Warning: Why annuity agents will soon be extinct, Pt. 1
By Joe Simonds
Advisor Internet Marketing
I’m about to tell you a true story about an industry that went through the same changes that the annuity industry is going to face very soon. If you believe me, you could be well rewarded. On the other hand, if you don’t believe me, then I will make it worth your time to change your mind and consider what is going on around you.
You will be pleased to know that the players in this other industry who saw the changes coming made billions. However, the majority sadly refused to believe it could happen to them and were left unemployed and looking for new occupations. Let me explain.
To help set the stage, my article that published on ProducersWeb in December titled “Warning: Why FMOs will be extinct soon” received over 7,900 total reads. As you can imagine, that translated into an immense amount of feedback and personal emails. What really shocked me was that 85 percent of the feedback was positive. And half of the overall feedback came from FMO's principals, wholesalers and FMO/IMO personnel. Who would have guessed that they actually believed and supported much of what I wrote?
I’ve been told that the article also created uneasiness among some FMOs, in particular the groups who have continued to do the same thing for many years and will do anything within their power to avoid rocking the boat by embracing any kind of drastic change.
More interesting was that the article spawned some very intense conversations about other facets of the annuity industry which will undoubtedly be affected by the upcoming technological changes and consumer behavioral changes that I mentioned in the article. In particular, how your average annuity agents/advisors will be impacted by changes in distribution and technological advances in our industry.
For the last two months, I have been conceptualizing and refining this article in my head. This past weekend, it all flowed out. As a fellow annuity salesman, wholesaler, educator and FMO founder, I urge every single annuity agent/advisor/producer/FMO to read this. For those of you that know me personally, you know that I am passionately optimistic and I get no joy out of bad news. However, I do enjoy finding the silver lining in change and helping other people capitalize on it. This article serves as a stern warning about what I believe is coming, and I assure you this article will open many of your eyes to what could happen to your practice and your livelihood if you don’t adapt. In fact, it could ruin my business if I don’t personally adapt to the changes correctly.
Sadly, there will be many that dismiss this warning and continue down the path of saying, “It can’t happen to me,” like so many other industries, companies, and individuals that refuse to accept change. My friend, Stan the Annuity Man, refers to these late adapters as “typewriters." And at some point, all typewriters go extinct. So without further ado, here is my warning to all annuity agents in America. The true story begins with an industry we all know well. It is an industry that most would never associate with annuities or annuity distribution; however, the similarities are striking upon analysis. What industry am I referencing? If you guessed the airline industry, you would be correct.
As most of us learned in school, the first flight by the extraordinary Wright Brothers took place back in 1903. But it wasn’t until the 1970s that commercial flights became a more common and economical way to travel. Prior to that, they were mostly used for traveling abroad, for large corporations and for the wealthy.
Now before I continue with the story, I want to take one last break to identify the cast of characters and how they relate to our beloved annuity industry. I am certain that it will help you tie the pieces together even quicker as I finish the story:
Airline carrier = insurance carrier
Large travel agency = FMO/IMO
Travel agent = annuity agent
Airline traveler = annuity consumer
Airline ticket = annuity
The airlines sold their tickets through a vast distribution system of travel agents and travel agencies nationwide, and for years, all parties made money. In almost all cases, the consumer was forced to go through a travel agent to book an airline ticket, and going direct to the carrier was not even an option for many years. As you can imagine, the bigger travel agencies made more money — as a result higher of commission levels and bonuses — than the smaller groups. Over time, many side deals were cut, including some carriers forming proprietary distribution deals with certain large travel agencies.
Sound familiar so far?
But all that began to change in the 1990s, eventually turning into a horrid domino effect for many travel agents and agencies. After airlines had been squeezed of profits while watching most of their distribution system continue to make the same commissions in spite of the carriers’ shrinking margins, the airlines began to look for ways to cut out the middle man.
So, early in the 90s, carriers nationwide lowered commissions to travel agencies and agents in an attempt to increase their own profits. Of course, the travel agents and travel agencies were furious. They strongly believed that the airlines would be out of business without them, and that they deserved every penny and more. Many left the business. Some focused on other travel products besides airlines, such as cruises and hotels, even though airlines had long been the bread and butter for almost all travel agencies in the country because of upfront and rich commissions. The rest just dealt with it, continued working and hoped it wouldn’t get worse. Note: For decades, travel agents and travel agencies were paid a percentage of what they sold for the airline. It was usually an upfront commission, and the travel agent could tell the client with a straight face that their commission wasn’t coming out of the client’s pocket, that the airline paid the commission out of the airline’s pocket. Almost identical to the fixed and fixed indexed annuity commission structure that has existed for many years.
What is also interesting is that 1990 marked the beginning of a slow decline in the number of new travel agents entering the business. Travel agencies were finding it tough to recruit young professionals and college students into the business, and many critics and travel writers started to wonder who would fill the shoes of the older travel agents as they retired or left the industry. By 1995, many more travel agents were leaving the business, and the lack of competitive salaries and guarantees resulted in very few new people entering the field. Any of this ring a bell?
In 1997, “IT” came out of nowhere and hit the already feeble travel agency model like a ton of bricks. The travel agents and agencies had seen it coming, but had done little to avoid it. They had heard about it for the last few years, but they all said it wouldn’t affect their business. How could it? The airlines needed them more than they needed the airlines. “IT” was called the Internet. It was just a fad — or so they wanted to believe.
Looking back now, it seems almost humorous that they couldn’t see it coming. But Radio Shack and Borders books didn’t see Amazon coming, Blockbuster didn’t see Netflix coming, local newspapers never saw digital print coming, the music record industry refused to believe that Apple could sell songs digitally for $.99 and cut them out, Kodak never thought people would want to use their convenient camera phones over a bulky camera, and most of us didn’t believe the housing bubble was coming … until it was too late.
Afterwards, bubbles and “typewriters” always seems so obvious to all.
In a related story on LifeHealthPro titled “Direct annuity sales are coming. Are you ready?”, Stan the Annuity Man describes a similar situation where a former VP of Dean Witter was scoffing at the business model of Charles Schwab and Scottrade many years ago. This VP firmly believed that those models would never affect big names like Dean Witter and that it simply “Can’t happen.”
Of course, it's not so funny now, as wirehouses like Dean Witter and Merrill Lynch have imploded by not adapting, while the low cost, cut-out-the-middle-man models like Schwab are reporting exceptional profits and growth.
Stan goes on to say, “The reason that both of these business models continue to be wildly successful is because they provide low-cost, transparent and simple solutions that are customer friendly. It’s really that simple, and a definite snapshot of our annuity future.” So, let’s circle back and tie in what the Internet did to the already fragile airline distribution system. By the late 1990s, much of the general public had access to the Internet (do you remember your first AOL or Hotmail email account back in 1996 like I do?), and many of the main airlines saw this as their chance to finally cut out the travel agents and agencies. By selling direct, the airlines could eliminate the commissions paid to travel agents and agencies, lower prices for consumers, and increase their profits. It was a win for the airlines and consumers.
The following 5 to 7 years were a rough time for many travel agents and agencies, as most were forced to focus on selling other less profitable travel items like cruises or other destination trips. Many agents and agencies left the business completely, and the industry experienced a very harsh disintermediation. (If you hear this term used by a carrier, then pack up your bags. In economics, disintermediation is the removal of intermediaries in a distribution/supply chain, or "cutting out of the middleman." Instead of going through traditional distribution channels with distributors, wholesalers, brokers, or agents, companies may now deal with every customer directly, usually via the Internet).
So, what exactly did the Internet enable the airline carriers to do?
Keep in mind that at the time, most consumers and travel agents had believed that it was somewhat complicated to buy an airline ticket. There was no central comparison website (or hundreds of websites as we have today), and for many years, the only way to book a flight without a travel agent was to call each airline directly to quote prices. But since the travel agents’ commissions weren’t directly affecting the cost of your flight, why not just have the agent make the calls and/or use the Global Distribution System (GDS), where agents could see and compare flights on your behalf.
It doesn’t take a rocket scientist to figure out that if the Internet could give everyday consumers the ability to access the same data as travel agents, they could start doing the shopping themselves. The airlines simplified the process and turned their websites into easy-to-use modules where you could book your next flight without talking to anyone.
It seems so simple today, but this was truly a breakthrough in air travel at the time. It became especially tough for travel agents to compete when the airlines starting offering discounts if you booked directly through their website. Do you recall many of the airlines offering up to 10,000 free Skymiles just for purchasing your flight online in the early days of online booking?
Although the majority of travel agents went out of business, some of the smartest ones either created or teamed up with existing travel agencies and went digital themselves. So, there really is a silver lining at the end, as I hinted in the very beginning of this story. These digital travel trailblazers could see that they were getting cut out by the Internet, so why not take advantage of it themselves? They realized that with a website powerful enough to attract consumers, you can divert some of the consumers from going direct to the carrier, especially if you can offer flight comparisons and other value added services like air/hotel/rental car bundles and travel packages that the airlines’ direct websites didn’t currently have.
Can you guess the names of these travel agencies that are making today billions? If you guessed Travelocity, Orbitz, Expedia, Voyages, Priceline and Hotwire (just to name a few), then you are correct. They are known today as digital travel agencies, and they currently control approximately 50 percent of airline ticket sales. The remainder is all direct to the carriers’ websites. There is still a battle for distribution among the digital agencies and the airlines, who obviously want it all to go direct if possible.
What happened to the “brick and mortar” travel agencies and agents? To be honest, most of them are no longer in airline ticket distribution. The excess overhead, in conjunction with competing against slimmer margins used by the digital agencies, resulted in the collapse of the business model.
However, some of the smarter ones found new niches, like exotic travel spots that a cookie cutter company like Travelocity just doesn’t have the bandwidth to specialize in. For example, let me show you what popped up when I did a Google search for a travel agent in my local area of Atlanta. Here is their “About Us” page.
“Explorations is a boutique luxury travel company in Atlanta, where we’ve been spoiling our clients for 25 years. With personalized service, worldwide connections and a dedicated team of expert travel advisors, Explorations offers exactly what discerning travelers need to take the trip of a lifetime. Whether you are looking for us to plan your destination wedding or plan your trip into space, Explorations can be the first stop on your itinerary. Our goal is to exceed expectations and offer you access to a world beyond your imagination. Contact Explorations today to plan your next adventure."
Now that is pretty exciting. In fact, I was thoroughly impressed with this company and their site. I am not sure how many people (if any) ever take them up on a trip into space, but I do commend them for finding a niche and staying in business that way. From the looks of their site, they are doing just fine.
And as I mentioned, it is all about adaptation. The ones who refused to adapt and specialize are gone. Just like old typewriters collecting dust and cobwebs.
But enough about airlines, you want to know exactly how this affects our annuity and life insurance industry, right? Be sure to read part two, in which I explain exactly why this all matters to you.