla. The small- to medium-sized firms that independent agents typically serve do like the idea of having an in-plan annuity option to offer to employees, Pedigo said. He bases that conclusion on his contacts with employers as well as his research. Employers like the guaranteed income stream the products will provide to plan participants once retired, he said. They like that the annuity accounts will have upside growth potential along with a guaranteed floor during the participants’ working years. And they like that they don’t have to leave their current plans in order to add the option, he said. “Either they can add the FIA to the existing platform or, if that is not allowed, they can make it an outside plan asset that is still a part of the 401(k), in the same way as they might add a real estate investment trust option.”
History
Offering in-plan annuity options inside of 401(k)s and other defined contribution 42
InsuranceNewsNet Magazine » April 2014
plans is not new. In-plan annuities have been available at least since 1999, according to a 2012 report from the president’s Council of Economic Advisors. But those products were immediate annuities, Pedigo said, and “their availability inside defined contribution plans has declined over the years, largely due to the liquidity restrictions inherent in immediate annuities.” The landscape began to change in 2012, however. That’s when the Department of the Treasury and the Internal Revenue Service issued a package of proposed regulations and guidance on retirement plans. The documents were designed “to remove impediments and otherwise ease the offering of lifetime income choices that can help retirees manage their savings,” the Treasury Department said at the time. That regulatory package has opened the door to innovating new approaches for offering annuities inside of 401(k)s, Pedigo said. A handful of very large annuity carriers now offer annuities inside plans for their own workers as well as for employer clients. Still, a 2013 survey by Aon Hewitt
and cited by the Society of Actuaries found that only 10 percent of employer plans were offering in-plan annuities. “That leaves a lot of room in the market for growth,” Pedigo said. So far, the annuities being considered for in-plan annuities tend to be variable annuities with income guarantees, or a mixture of variable and FIAs having such guarantees, Pedigo said. Of the two, the FIAs may have lower costs, depending on policy design, he said. Group annuities with deferred income annuity riders are available too, but they typically don’t offer access to cash values at all times.
Where’s the Fit?
How might the FIA fit into this new world? It provides employers with another annuity option to consider, Pedigo said, referring to individual FIAs that are portable, anti-discriminatory and built with a guaranteed lifetime income benefit. It’s voluntary, so participants can elect the option at will and specify what portion of each contribution should go into the annuity. Participants can stop and start this election as they would with any other plan option.
NEW ROLE FOR FIXED INDEX ANNUITIES: INSIDE 401(k)s “Due to ERISA requirements, the employer/plan sponsor must be named as owner of plan assets, including any annuities, while the plan participant still works at the firm,” Pedigo said. “But workers who leave the employer can take the annuity with them as an IRA, just as they would other plan assets.” The worker then becomes the owner of the annuity, complete with the guaranteed income rider. The FIAs also have other features, such as care benefit provisions, that provide additional value to the plan participants.
Provisos
Agents who are interested in offering FIAs this way will need to prepare for potential plan-related issues. For instance, look for FIAs that will allow issue ages for younger workers as well as older workers. If the minimum issue age is only, say, 45 or 50, then any workers younger than that would be excluded, inviting potential discrimination issues, Pedigo said. “They would also be delayed from starting to purchase their guaranteed retirement income stream.”
How might the FIA fit into this new world? It provides employers with another annuity option to consider. Some plan administrators may balk at the in-plan FIA option. In one case, Pedigo said, the administrator rejected a plan at the last moment due to concerns about processing. “The administrator was using electronic data transfer for its 401(k) processing. But upon learning that FIAs require manual processing, because they typically only provide annual and year-end reports, the administrator said, ‘No, we do not want to do the manual processing.’ ” In such cases, look into hiring an administrator that is willing to do the
ANNUITY
manual processing, Pedigo suggested. “Manual processing of the annuity could entail additional cost, so consider putting this out to bid and then do cost comparisons. Remember, you can carve out the administration, and it’s not as big a deal as changing the custodian.” Finally, emphasize that the FIA option is a long-term commitment for retirement income. Although workers do have access to the funds, he stressed that removing money from the annuity will defeat the purpose. “It will also cost the participant if the surrender charge period has not expired.” Chances are good that participants who elect an FIA in-plan option are already thinking long term, Pedigo said. “They will be buying this fixed product option because they want the guaranteed income stream to be there in retirement, whether they stay at the employer or not.” Linda Koco, MBA, is a contributing editor to AnnuityNews, specializing in life insurance, annuities and income planning. Linda may be reached at linda.koco@innfeedback.com.
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April 2014 » InsuranceNewsNet Magazine
43
HEALTHWIRES
Veteran insurance brokers adapt to a changing market. bitly.com/qradapt
ACA Consumers Staying Away From Cheaper Plans Consumers buying health insurance under the Affordable Care Act (ACA) aren’t going for the gold, and they aren’t settling for bronze. Instead, the majority (62
percent) of those who selected coverage under the exchanges appear to be satisfied with silver, accord-
ing to federal figures. That’s good news for insurers who were concerned that too many people would pick the cheapest premiums, then discover they couldn’t pay the plans’ higher deductibles for medical care, said Michael Mahoney of GoHealth, a private online platform that helps people enroll. The popularity of the silver plans shows consumers are selecting the best package of financial assistance offered through the government exchanges. For a family on a silver plan with an income at 150 percent of the federal poverty level, the cost-sharing assistance reduces a $12,700 annual out-of-pocket maximum to $4,500, and for an individual from $6,350 to $2,250, Mahoney said. The cost-sharing subsidies were intended to encourage consumers to “buy up,” he said.
SMALL FIRMS TO SEE PREMIUMS JUMP
65%
A new federal report estimates that 65 percent of small firms will pay more for employee health insurance as a result of of small firms will pay the ACA, while the remaining more for employee health insurance 35 percent will see premiums drop. Those increased costs will probably be passed on to workers and their families, according to estimates from the Centers for Medicare and Medicaid Services. The effect on large employers is “expected to be negligible,” the report said. Federal officials attributed the changes to new “community rating” rules in the ACA that prohibit the use of gender, health status and claims history as rating factors and new restrictions on
the difference in premiums based on age. Before the new rules, firms with younger and healthier workers often paid lower premiums and they were more likely to offer coverage. Many small businesses renewed their DID YOU
KNOW
?
existing policies in late 2013. That move enabled them to avoid these new rules and potentially higher premiums for a time until they will have to fully comply with ACA.
NORTH DAKOTA HAS THE HIGHEST WELL-BEING
North Dakota residents had the highest well-being in the nation in 2013, according to the Gallup-Healthways Well-Being Index. South Dakota trailed its northern neighbor in second place, with its highest score in six years of measurement. Hawaii held the top spot for the previous four years but fell slightly last year. West Virginia and Kentucky had the two lowest well-being scores for the fifth year in a row. Nebraska topped all other states on the Life Evaluation Index, with a score
that was 17 points higher than West Virginia’s. Alaska boasted the highest Emotional Health Index score, while Vermont led all states in healthful behaviors for the second straight year. Massachusetts
THE PROPOSED 2015 BUDGET for the U.S. Department of Health and Human Services topped $1 billion, the highest amount in the department’s history. Source: Associated Press
44 InsuranceNewsNet Magazine » April 2014
had the best score on the Basic Access Index for the fourth straight year, which is partially a result of having the highest percentage in the nation of residents with health insurance.
STUDY FOCUSES ON LATINO HEALTH
The National Institutes of Health has released findings from the largest study of Latino health conducted in the United States, which revealed a number of risk factors in this ethnic group. Among the findings: » Eighty percent of men and 71 percent of women had at least one adverse risk factor for cardiovascular disease, such as high cholesterol, high blood pressure, obesity, diabetes or smoking. » The percentage with obesity was high among all Hispanic/ Latino groups but was lowest among participants of South American origin. » Among younger participants, few had diabetes. But among participants ages 65 to 74, almost half had diabetes. About half of the men and women with diabetes had it under control. » Men were more likely than women to eat enough fruits and vegetables each day. » Hispanic/Latina women, especially those ages 45 to 64, were more likely to report symptoms of depression than men were.
QUOTABLE Increasingly, employers are viewing health improvement even more broadly through the lens of well-being and productivity. — Robert Kennedy, with Fidelity’s Benefits Consulting
HEALTH
Clients Clamor for ‘Mediclarity’ A s the baby boom generation becomes the Medicare generation, advisors who are committed to serving the senior market will be in demand.
GROWTH IN MEDICARE MARKET (Jan. 1, 2013 vs. Jan. 1, 2014) Individual MA
Individual PDP
Employer Plans
By Andrea Koretz and Craig Ritter
46
InsuranceNewsNet Magazine » April 2014
11,645,095
8.0%
7,408,802
12,573,818
17,992,819 % CHANGE
O
ptimistic trends in the Medicare sales environment continue to attract advisors who are dedicated to this ever-changing marketplace. With more than 10,000 people aging into Medicare every day, insurance carriers competing for market share and consumers practically begging for help to understand it all, advisors committed to the senior market are in demand. While competitive products and compliance are critical to anyone selling in the Medicare milieu, trends that can affect current clients, prospects and advisors themselves are also vital to the success of every salesperson in this complex and exciting industry. Growth of the Medicare market will continue to attract and retain many advisors to the business. Sales growth continued to increase in 2013 and into this year for Medicare Advantage (MA) and prescription drug plans (PDPs), with an 8 percent and 3 percent gain respectively. However, the biggest sales spike was in the employer group plans, which experienced a whopping 26.6 percent increase. The largest factor in the employer plan growth was caused by the Affordable Care Act (ACA), which made the tax benefits to employers much less attractive if they continued to sponsor their own prescription drug plans for their retirees. So from 2013 to 2014, we saw a huge migration away from employers self-funding their own prescription drug plans and into a group PDP. The reason behind this is that when the Part D benefit began with the Medicare Modernization Act of 2003, subsidies were provided to employers in order to prevent a massive migration of Medicare beneficiaries from self-funded groups to group Medicare Part D. Initially, these subsidies
5,852,892
18,539,923
3.0% 26.6%
were not considered taxable. In order to fund the ACA, the tax-free status of these subsidies was phased out. This resulted in employers moving from self-funded to group Medicare Part D plans. The health insurance market as we know it today is largely a government-controlled environment, as is evident by the 100 million lives the Centers for Medicare & Medicaid Services (CMS) covers through Medicare, Medicaid, Children’s Health Insurance Program (CHIP) and federally subsidized public health care exchanges. We expect to see this number of covered lives to grow rapidly in 2014, 2015 and beyond. Contributing to this gargantuan growth are baby boomers aging into the Medicare program as well as more people qualifying for Medicaid and CHIP. Another 40 million individuals are covered by small group employers, those that employ fewer than 100 workers. The individual health care market covers approximately 19 million lives, according to America’s Health Insurance Plans (AHIP). While there are 47 million nonelderly uninsured Americans, another 72 million people are covered
by large group health insurance plans, which are designed for employers that employ 100 or more workers. The impact of the small group market is significant. A Washington Post article from Jan. 11 stated, “When millions of health-insurance plans were canceled last fall, the Obama administration tried to be reassuring, saying the terminations affected only the small minority of Americans who bought individual policies. But according to industry analysts, insurers and state regulators, the disruption will be far greater, potentially affecting millions of people who receive insurance through small employers by the end of 2014.” There are also significant shifts in the large group segment, and these, too, impact the health care landscape. Some of these companies are eliminating or significantly changing spousal and dependent coverage. Others have shifted workers to a part-time status where health benefits coverage is not mandatory. While it may not be the best news for the employees and their families, this movement creates huge opportunities for others in the health care arena. The biggest winners are private health
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Reinventing Insurance April 2014 » InsuranceNewsNet Magazine Distribution
47
HEALTH
CLIENTS CLAMOR FOR ‘MEDICLARITY’
exchanges and companies that provide the technology to make them work. Arguably the most talked about player in today’s health insurance domain, the ACA health care exchanges continue to provide intrigue to both consumers and the business community. So what is driving this movement to exchanges? Historically, employer group plans were constructed based on the one-on-one interactions of the business owner and the group health insurance broker. Individual policies were historically sold on a one-on-one basis between an individual health insurance broker and the client or prospect. The broker could analyze many insurance products and present a preferred product to a single consumer. But what happens when the relationship is “many to many” (many consumers evaluating many insurance products)? If advisors are not able to fill the void, the exchange can assist a large number of consumers with the evaluation of a large number of insurance products. Effectively, this is another form of the trend toward “mass customization.” Advisors in the MA and PDP markets must be aware of how each carrier is handling the new commission regulations set by CMS in the fall of 2013. While new policies for coverage that took effect Jan. 1, 2014, will see no impact from the new regulations, new policies will have advancing commissions limited to the current calendar year. Here is an example of how the replacement commissions will be paid based on the new CMS guideline: If an agent writes an MA or PDP (true-up or replacement), the first commission payment made will be for the months remaining in the calendar year. If the plan is effective Feb. 1, 2014, the first payment will be eleven-twelfths of the commission. If the plan is effective for Dec. 1, 2014, the first payment will be one-twelfth of the commission. In cases where the enrollment is a “like for like” replacement, the agent would not receive any additional commission payment. However, cases where the enrollment will be a true-up and is not a likefor-like situation, insurance carriers will 48
InsuranceNewsNet Magazine » April 2014
pay either the agent’s true-up commission in full or pro rata. Situations in which the enrollment is not a like-for-like situation include: » New to Medicare Advantage or new to Medicare. » Moving from original Medicare to Medicare Advantage. » Moving from Medicare Advantage to a prescription drug plan. If carrier pays true-up in full: If the policy is effective Dec. 1 and the full commission is $400 and the carrier paid the agent $16.67 (one-twelfth of the $200 replacement commission) in the first payment, the company will then true-up the remaining amount to the agent. In this case, the true-up payment would be $383.33. If an agent writes a Dec. 1, 2014, effective application and the company pays in full, the agent is paid $400 for that one month. If the beneficiary stays in the plan, the agent will continue to receive monthly renewal payments from the carrier, starting in January 2015. If carrier pays true-up pro rata: (Pro rata means that the carrier pays the agent for the months that the Medicare beneficiary was in the plan.) If the policy is effective Dec. 1, the full commission is $400 and the carrier paid the agent $16.67 (one-twelfth of the $200 replacement commission) in the first payment, the company will pay the agent only one-twelfth of the $400, or $33.33. So the agent would receive an additional payment of only $16.66 ($33.33 minus the first payment of $16.67). Advisors should understand how each of their contracted carriers will pay out commissions under the new CMS guidance. Advisors will likely see the biggest impact of these changes for effective dates that occur later in the calendar year. Additional changes to agent commissions were proposed by CMS in a 678-page
document released on Jan. 6. Key points that were suggested by CMS include: [1] Renewal compensation limited to 35 percent (versus 50 percent) of initial year. [2] Lifetime renewals. [3] Renewal payments moved up to current fair market value (FMV) for that year. [4] Carriers cannot pay commissions to agents for annual election period (AEP) business until Jan. 1 of the following year. To summarize the proposed changes, CMS proposes limiting renewal and replacement commissions to 35 percent of the initial commission rate (currently, most companies pay 50 percent of the initial rate). However, CMS proposes making these renewal rates paid for the lifetime of the enrollment and to have the insurance companies pay all renewals (regardless of year of entry) at the current year’s rate. The commissions generally increase by a small inflationary factor each year, so all renewals would move up (or possibly down) based on the most recent rate published by CMS. In keeping up with the trends and complexities of the marketplace, it is paramount for advisors to focus on each of their core strengths. Transactional selling is the strong suit of the exchanges. Advisors should focus on areas in which exchanges can’t do well. These areas include relationship building, working as a trusted advisor for clients, cross selling, needs analysis and obtaining referrals. Andrea Koretz is senior marketer for Ritter Insurance Marketing, Harrisburg, Pa., and an active health insurance agent. She formerly served in various Medicare sales and communications roles. Andrea may be reached at andrea.koretz@innfeedback.com. Craig Ritter, CPCU, AFSB, is president and owner of Ritter Insurance Marketing, Harrisburg, Pa. Craig began blogging about Medicare in 2008, and his blog is read by agents and insurance industry insiders, with almost 1 million article views. Craig may be reached at craig.ritter@innfeedback.com.
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© 2013 OneAmerica Financial Partners, Inc. All rights reserved. OneAmerica® and the OneAmerica banner are all registered trademarks of OneAmerica Financial Partners, Inc.
April 2014 » InsuranceNewsNet Magazine
49
FINANCIALWIRES
Only half of Americans have more savings than credit card debt. bitly.com/qrcreditcard
Are Your Prospects Afflicted by ‘Advisor Anxiety’? We already know that many folks are afraid to see the dentist and others cringe at the thought of shaking hands with a funeral director. Now you can add financial advisor to the list of professions that strike fear into the hearts of the human species.
At least two factors are at play when it comes to what experts call “financial advisor anxiety.” One is called disclosure anxiety – feelings of discomfort at the prospect of sharing personal information with a professional advisor, according to a just-published study on the subject. And the other is evaluation anxiety – expectations of being negatively judged by the financial professional. The problem isn’t limited to the United States. A study showed that nearly half of Australians are creeped out by the prospect of meeting with a financial advisor. The embarrassment that people have about revealing personal details to financial advisors is similar to the reluctance many people experience while disclosing their health problems to medical professionals, according to the report.
WHY RETIREMENT IS ON THE BACK BURNER
58
%
Financial concerns aren’t the only reason Americans continue to put off retirement, of workers plan according to a new survey by to delay retirement Career Builder. Many said they need the health insurance and benefits, and half said they just plain enjoy their jobs.
About 58 percent of workers 60 and older said they are delaying retirement.
Half of them said they believe they will be able to retire within four years. When asked why they aren’t ready for the gold watch, 79 percent said they can’t afford to retire; 61 percent say they need health insurance and other benefits; 49 percent enjoy their jobs; 46 percent enjoy where they work; and 27 percent are afraid retirement will be boring.
WHERE DOES THAT TAX REFUND REALLY GO?
’Tis the season for Uncle Sam to send out income tax refund checks, and that raises the question, how do Americans really spend that “windfall”? The answer? It depends on who asked. Two recent surveys give conflicting DID YOU
KNOW
?
50
answers to whether that money ends up being saved or spent. TD Ameritrade polled 1,000 people and found that 61 percent of those who expect a refund plan to save or invest the money. The survey also found
that 21 percent of the respondents plan to use the money to pay off debt, while 19 percent plan to spend it on discretionary items and 18 percent expect to spend it on necessities. Meanwhile, LIMRA Secure Retirement Institute (SRI) conducted a similar survey and found a different set of answers. SRI found that 44 percent of Americans expecting a tax refund this year plan to use it to pay down credit card or other debt, while only 9 percent say they will save it in a retirement account.
MARRIAGE/WORK TRENDS ENDANGER RETIREMENT
The composition and work patterns of American households have changed dramatically over the past 50 years, and that affects future retirees. Fewer retirees are expected to receive spousal or survivor benefits from Social Security and private employer-sponsored pension plans in the future, increasing their economic
THE AVERAGE RETURN ON AN INITIAL PUBLIC OFFERING was 20 percent
THE U.S. RANKS NEAR THE BOTTOM of the top 20 countries in this year. The average increase in the first day (or “pop”) is 13 percent. term of retirement security. Source: Natixis Global Retirement Index Source: Renaissance Capital
InsuranceNewsNet Magazine » April 2014
QUOTABLE Women are controlling more money, earning more money and, with the boomer population, inheriting more money. But they’re still relatively new at making certain broader financial choices. — Suzanna de Baca, a vice president at Ameriprise Financial
vulnerability, according to a new government report. The report by the Government Accountability Office (GAO) noted that over the past 50 years, the proportion of unmarried and never-married individuals in the population increased steadily.
At the same time, the proportion of single-parent households more than doubled. Eligibility for Social Security spousal benefits among women is projected to decline, in part because fewer women are expected to qualify based on marital history and more are expected to qualify for their own benefits based on their own work record.
WHAT MAKES YOU A GROWN-UP?
Many rites of passage may be considered steps on the road to becoming an adult. For some, it’s being able to vote. For others, it’s moving out on their own, being able to buy an alcoholic beverage (legally), graduating from school or buying a car. But for most, there is one big step that marks the shift from childhood into adulthood, and it’s landing that first job. In The Hartford’s Gen Y Speaks Survey, more members of Generation Y said getting their first job and making their own financial decisions were the events that made them feel like grown-ups,
even more than moving out of their parents’ homes or starting a family. Gen Y said starting a family was the top event that triggered the need for both life and disability insurance (62 percent and 43 percent, respectively). Getting married and landing their first job tied (32 percent) as the second milestone that results in the need for disability insurance.
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FINANCIAL
Chasing Performance Can Lead Investors to a Calamitous Fall T he results of moving investments to the latest market winner are so terrible that investors are better off putting their money into the latest market loser for long-term returns. By Craig L. Israelsen
C
hasing performance. It’s a really bad idea, but investors often do it. One of the persistent challenges faced by advisors is managing the “regret” of clients – specifically the regret of not being invested in last year’s best asset class. This type of regret obviously suggests that advisors should have known which of the many asset classes (e.g., mutual funds) in the marketplace would be the star performer in the coming year. Seriously? If people had that sort of perfect knowledge, why in the world would they be financial advisors? Those people would be sitting on their own island somewhere. Nevertheless, let’s examine how performance chasing would have played out over the past 15 years (from Jan. 1, 1999, to Dec. 31, 2013).
Performance Chasing
This investing behavior is like returning to a bad habit – we know we shouldn’t but we do it anyway. One version of performance chasing would consist of moving all of the portfolio assets into last year’s best-performing asset class. This is performance chasing at its “finest” (aka worst). In this analysis, there were 12 asset classes to monitor and “chase” (as shown in Chart 1). Here’s how this works: In 1998, the best-performing asset class among the 12 was large-cap U.S. stock. Thus, at the start of 1999, the entire portfolio was shifted to large-cap U.S. stock. The return of large-cap U.S. stock in 1999 was 20.37 percent – a great outcome. But this approach collapsed the following year. The best-performing asset class in 1999 was emerging non-U.S. stock – 52
InsuranceNewsNet Magazine » April 2014
so the entire portfolio was shifted into emerging stock at the start of 2000. Bummer. In 2000, emerging stock got rocked with a -27.45 percent return. The annual returns of this performance-chasing portfolio are shown in Chart 2. Understandably, this version of performance chasing may represent the extreme – but extremes happen far too often. The outcome of this “momentum investing” approach over the past 15 years was an annualized return of 0.66 percent and a standard deviation of return of 23 percent. A $10,000 initial investment on Jan. 1, 1999, was worth only
$11,043 by the end of 2013. It’s possible that there might be some time frames in which performance chasing seemingly works out (such as the period from 2003 to 2006). That’s why bad ideas don’t completely disappear – sometimes they work out. But a person’s investment portfolio needs to work out for decades – not just a few years.
Dogs of the Dow
Here’s another wacky idea: How about investing completely in last year’s worst-performing asset class? This bold approach actually performed better than
CHASING PERFORMANCE CAN LEAD INVESTORS TO A CALAMITOUS FALL
FINANCIAL
CHART 1 15-YEAR PERFORMANCE OF 12 ASSET CLASSES: 1999-2013
Losing the Chase Chart 1 shows the performance of 12 individual asset classes. Chart 2 shows the (rather poor) 15-year performance if an investor moved money annually to the best performer of the previous year. Chart 3 shows that even investing in the previous year’s loser produces a better result than chasing best performance. The chart compares results of chasing best performance, chasing worst performance and equally diversifying in the 12 asset classes.
12 Asset Classes (1999-2013)
15-Year % 15-Year Growth Annualized Standard Deviation of of Return Monthly Returns $10,000
Large-Cap US Stock Mid-Cap US Stock Small-Cap US Stock Developed Non-US Stock Emerging Non-US Stock REIT Natural Resources Commodities US Bonds TIPS Non-US Bonds Cash
4.58 9.75 10.11 4.42 10.64 10.24 9.50 12.38 5.18 6.22 3.90 2.35
19.39 19,590 19.54 40,374 19.79 42,406 22.68 19,125 35.33 45,564 20.45 43,160 23.46 38,988 20.33 57,569 3.80 21,337 6.41 24,710 8.75 17,758 2.23 14,174
Performance figures above are based on actual ETFs and are reflective of the following indexes: S&P 500, S&P MidCap 400, Russell 2000 Value, MSCI EAFE, MSCI EM, Dow Jones US Select REIT, S&P North American Natural Resources Sector, Deutsche Bank Liquid Commodity - Optimum Yield, Barclays US Aggregate Bond, Barclays US TIPS, Barclays Global Treasury ex US, and US Treasury Bills 3 Months.
CHART 2 THE ANNUAL RETURNS OF A “PERFORMANCE CHASING” PORTFOLIO
CHART 3 SUMMARY OF PERFORMANCE: 1999-2013
30
Performance-Chasing (Last year’s best asset)
20
Dogs of the Dow (Last year’s worst asset)
15-Year Performance
10
Spread the Wealth (Broad, equal diversification)
0% -10
15-YEAR AVERAGE ANNUALIZED RETURN
-20
0.66%
-30 -40 -50
1999
2001
2003
2005
2007
2009
chasing last year’s winner. By investing completely at the start of each new year in last year’s worst-performing asset class (among the 12), the 15-year annualized return was 5.98 percent and produced an ending account balance of $23,895. Not a super-impressive outcome, but a lot better than chasing last year’s winner.
Spread the Wealth: Broad Diversification
What if an advisor simply built a broadly diversified portfolio that invested equally in 12 asset classes and rebalanced them annually? While broad-based diversification
2011
2013
5.98% 5.98%
8.44% 23.0%
25.9%
12.6%
15-Year Standard Deviation
Growth of $10,000
11,043 23,895 33,702
may not be very exciting, this approach produced a 15-year annualized return of 8.44 percent with a standard deviation of 12.6 percent. Building a strategic, multi-asset portfolio produced an outcome that was better than six of the individual asset classes shown in Chart 1 – including large cap U.S. stock (i.e., the venerable S&P 500 Index). Investing solely in the S&P 500 grew $10,000 into $19,590 over this 15-year period, whereas the 12-asset 7Twelve Portfolio turned $10,000 into $33,702. A summary of the performance for each approach is shown in Chart 3. As boring as it is, simple broad-based diversification is
very hard to beat over time. If clients want to bet the farm on wild cards, tell them to play the lottery. When it comes to their investment portfolio, boring is best. Craig L. Israelsen, Ph.D., is the developer of the 7Twelve Portfolio and is a principal at Target Data Analytics, which develops indexes for the benchmarking and evaluation of target-date/ life-cycle funds. He is also the executive-in-residence in the financial planning program at Utah Valley University (UVU). Craig may be contacted at craig. israelsen@innfeedback.com.
April 2014 » InsuranceNewsNet Magazine
53
BUSINESS
How to Build a Pipeline of Client Evangelists Be more assertive in obtaining referrals and testimonials, and watch your sales pipeline fill up. By Dan Weedin
T
he biggest mistake that insurance agents make is believing that product and insurance acumen are the keys to acquiring and keeping business. It’s a mistake because your competitors all have the same or better knowledge (if they don’t, they are quickly weeded out by natural selection).
Knowledge is considered a given by your prospects. The most effective way to accelerate your business growth and retention is through building a massive pipeline of client evangelists who provide you with rave reviews and referrals. Gaining strong referrals and testimonials is an art and a science. The reason so many agents do a poor job of it is because they don’t know the difference between the art parts and the science parts nor do they know how to leverage them. Those who excel in this concept separate themselves from the rest. Here are some strategies and tactics that you can use immediately to enhance your closing ratio on referrals and testimonials dramatically and help seal the deal more efficiently and more often.
Cold Calling Leads to Frigid Results
Cold calling is still inexplicably the industry standard for acquiring new prospects. Unfortunately, it’s the worst method because it has the lowest efficiency. The rate of return on the cold-calling investment is about 2 percent. Yet agents keep investing in it. They would never make that type of investment with their money in the stock market, but they seem willing to do so with their sales pipeline. Sales managers spend an inordinate amount of time trying to cajole their producers into making cold calls, whether it’s over the phone or in person. What sales 54
InsuranceNewsNet Magazine » April 2014
managers should be tracking instead is the producer’s prowess at gaining testimonials and referrals. If the producer needs training, this is where the time needs to be invested.
out of conversation. Otherwise, you may get pedestrian testimonials, if you even get them at all. This also can be done in person during a renewal session or other meeting with your client.
Testimonials
[2] Ask your clients if they are satisfied with your work together. This is the scary one for many agents. If the answer is lukewarm or negative, you have bigger problems than obtaining a testimonial. If the answer is yes, then move on to the next step.
Gathering and using testimonials has become more essential with the advancement of technology. Twenty-five years ago, testimonials could be used only on expensive marketing brochures. Because marketing materials didn’t get turned over much, testimonials became obsolete. Agents don’t ask for testimonials and referrals because many have not been trained to ask. If they have been trained, then they might fear rejection by the client, worry about making the client uncomfortable or discover that the client has not really been satisfied with the agent’s work. Today, there is a definite need to get quality testimonials (both written and video) for a myriad of marketing platforms, such as your website (testimonials should be ubiquitous and easy to find on every page of the site), blog, social media, printed marketing material, email signature files and proposals. (I never see testimonials on proposals. Never.) Here is the process for acquiring powerful testimonials: [1] Call your client instead of emailing your client. The best testimonials come
[ 3] Ask your clients why they value working with you. What is it that makes you special? Be in the moment, listen and take notes. Ask the kind of questions that result in candid responses. Your clients must give you responses that relate to reasons other than price or you are open to the risk of your competition stealing them away. [4] Once your clients have divulged the value they receive from you, confirm and clarify. Language such as “If I heard you correctly, you said…” is a great way to frame their words into something that can be used in marketing. [5] If your clients agree with your clarification, then ask them if you can use their words and their names as a testimonial. If they agree (which they always will), then you’re set.
HOW TO BUILD A PIPELINE OF CLIENT EVANGELISTS I’ve started accumulating video testimonials. It’s easy. Early in the process, ask your clients if they would be willing to provide a 30-second video testimonial. You will ask them the questions and all they have to do is answer. Assure them that it doesn’t have to be perfect and you can always do a retake if necessary. You then record the video with your phone or tablet. Take it back to your desktop and edit out any errors and your questions. Voila! You have a nice video to use on your website and blog, plus you can use your clients’ words in print.
Referrals
Obtaining referrals basically involves the same process as obtaining testimonials. As a matter of fact, if you are really efficient, you can ask your clients for a referral right after they give you a testimonial! Referrals are about self-confidence. Period. Agents don’t ask for referrals frequently enough because they fear rejection, damaging the relationship or getting poor leads. But you can’t just wait around
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for referrals to come to you. You need to be more assertive. Here is the process: To a client: “John, referrals are the lifeblood of my business. Whom do you know who would benefit from working with me as you have?” To a referral source: “Jane, my insurance business is growing rapidly, yet I still have room for new clients. Whom do you know who would be interested in enhanced protection for their revenue, assets and profits?” (Note I didn’t ask whether the person being referred would be interested in “the most inexpensive insurance.”) Be prepared for objections. Objections in this case are stalling techniques such as “Let me think it over and I will get back to you.” Make this easy on your clients and colleagues. Offer them the types of people whom you would like to meet and whom they know. Be specific about the type of clients you are looking at taking on (industry, size, etc.). Offer to call your clients back in a week to have them give you one name. Don’t just let them off the hook. They are normally willing to help,
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as long as you make it easy for them. Referrals are based upon these basic principles: You desire more business and are confident, prepared, skilled in asking, ready for objections (not rejection), consistent and persistent. If sales managers were more adroit at teaching producers about gaining testimonials and referrals, I promise that pipelines would increase, more deals would be sealed and revenue would increase. These are all very good things for agencies, don’t you think? Creating a culture in which producers go after the low-hanging fruit of testimonials and referrals instead of the more difficult cold calling will improve efficiency, decrease frustration and raise revenue for your agency. Dan Weedin is president of Toro Consulting, Poulsbo, Wash. He coaches and mentors insurance professionals to accelerate their career through professional growth and skill development. Dan may be contacted at dan. weedin@innfeedback.com.
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SOCIETY OF FSP INSIGHTS
For more than 80 years, the Society of Financial Service Professionals has been helping individuals, families and businesses achieve financial security.
The Right Team Approach Can Make 2+2=6 H ow bringing the right people to the advisory team rescued a couple’s disastrous investment. By Richard M. Weber
T
raining + Practice + Teamwork + Synergy. All these words come to mind when I watch my 11-yearold grandson play hockey. I see how he and his teammates are developing skills in this sport – skills that will serve them well throughout their lifetimes. In hockey, it’s “Maybe I could score – but it’s much more likely we’ll win the game if I pass the puck to the forward who has the best shot at making a goal.” However, functioning in a team environment is a psychological challenge, because it goes against our egocentric desire to win and claim credit for the score. Teamwork may come naturally to some, but for most of us, working in a team environment requires practice, patience and suppressing that urge to push ahead just to see whether we indeed might be able do it on our own. It turns out to be no different in the various specialties of financial planning. As with many of my peers, I pride myself on the knowledge and skills I’ve developed to help my clients make smart insurance decisions – and then helping them manage those policies throughout their lifetimes. But, of course, my clients need so much more than expert insurance advice. They need legal and accounting advice, investment and benefits advice, someone from whom to draw ideas about succession planning and trust planning, and all the other practical things that occur under the financial services umbrella that do not fall within my skill set, expertise or licensure. In the 70 or so years of the Society’s first “incarnation,” we enjoyed the familiarity and fraternity of a common career and expertise. We took Chartered Life Underwriter classes together – taught
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by our older mentors – and in time we became mentors to the next generation of students. In the process of learning by teaching, we became skilled at knowing how to assist our clients in identifying the risks that could most adversely affect them and then helping them either mitigate or transfer those risks. That’s what health, life, disability and long-term care insurance are all about – along with the ability of transforming the risk of “living longer than our money” through the assurance of lifelong income through annuities, regardless of how long we live. It took the Society’s second phase to bring the need and opportunity for true teamwork into focus. Beginning in 1999, our membership expanded to include attorneys, accountants, investment specialists, financial planners, employee benefit experts – and, yes – life/health/disability/ annuity/long-term care insurance professionals who came together under the Society’s new name and purpose. Chapters around the country began to transform into providing members with opportunities not only to learn from each other but also to know each other. This led to a process where, for example, one member would be inspired by the nuances of a client’s legal issues to make a referral to another member whose skills in that arena are known firsthand. Case in point: My client and her husband were fortunate enough to have “dot-commed” in 1999, and their wealth reasonably survived the stock market correction of 2000-2002 only to be hit hard by the 2008-2009 financial crisis. Except it wasn’t 2008’s substantial drop in the equity markets that was the problem. Instead, it was the repercussions of succumbing to the “free life insurance” pitch of a stockbroker who fancied himself a life insurance premium financing “whiz.” At the depth of the country’s
financial crisis, the lender called the loan, the insurance premiums went unpaid and the collateral was sacrificed. Not even Ghostbusters could have answered the call to save this situation! Drawing upon our known ongoing professional relationships, we were able to assemble the team that initiated an ultimately successful lawsuit against the whiz, professionally restructured and managed the investment portfolio, and provided appropriate financial and retirement planning to the couple. They could get on with their lives, realizing that their risk tolerance was now better matched to the deployment of their resources. Not to mention that we also helped them acquire life insurance that made sense in the amount and style and was grounded in a realistic payment plan. This was accomplished not merely on the basis of individual practitioners with specific expertise – but also by the ability of those experts to work together effectively in a truly collaborative environment. In the end, our clients understood that they were much more comfortable. They perceived the entire credibility of the process as being in their best interest – all due to the mechanism of a well-functioning team that was focused on them. For this couple, the team of experts capitalized on their individual knowledge and made 2 + 2 = 6 for the benefit of the client. In the world of client-facing professionals, it doesn’t get much better than that! Richard M. Weber, MBA, CLU, AEP, is the immediate past president of the Society of Financial Service Professionals. He may be contacted at richard.weber@ innfeedback.com.
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LIMRA INSIGHTS
More than 850 financial services companies in more than 70 countries turn to LIMRA first to help them build their businesses and improve their performance.
On Choosing Baseball Bats and Life Insurance T oday’s consumers have vastly more product choices and delivery methods than ever before. The insurance industry must adapt to this evolving consumer landscape. By Scott R. Kallenbach
W
hen I was growing up, one of the rites of spring was going to the local sporting goods store with my dad and picking out just the right baseball bat for the upcoming season. The choices were modest compared to what are available today. Did I want a bat made out of wood or aluminum? What length should I choose? A thin handle or a thick one? I would pick and choose and take numerous practice swings until I found one that was “just right.” My son is a freshman in high school and has played baseball since he was a 5-year-old. He just bought a new bat for the upcoming season, and it arrived the other day via FedEx. His bat is made of a special composite material that adheres to specific tolerances that measure the trampoline effect when it makes contact with a baseball About the only thing it has in common with the bats I used is that it’s 32 inches in length. He took his first practice swings in our family room the day it was delivered. What do the evolution of baseball bat design and the shopping experience have to do with life insurance? More than you might imagine. In today’s competitive landscape, consumers routinely use the Internet and social media to get advice on, shop for, compare and buy retail products. This is carrying over to the insurance industry. With an increased level of complexity compared to my day, how did my son know which bat would be just right? He did research before making the purchase. Scouring various websites, he pored over online reviews, and he sought recommendations from those he trusts: his friends. Sound familiar? It’s the same 58
InsuranceNewsNet Magazine » April 2014
pattern many consumers follow during the life insurance buying process. Consumers are evolving, the world is changing and the insurance industry must adapt. It’s an increasingly consumer-centric environment. LIMRA research reveals that consumers want to engage with us differently than in the past. They want to use all the technology at their disposal to make the buying process more efficient and effective. Consumers today are time starved. As they juggle responsibilities between work and home, their time is precious. Consumers are also stretched financially like never before and are looking for value. They are tech-savvy, using the tools available to dictate when and where they get things done. As part of the strategy to serve consumers on their own terms, LIMRA research predicts an increase in easy-to-understand life insurance policies designed for those who are tech-savvy and self-directed. Product choices and options will be limited, making it easier for consumers to choose. Information overload (too many choices) commonly makes consumers feel overwhelmed and confused, which leads to inaction. People tend to put off difficult decisions to avoid the regret from making the wrong choice. The shift to a more simplified approach goes beyond underwriting. Policy design changes also apply to language. We expect greater use of simple, transparent terms that consumers hear every day and an increased effort to avoid industry jargon. Our research also shows that predictive modeling will take on greater importance going forward and may be the key to unlocking the middle-income market. Predictive modeling has the potential to reveal consumer needs and preferences, uncover desired product enhancements, and bolster underwriting decisions – all in a cost-effective way that provides value to the consumer.
Consumers are evolving, the world is changing and the insurance industry must adapt.
Many consumers are interested in simple, easy-to-understand solutions. Predictive modeling could help bridge the gap between simplified underwriting and full underwriting. Premium pricing for limited underwriting with predictive modeling could potentially be on par with policies that undergo full underwriting. For many organizations, it is too expensive to meet the needs of middle-market consumers with fully underwritten products sold face-to-face. Predictive modeling may lead to alternative solutions. Expanding markets and growing sales with life insurance products that are convenient to purchase, easy to understand and provide value to customers will come together to hit a home run for the industry. It’s in our best interest to help consumers pick the products that feel just right. Scott R. Kallenbach, FLMI, is research director of strategic research for LIMRA. He is responsible for identifying strategic issues that can impact the financial services industry and helping member companies develop approaches to meet those challenges and grow. Scott may be contacted at scott.kallenbach@ innfeedback.com.
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Monthly Webinar Series NAIFA’s free members-only webinars feature timely information and training on topics such as sales, prospecting, marketing, practice management, and legislative updates. NAIFA’s Advisor Today Magazine Advisor Today is the premier source for practice management content and industry news. Online Seminar Series NAIFA’s Online Seminars grant 24/7 access to training and information on topics like succession planning and thriving during your first three years in the business.
NAIFA’s Virtual Library The Virtual Library is a one-of-a-kind repository of online sales tools and resources, including client presentations. NAIFA SmartBrief All the insurance and financial news you need, every day, in a two-minute read. NAIFA ClientCast® by RealWealth® These professionally produced podcasts are yours to forward to your clients and prospects each month, and feature a variety of topics including life, health, long term care, disability and critical illness insurance.
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April 2014 » InsuranceNewsNet Magazine
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MDRT INSIGHTS
The Million Dollar Round Table is the premier association of the world’s most successful life insurance and financial services professionals.
Rank High on High-Net-Worth Clients’ Go-To Lists When you become comfortable and confident in helping high-net-worth clients solve their unique problems, your practice will receive a tremendous boost. By John J. Demboski
I
t’s no secret that high-net-worth clients can really bolster a financial professional’s business. So how does an advisor successfully engage this audience? In my experience, working with affluent clients requires a great amount of time, dedication, expertise and collaboration. From my 13 years in the financial profession, I have found five main areas that have helped me succeed in this market.
Adaptability
Affluent people feel most comfortable working with other affluent people, because this is a relationship business and having things in common helps build relationships. This could range from having common interests, hobbies, education, etc. All these things play a crucial role in the mind of the client. The more familiar we are with their background and interests, the more inclined they will be to build a relationship and thus work with you. Take a look at yourself to determine what parts of your life are congruent with their lifestyle.
Acting Naturally
In addition to feeling confident in the marketplace, we need to be comfortable being ourselves. If we don’t feel comfortable, neither will the client, and this will make it much harder to build a lasting relationship. The size of the case shouldn’t intimidate us or affect the quality of help we give. The most important thing is to focus on helping our clients achieve financial security.
Clarity
Big cases simply come about as a result of 60
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solving big problems. What big financial problems do you feel most comfortable addressing? Are they estate planning scenarios or business owner issues? Are they extremely high-net-worth family income protection cases? Once we have clarity on the area in which we will most confident, we should take a look at our community to determine where we can add maximum value. Make a list of people who might have some of these big problems you can solve. We’ll need to look proactively for those who could benefit from our expertise, because big cases won’t just come to us.
Collaboration
Ty pica l ly, high-net-wor th clients work with an advisory team to get the proper guidance for legal and tax purposes. This means we need to be able to engage comfortably with certified public accountants and attorneys while being acknowledgeable and respectful of boundaries. A client wants to work with someone who has their best interest in mind – not a salesperson who is focused on closing the deal. During the meeting, steer clear of bringing up products and instead share the value you bring to the team. I’d suggest opening up the conversation by saying, “My role here today is to be a resource to you and your team in helping brainstorm how you can solve ...” If we come from that perspective, we will be regarded as a valued member of the team rather than an outsider trying to sell or push a product.
Competency
Last but not least, we must be an expert on all technical details that pertain to our area of expertise. One way to prepare for meetings effectively is to consider what types of questions might come up from each of the team members. We can directly reach out to the CPA or the attorney in advance to get clarification on what type of questions they might ask so that when we’re in front of the client, we are the expert. This will help ensure that our competency is never called into question. Simply ask, “I want to be as prepared as possible for our meeting next week. I anticipate that we will be discussing X, Y and Z; is there anything else you would like me to research for you in advance?” If we feel comfortable and confident in each of the above five areas, we will be on our way to working successfully in the affluent market. There is nothing more important for the advisor than managing the client’s expectations, providing exceptional service and working as a team to protect them and their future generations. John J. Demboski, CFP, is an 11-year member of the Million Dollar Round Table (MDRT) with four Top of the Table qualifications. He is also a Bronze Knight of the MDRT foundation. His practice, Demboski & Chapman Financial and Insurance Solutions, creates a transformational financial planning experience that results in their clients identifying and taking actionable steps to attain their financial objectives. John may be contacted at john. dembski@innfeedback.com.
NAIFA INSIGHTS
Founded in 1890, NAIFA is one of the nation’s oldest and largest associations representing the interests of insurance professionals from every congressional district in the United States.
Five Pillars for Success C hange your life by embracing these concepts and using their strengths. By Herman L. Dixon
I
n my 40-plus years of business experience, I have discovered that there will be challenges to face each day. These challenges can bring us success, setbacks or great learning opportunities. It all depends on how we approach each day and what we allow to dominate our attention. The learning opportunities I’ve gained from these experiences center on five pillars that can help you succeed in life and in your career.
The Pillars of Success
The first pillar is to live. Living is much easier conveyed than acted on. We often get into a routine that prevents us from thinking about what life provides. We fail to fully comprehend that each day brings no promises or guarantees. The day we have today could be our last. That is why it is so vital to live in the moment so that we can be in line to experience the best of what life has to offer. How are you approaching your days? Do you get excited about opening your eyes, or are you sad that your eyes are open? When we realize that life is a privilege that we are granted and a limited opportunity, we understand that we make a living by what we get; but, more important, we make a life by what we give. We must be enthusiastic about life and about living it to the fullest, and we must realize that life will not be without pain or problems. The second pillar is to act. You can’t do anything by doing nothing. Plans made and dreams brought forth mean nothing if you do not put those plans and dreams into action. Before success can be considered, you must first act. To make a sale, you must ask. Take action even if it is wrong. Even a wrong action will help you discover what does not work and will position you to try something else that may just work. Action is the difference between success and failure. Do not wait so long for your ship to come in that your pier collapses.
The third pillar is to grow. When we believe that we are in a position where we will never learn or grow in our knowledge or skill level, we are doomed to decline. Growth sparks energy, enthusiasm and excitement about what is current or what can be. Growth opens the doors to new opportunities and new challenges. With so much they have to gain, why don’t some people want to grow? For some, it is fear; for others, it is lack of commitment or a belief that the time required does not justify the effort. It is difficult to understand why, but in simple terms, it centers on complacency. We get too comfortable with where we are, and we allow complacency to rule our lives. The fourth pillar is influence. At its most basic level, influence is the simple gift of ourselves – that small piece of us that allows others to realize that hope abounds. It is the strength to stand before an individual or a group and transfer a vision that becomes the setting on which impossible heights are reached and dreams are realized. Through influence, we solidify the basis for a lasting legacy. The fifth pillar is to overcome. Life is full of critics who find fault with any
undertaking by visionaries who attempt to deviate from the norm. Being able to overcome criticism and setbacks is a must for success in life. Perhaps one of the most famous circumstances of overcoming occurred when Thomas Edison was developing the light bulb. It took him 1,000 tries to be successful. When asked about his failures, his response was that he endured only 999 successful failures of what would not work until he finally found out what did work. Each shortfall taught him something he used to get closer to his goal of creating the first sustainable light bulb for general use. Having the will to overcome is easier said than done. It is tough to stand alone in a crowd when all those around you are challenging your position. Uploading your vision in the midst of obstacles demands more than a simple positive attitude – it demands an unwavering affirmation of rightness without regret. Herman L. Dixon is a NAIFA member and president and chief executive officer of Think BIG! Coaching and Training. Herman may be contacted at herman. dixon@innfeedback.com.
April 2014 » InsuranceNewsNet Magazine
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NAILBA INSIGHTS
The National Association of Independent Life Brokerage Agencies (NAILBA) is a nonprofit trade association with over 350 member agencies in the U.S. and Canada.
How to Bring in the Big Case D elivering the large case requires obtaining the best product from the right carrier and avoiding the pitfalls along the way. By Barbara Crowley
E
very producer envisions writing and delivering a large case. Brokers Clearing House generally considers large cases to be cases with a face amount of $10 million or more or cases with a premium of $100,000 or more. Many large cases come about because of the relationship between the insurance professional and the client or from the client’s other advisors. It’s not unusual to have centers of influence such as attorneys, certified public accountants or investment advisors involved in the process. One of the first decisions to be made is how much insurance is needed. You may be the one to determine this based on the individual situation, or the amount may be determined by other advisors. Regardless, it’s your responsibility as the insurance advisor to be able to support the amount. The amount should be determined by the purpose and the financial facts. Different formulas are applied depending on the purpose of the insurance. All large cases should be accompanied by a detailed cover letter from the insurance advisor. The cover letter should address the purpose of the insurance and an explanation of how the amount was determined. As the amount of coverage increases, so does the need for additional financial and medical information. The in-force life coverage is critical so you know that you are not going over the insurance carrier retention (the face amount they keep) or the jumbo limits (all the applied for and in-force). Here are some examples of necessary information: » Personal and family protection – The amount should be based on current income liabilities and age. Take into account the clients’ needs now and in the future (income replacement). A personal 62
InsuranceNewsNet Magazine » April 2014
financial statement will be necessary. » Key person coverage – Why is this individual unique to the business? Does the salary reflect the person’s value? What is the value of the business? Stock options and percentage of ownership in addition to salary can be significant when showing a person’s value to a company. » Buy-sell coverage – A brief explanation of the terms of the formal buy-sell agreement is helpful. How much is the business worth, and what method of valuation was used? » Estate planning coverage – A personal financial statement is necessary. A corporate financial statement also is necessary if applicable. » Salary continuation/deferred compensation coverage – Explain the plan specifications used in determining the amount of insurance needed. Are all owners and/or key employees being insured? If not, why not? Carriers may ask for personal and/or corporate audited financial statements, profit and loss statements, balance sheets, tax returns, and other documents necessary to evaluate the risk. After the face amount has been generally determined, the next step is where you take this high-profile client. Large cases should not be spreadsheeted other than for an idea of the cost. The carrier with the lowest premium may not have the ability or capacity to underwrite your client. You shouldn’t quote a number up front that may not be deliverable later. Working with a brokerage general agent with multiple carriers and an inhouse underwriting expert is important if you do not have a primary carrier that writes and competently handles large cases. Matching the client to the most suitable carrier is a crucial step. If the case is large enough, more than one carrier may be necessary. You must manage the client’s expectations by explaining what will be
required and how long the process might take. Large cases generally take longer, as the purpose and financial justification can be complex. It is important to discuss how your client’s health can affect writing the big case. This issue becomes more critical as the case size increases. It also accelerates the mistake of spreadsheeting products and looking for the lowest premium. Getting basic health history is necessary to help point the case in the right direction. Preliminary information can be obtained by the producer or by the BGA’s underwriter up front. If the client appears to be in great health, the carrier choice will be based primarily on capacity and financial underwriting proficiency. If, however, the client has a health history that requires expertise in impaired risk underwriting, the carrier choice will be determined by that history, by capacity and by financial underwriting ability. Some brokerage agencies may suggest compiling the medical records first. In certain cases, this may be helpful. The bottom line is to take a professional approach. Know the purpose of the insurance, get detailed in-force information, visit with your brokerage office or carrier about your case, set client expectations, obtain pertinent health history and never submit multiple formal applications unless it’s part of the plan. I can’t tell you how many “big cases” get into trouble along the way. Having the right captain at the helm makes a world of difference. When problems arise, you want experience, knowledge and influence on your side. You want to feel confident that your client is getting the best product from the right company. That’s what you get when you work with qualified sources on big cases! Barbara Crowley is president of Brokers Clearing House in West Des Moines, Iowa, and 2014 NAILBA Chairman of the Board. Barbara may be contacted at barbara. crowley@innfeedback.com.
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THE LAST WORD
From M&A to LTCi: Seven Topics That Crossed My Radar Screen Notable quotes heard during recent company meetings provide insight into what’s happening in the industry. By Larry Barton
I
n recent weeks, I have spoken at numerous company meetings, offering insight on the importance of insurance products for clients at every economic level. Such forums also provide an opportunity to listen thoughtfully to producers and general agents about their perspectives on a wide variety of subjects. Because of compliance and company proprietary rules, it is difficult for an active producer to have the same kind of radar screen that benefits pilots, in the air and on the seas, every day. Although they are imprecise, here are seven topics that I jotted down as I recalled various conversations. The quotes are summaries and are my best attempt to recapture “the buzz,” but I found every one of them to be important, even though I do not necessarily agree with all of them. Let’s hit the radar. [1] “I miss Joe Belth already.” Dr. Belth retired as editor of Insurance Forum a few months ago. He is one of the insurance profession’s most insightful and brutally honest analysts. Over several decades, he had the courage to tackle questionable tactics employed by the A.L. Williams organization (now Primerica). He spent thousands of hours reading court cases, company reports and various filings in order to create a higher level of transparency and accountability by insurance executives. He ensured his editorial integrity by refusing to accept advertising. Now when we want to learn about industry transgressions, we can rely more than ever on InsuranceNewsNet to speak out on behalf of the honest agents and a noble profession. [2] “I’m quitting, and my general agent doesn’t care.” This beauty was heard by one of the top three agents at one of the four largest mutual companies. 64
InsuranceNewsNet Magazine » April 2014
His story: “I have several hundred agents whom I recruited and groomed. We are the engine that fuels the company. Because I am a successful baby boomer, no one believes I will retire at age 59. They are ignoring the long-term consequences of our agency’s not having a succession plan. That’s crazy. All they (home office) think about is this quarter. So, they will break apart my agency, and they assume the same level of commitment will continue. It’s a bad bet when you don’t tell people in an agency what’s ahead.” [3] “Get ready for some major mergers and acquisitions.” It’s a well-known fact that a few notable carriers are struggling because, among other reasons, they sold annuity products with 6 and 7 percent interest rates as late as 2010. If the boards of these companies can extract themselves from these untenable contracts in a discreet and safe manner, the public will be well-served, albeit for all the wrong reasons. [4] “No woman has made a major charitable donation like Bill Gates, Warren Buffett or any of them.” Ouch! I politely reminded this person that one of the reasons for this may be that “the glass ceiling” delayed the inevitable donations that will certainly flow to charities, and that many women have made sizable donations that are the percentage equivalent of those by these fabled entrepreneurs. Sexists don’t necessarily listen to logic, so I leave you to ponder that observation. [5] “Long-term care insurance is coming back.” Between 2008 and 2013, several major companies, including MetLife and TIAA-CREF, among many others, essentially exited the LTCi business. The cost of payouts on existing contracts was out of whack with optimistic projections. As a result, the industry was in a freeze frame until a new Federal Reserve chair emerged, Obamacare was somewhat settled and the large health care compa-
nies determined where they would fit in a world of exchanges. With much of that now in place, we are seeing more companies introduce smart, well-designed and higher-premium products that can help consumers fill important gaps in protecting their families. If you haven’t followed the LTCi market for some time, you may be surprised at many new policies are being written right now. [6] “Carson is one of the few rock stars in the business.” Barron’s latest list of the top financial planners in the country appropriately featured Ron Carson, ChFC, of Carson Wealth Management. At age 49, Ron is the Peter Lynch of his generation. He and his team have more than $4 billion under management and an insurance practice that’s sizzling. Every one of Ron’s clients can listen in on staff meetings via phone, the ultimate act of confidence and transparency. All services are included in one fee. He is the real deal. [7] “Obama will use an executive order to destroy cash buildup.” Well, if you’re a conspiracy theorist type and an insurance agent, this makes total sense. To the rest of us, it’s fiction that has no basis in fact. I’m hardly a fan of this president. His profound lack of interest in job creation and his obsession with income redistribution are absurd. Without wealth and the reinvestment of such, free enterprise fails. However, a swipe of the pen on this one would be so patently illegal and trigger such massive criticism from the insurance industry and policyholders that even the few Democrats who still want their picture taken with the president would fade behind the curtain at any photo opportunity. Keep serving your clients with energy, honesty and discipline. Larry Barton, Ph.D., CAP, is chancellor of The American College. Larry may be contacted at larry.barton@ innfeedback.com.
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