Going Upstream With Annuities

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David R. Evanson

Insurance Marketing, Winter, 2006

During an expedition in September of 1784, George Washington looked at the great panoply of rivers west of the Appalachians and wondered about the possibilities. It was obvious they could move goods. But economic development could be increased exponentially if goods could be moved not just downstream, but upstream as well. This simple, yet radical notion set off a frenzy of development resulting in Robert Fulton’s steam engine and, in a single stroke, doubled the capacity of the country to spur on commerce.

This is a history not unlike that of annuities. Since their popular explosion as an investment product starting in the late 1970s, annuities have moved in just one direction: Investors could buy them, but they could not sell them. But now, with the emergence of a secondary market for annuities, investors can buy and [italicize and] sell. And in the same way steam power helped spur on the commerce of the nation, so too will liquidity help drive annuity sales by providing investors with greater options and flexibility.

By some accounts, the time for innovation in the annuity market has come. The press regularly takes annuities to task. Some recent and typical criticism include:

“In the end, not very many of us should be investing in annuities at all. Yes, there are reasons why they sometimes make sense, but there are even more reasons why they mostly do not.” – suzeorman.com

“Annuities by and large: are too expensive, offer mediocre insurance coverage, restrict the ownerzzs investment choices to so-so, ho-hum, quasi-mutual fund subaccounts…and lack liquidity” – The Motley Fool

“I have never been a big fan of variable annuities, and there’s been little reason to change my mind…” – Dan Wiener, The Independent Advisor for Vanguard Investors.

In addition, regulators have been taking aim at the annuity market too; cracking down on insurers and agents alike for sales practices.

The cause of many problems associated with annuities, perceived or otherwise, is the lack of liquidity and the problems this can cause the investors who own them. Thus, a secondary market for annuities is very much in the interest of the insurance industry as a whole because it will aid and abet the continued sale of a profitable product, while providing consumers with more options.

What’s Good for the Goose . . .
Historically, innovation succeeds when it delivers benefits to all [italicize all] of the constituents in a marketplace. In the case of the secondary market for annuities, it’s not only consumers, but also the agents and the brokerage general agents who have found their practices can be enhanced through the provision of new found liquidity.

Although the secondary market for annuities – not really an exchange per se, but rather a group of specialty finance firms that purchase annuities with their own capital — is in its nascent stages, a growing number of Brokerage General Agents have found it to a successful recruiting tool.

For example, The Milner Group, a wholesaler located in Atlanta, GA, reported that the firm generated 55 inquiries from agents when they first began marketing access to an annuity purchase program, a number that is significantly higher than the firm’s average monthly agent inquiry. Commenting on the overall response principal Chad Milner said, “The agents that we talked to believed that they could do more overall business with an annuity purchase program. But what really excited them was the newness, the uniqueness of the program.”

The reason that BGAs and IMOs should seriously consider participating in an annuity purchase program is precisely for the reason Milner suggests: it works for agents and brokers but not in the way a gimmick or sales promotion helps. An annuity purchase program helps in a much more fundamental way because it enables agents and brokers to builder stronger more profitable practices.

The Big Three
The are principally three ways an annuity purchase program helps build practices: increased profitability, increased client retention, and finally, more productive prospecting.

With respect to profitability, helping clients sell their annuities offers agents a new commission opportunity from their existing book of business. The size of this opportunity is elusive. On one hand, only a limited portion of the clients in an agent’s book should, could or would sell their annuities. Many are doing exactly what they are supposed to be doing: providing a secure, stable source of income. In this case, selling them would be irresponsible.

On the other hand, for those clients that have an appropriate reason to sell – perhaps 15% to 20% of an agent’s book – there is the question of proceeds. Some clients will build another house, or start a business. Yet still others are selling because their investment picture has changed, and they need additional financial products and services as they reinvest the proceeds. In this regard, providing liquidity for annuities offers the prospect of a more meaningful revenue stream because it provides access to assets that were previously lost to the often long term nature of annuity sales.

With respect to client retention, a secondary market for annuities offers agents a new opportunity to build stronger bonds with their clients. In an environment where all of the lines between agents, brokers, wealth managers, stockbrokers and even tax accountants is blurred, building stronger relationships is an imperative for long term success.

Even though perhaps just 15% to 20% of your clients will actually have an interest in selling their annuities, almost all of them will have an interest in knowing what their options are. And it is this act of outreach – contact, reviewing options, getting re acquainted with client goals and options, and reacquainting clients about what you can do for them is what delivers juice above and beyond the immediate prospect of a sale and a commission.

In fact in certain respects, the existence of a secondary market that values a client’s asset almost obligates a broker to get a quote on the annuities they have marketed just so their clients can understand the market value of the asset they have. It seems far fetched that a brokerage firm would deliver a trade confirmation or statement that does not contain a security or portfolio value; why wouldn’t and indeed why shouldn’t the same reasoning apply to an annuity?

Finally, with respect to new business development, marketing with the idea that you can help clients buy and sell [italicize sell] annuities is different, and for many investors, more engaging than one which says you can help them simply select [italicize select] annuities which are perceived by many – rightly or wrongly – as a commoditized product.

While the latter appeal is a sales proposition, the former is a full service, solutions based proposition. Said differently, if the marketing message imbedded in your sales materials and your sales pitch is that you are annuity product specialists, it may never rise above the noise that prospects face on a daily basis. However, if one of your core messages is, “Cash Out Options for Your Annuity,” you immediately rise above your peers because rather than offering them a product, you offer them a solution [italicize solution].

A niche market that can be addressed with annuity purchase programs is the trust and estate market. Data from our recent transactions shows that approximately 26% of sales of annuities for cash came from owners who inherited the asset as a beneficiary. It’s a well established fact that while annuities are excellent tools for providing income, they are poor tools for transferring wealth between generations. Many beneficiaries pay taxes on the increase to their ordinary income brought on by the inheritance of an annuity, but even worse, are then stuck with a monthly or quarterly payment that was not at all designed to fit their financial goals and objectives. For owners of inherited annuities then, the prospect of liquidity is a godsend.

And among the living who consider ahead of time the thorny issues of wealth transfer associated with annuity ownership, the prospect of liquidity has real appeal. For these investors there is the opportunity to sell their annuities and purchase stocks, bonds or mutual funds, which will pass onto heirs with little immediate tax consequence other than an increase in the beneficiary’s basis. Broker’s and agents should remain cognizant of the fact that providing a solution for efficient wealth transfer places them in a position for generating new business and longer term relationships with the beneficiaries and heirs. Moreover, these assets have the prospect of growing tax free across two generations, representing a potentially significant bump in the assets under and agent’s purview, administration or management.

Of course it almost goes without saying that all of the benefits that accrue to agents and brokers provide the obvious downstream benefit to IMOs and BGAs in the form of stronger relationships and the prospect of new revenues from an existing book of business. The notion of agents helping clients select annuities is an obvious one. The notion that these same agents and brokers can help their clients sell them as well is less obvious, somewhat radical, but ultimately an idea whose time has come. Brokers, agents, IMOs and BGAs who embrace this idea are the ones who will be best positioned to capitalize on the next stage of growth in the annuity market.

Suggested Callouts:

Broker’s and agents should remain cognizant of the fact that providing a solution for efficient wealth transfer places them in a position for generating new business and longer term relationships with the beneficiaries and heirs.

The cause of many problems associated with annuities, perceived or otherwise, is the lack of liquidity and the problems this can cause the investors who own them.

The are principally three ways an annuity purchase program helps build practices: increased profitability, increased client retention, and finally, more productive prospecting.