Consider the recent history of two products. In the American marketplace, both held a pedestrian yet respectable position: they were solid, reliable, sometimes boring, but rarely unpredictable, associated with mature consumers who had little time for restless speculation. For those desiring a more interesting experience, there were other roads to travel, routes that could lead to more stirring results, albeit with a little risk -- products that left us dizzy with their speculative possibilities. Our protagonists in this analogy, though, our two square and conventional product cousins couldn't be bothered with such folly.
I'm writing, of course, about fixed annuities and coffee. Bear with me.
The 1990s brought to the world Seattle-style ubiquity: grunge music, flannel shirts, and Starbuck's coffeehouses to virtually every neighborhood, mall, and airport in the United States. Suddenly, that boring old cup of coffee became a new experience. Who knew that a simple breakfast beverage once associated with doughnuts and police stakeouts could be so hip, so diverse, or so unexpectedly cool? Since when did ordering your coffee become so complicated, the choices so diverse? "Large, cream and sugar" became "I'll have a venti white mocha double latte, extra hot, no whip." Huh?
Perhaps that same coffee drinker, experiencing their first $4.75 latte, also heard about their first indexed annuity a few years later. The world of fixed annuities, since the first "EIA" was introduced in 1995, would never be the same again. The fixed annuity was the insurance industry's plow horse of financial products, paying a predictable rate of return while protecting the customer's principal. Indeed, although offered in a few varieties, fixed annuities rolled from the assembly lines and into homes with all the cachet of the Model T. With the upstart EIA, all of that changed, and soon producers and consumers alike were introduced to its dizzying array of market-linked possibilities and crediting method flavors. "I'll take the blended index with the bonus, enhanced withdrawal benefit, and monthly averaging crediting option." Excuse me?
Two run-of-the-mill products were torn apart and recreated, and emerged more interesting and complicated than before, and inarguably more marketable. Now, the coffee drinker wasn't just someone in a corporate job, approaching middle age, who needed a quick pick-me-up; they were immersed in the world of the Italian coffee house without leaving their block. How could that person, experiencing that heady rush of bohemian prestige every morning, ever return to the line at the local diner? The coffeehouse became a boom industry. By 2004, "Americans drank a record amount of coffee at home, in the office and at trendy cafes, lifting green coffee roastings to a 30-year high, industry research found last week. `The specialty coffee industry created a number of different entry level points for consumers that leads to that coffee drinking habit. Ninety percent of the credit goes to the specialty industry,'" said Ted Lingle, executive director of the Specialty Coffee Association of America.1 Similarly, indexed annuities surged from modest beginnings to more than 55 billion in 2004.2 Certainly market conditions played a part in their rise during the early part of the decade, but salability and choice didn't hurt. The safer investor could now play in the market and keep their chips from going to the house, provided they were willing to sit at the table long enough. The EIA brought new possibilities to traditional insurance savings products, and submerged the safe investor into the fast-track world of the stock and bond markets, all while wearing a life vest. Investing in fixed annuities became, dare we suggest, cool?
The life cycle and lessons learned
But products, like people and organizations, have a predictable life cycle. What we have referenced so far is the birth (or rebirth) and subsequent love affair with the childhood, or growth stage, of each product's life cycle. During childhood, the product is largely embraced by those who come to know it. It is new, different, and interesting, and especially in our coffee example, often makes us feel better about ourselves. We experience a period of discovery where we overlook its flaws, its price tag, or its consequences, because... well, aside from the benefits of the product, it's so fresh and seemingly unique. We have seen this phenomenon with the new fixed annuity (formerly known as the EIA) and the new cup of coffee, the gourmet latte.
Since their rise to relative prominence in the middle part of the decade, both products grew from their relatively trouble-free, whimsical childhood into their adolescent stage. And it is there, typically, where the trouble and subsequent supervision begins. Excessive experimentation leads to confusion and bloated, hubris-driven ventures as products and companies approach middle age. Consider this from Greg Beato of Reason magazine:
In 2008, Starbucks closed 661 under-performing locations. In 2009 it shuttered an additional 300 stores and laid-off 6,700 employees. In an attempt to position itself against newer, hipper rivals, the company started talking up its "heritage." It resurrected a less polished version of its logo for use in certain branding situations. Presumably, its coffee is still brewed from coffee beans, but everything else in its new stores seems to have made a radical career switch. The bar at a London Starbucks is upholstered with scraps from an Italian shoe factory. The countertop at the Paris Starbucks is made out of recycled cell phones.3
Starbuck's seems to have emerged from its adolescent period with a wary eye towards middle age; it's still experimenting, still scrambling to meet the inevitable flood of competitive pressure, retraining, re-tooling. What it may need to ultimately realize, Beato postulates, is this:
In reality, the chain's customers have played a substantial role in determining the Starbucks experience. They asked for non-fat milk, and they got it. They asked for Frappuccino, and they got it. What they haven't been so interested in is Starbucks' efforts to carry on the European coffeehouse tradition of creative interaction and spirited public discourse. But if Starbucks really hopes to re-establish its authority as an innovative, forward-thinking trailblazer, it should perhaps use its next experimental venue to honor its heritage as the first chain to take gourmet coffee culture beyond the narrow boundaries of traditional coffeehouse values and aesthetics. Imagine a place with matching chairs, clean tables, beverages that look like ice cream sundaes, Norah Jones on the sound system, and absolutely no horrid paintings from local artists decorating the walls. A place, that is, exactly like Starbucks! Because despite its ubiquity, despite its advancing years, Starbucks is still the most radical thing to hit the coffeehouse universe in the last 50 years.4
Here's where the parallel lines begin to draw nearer in our most unlikely analogy. First, it's interesting to note that customers were initially drawn to the European-style prestige that has been so fundamental to the Starbuck's model, but they have also made their preferences clear; Starbuck's, whether willingly or grudgingly, has wisely listened, despite its continued flirtations with high-minded exclusivity. Chances are, you won't be able to order a blended toffee Frappucino on your next tour of Italy's countryside; but authenticity be damned. If it's Frappucinos the customer wants, Starbuck's delivers in several flavors. Indeed, meeting the customer's demands for variety is essential for continued relevance and survival. Second, the original idea is still good enough! A decent cup of rich coffee and a great aesthetic experience worked then, and it works now. After that, the best ideas a product manufacturer can implement as it approaches middle age come from the customers themselves.
And it's a lesson that some indexed annuity carriers have learned well after a particular rough adolescent development period. Following its rapid growth through childhood, the product, its manufacturers, distributors and salespeople -- its supply and delivery chain, or "the chain"-- had played the part of the cocky teenager well, occasionally flaunting and thumbing its nose at authority figures, sometimes taking more than its fair share through questionable sales practices, and pushing its figurative parents' limits on curfews -- surrender periods -- resulting in sometimes unfair punishments and restrictions (05-50, 151A) that have been aimed at the troublesome few to the detriment of the well-behaved many. Overselling of features, rather than benefits, and mispriced products brought disarray and confusion down upon the entire chain. Misinformation fueled by competing industry forces, especially the well-funded securities industry (who, of course, is here to help), flooded consumers, further exacerbating the problem. Many of us along the way weren't sure if the chain would survive strong and intact.
As indexed annuities approach middle age, the chain has, in many respects, responded admirably, albeit slowly; a result that could be attributed to several factors inherent in such a scrutinized and regulated industry. Like our coffee-producing friends, the manufacturing link in the chain has listened to both of its important customers --distributors and agents -- by developing consumer-friendly products that match their needs and wants. With an eye towards the regulators and the possibility of new restrictions and overseers, every link in the chain has adjusted accordingly, resulting in more robust training and suitability programs. Finally, each link in the chain also seems to understand one simple truth: the product, broken down into its essential components so appealing to consumers in the first place, is good enough. Guaranteed principal, stream of income options, and reasonable growth are good and simple things. The lessons of the life cycle have endured.
What does the future hold? Some believe we're well on the road to the indexed annuity losing its luster of variety and choice due to excessive regulation, and yet others contend the opposite. The truth, as usual, will end up somewhere in the middle, but I suspect that you can count on one thing for sure: No matter what annuity products we end up selling to our customers in a couple of years, we'll have plenty of varieties of coffee to drink while we do it.
1Food and Drink Weekly, Feb. 16, 2004.
2Jack Marrion, www.indexannuity.org, March 2010.
3Greg Beato, Starbuck's Midlife Crisis, Reason, February 9, 2010
4Ibid, pp. 3.
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