Kevin Startt, CFP, CLU, ChFC, CPCU, GamePlan Financial Marketing
Thursday, June 24, 2008

It has been three years since the inception of FINRA Notice to Members (NTM) 05-50 shook up the FIA world with a mandate for Broker-Dealers to supervise the sale of Fixed Index Annuities. Since then, Broker-Dealers (B/Ds) have scrambled to accommodate existing variable securities producers who generate a fair amount of FIA business.

Most B/Ds are concerned that if they don’t accommodate these reps, the reps will take their fixed business to another FIA-friendly B/D. Many B/Ds also look at the FIA business as nothing more than a nuisance, additional liability and ongoing noise in the continuing clash between traditional securities and insurance.

In the words of the infamous Rodney King, “Can’t we all just get along?”

At the recent Income Summit, two advisors with identical client profiles came up with diametrically opposed case designs. One was insurance-weighted with the usual blend of annuities, life and long term care insurance. The other proposal included dividend-paying blue chips, structured product and laddered bond funds. This divergence of professional opinion helps illustrate the situation. Because fixed products haven’t been part of the stable of revenues at most Broker-Dealers, having a profit center that includes FIAs or other fixed insurance products has been an afterthought.

Ironically, B/Ds echo reps’ concerns about spending 20 percent more time on decumulation clients that create 20 percent less revenue before they expire. As Americans age and become increasingly concerned with having an income that they can’t outlive, Fixed Annuities will evolve into a staple offering much like when Variable Annuities overtook mutual funds in B/D offerings in the late 1990s.

Broker-Dealers are at a crossroads. Many are continuing with business as usual. But because of NTM 05-50 and other factors, some B/Ds are creating their own Field Marketing Organizations (FMOs) or learning from some of the top performing FMOs how to create a new source of recurring revenue.

There are four core reasons why some Broker-Dealers are now including FIAs and other fixed insurance products in their product allocation, all of which point to the sustainability of their businesses.

1. Most B/Ds today have never felt the impact of a secular bear market and its impact on new and recurrent revenue over a 15 to 20 year period.
2. B/Ds have never been through a seismic demographic shift in wealth transfer and faced the challenges of maintaining margins during decumulation of core client assets.
3. Most B/Ds have never seen the regulatory challenges faced in this millennium which has led to continued consolidation and rep discontent.
4. The increasing trend towards federalization of the insurance business as seen in Treasury Secretary Paulson’s recent proposal or the Optional Federal Charter (OFC).

The Wall Street Journal featured an article on April 29, 2008, that emphasized the financial sector’s influence on the American economy may have peaked at about 27 percent of S&P capitalization. Yet the independent channel of distribution continues to grow at a rapid clip, and could be the major benefactor of the wealth wave. Independent Broker-Dealers that are armed with an array of diversified safe money choices are in a prime position to capture aging Boomers’ savings and investment dollars. These B/Ds, who have seen four bear markets in 25 years, know that long term retirement money will only stick in managed accounts during an inevitable secular bear market with consistent advisor communication, prudent allocation, and legacy planning.

As one major B/D executive recently said, “we realize that we have got to get it right on the distribution phase for our clients or the accumulation phase means nothing.” Another way of looking at it is the story of a young golfer who is told by his grandfather that when he was his age, he would have hit a shot right over the tree, but forgets to share the fact that the tree was only six feet tall forty years ago.

The last time we had a significant transfer of wealth by seniors was in the 1960s. At that time, there was some memory of the Great Depression and equity holdings fell from 44 percent of household assets to 17 percent. Today, in a much deeper and broader equity culture, there is a feeling among many B/D executives that because they manage retirement assets, the sticky and persistent nature of the assets will insulate their income statements from decumulation or a nasty bear market. Today’s withdrawals from 401k plans to pay mortgage bills indicates that these long term savings dollars may not be as sticky as once thought by advisors.

Regardless of what transpires, bull or bear, the value of fixed annuities has been demonstrated by such prominent resources like Wharton to be invaluable in prudent decumulation strategies as a viable alternative to stocks and bonds in providing superior risk adjusted returns. In addition, with Echo Boomers anxious to cash in on mom and dad’s inheritance, the absence of a safety net for all assets, such as long term care, will be inexcusable if an advisor holds themselves out to be a financial planner. Make sure, as a prudent advisor, to involve the kids in as much of the relationship management as possible and that all links in the legacy planning process know that mom and dad were offered an LTC policy or have sufficient self-insurance assets.

Don’t be like the gentleman with the sweetheart who after a memorable date wrote to his lovely gal: “I would swim the ocean, climb the highest mountain and cross a trackless desert to see you again.” But at the bottom of the letter he closed with: “PS, I’ll see you Saturday night if it doesn’t rain.” It’s raining decumulation dollars in America . Do you and your Broker-Dealer have a broad array of safe money alternatives to catch this wave of money in motion?

 

Kevin Startt is a 30-year financial planning veteran and Vice President of Broker Dealer Business Development for GamePlan Financial Marketing (www.gameplanfinancial.com), one of the world's leading field marketing organizations (FMOs) for independent life insurance agents and financial advisors. He can be reached at kstartt@gameplanfinancial.com or by calling 800-886-4757.

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