Warning: Why annuity agents will soon be extinct, Pt. 2
By Joe Simonds
Advisor Internet Marketing
Editors note: The first part of this article discussed the dramatic changes that rocked the airline industry in recent decades, leaving many unemployed and searching for new occupations. Part two will detail how the same thing is happening now within the annuity industry and provide advice for advisors and other industry professionals looking to prepare themselves for this brave new world.
Hopefully you picked up on some similarities between the airline industry and the annuity industry while reading the first past of this article, but for those of you that didn’t catch them all, here is a summary of why I believe the next decade will bring about the extinction of today’s annuity salesperson (and FMO) as we know them today.
Similarity No. 1: Many insurance carriers are earning approximately 40 percent to 50 percent less ROI on annuities compared to 10 years ago. Executives at some of our favorite annuity carriers are currently talking about the fact that FMOs still make the same commissions as they did 10 years ago, even though agents have experienced commission reductions, the carriers have experienced significantly reduced profits, and the consumers have experienced steadily decreasing guarantees and benefits. Just like the airlines, they will not let this discrepancy continue indefinitely.
They will find a way to either cut commissions or cut distribution in some shape or form. The most likely solution is to use a direct-to-consumer model. If given the chance, any VP of Sales or the CEO of any carrier that you or I do business with would cut out commissions to distribution if he or she was confident that sales would remain close to the same. Would you blame them?
Similarity No. 2: Like travel agencies in recent decades, the insurance agent base is shrinking drastically while simultaneously, the industry is having trouble replacing and recruiting young blood. So even if you don’t agree with me that carriers want to cut you out, I think we can agree that a steadily shrinking sales force is cause for alarm for many carriers. Carriers must take into account this dwindling distribution model when planning for future expansion. Offering their products directly to consumers seems like a simple solution.
Similarity No. 3: FMOs and agents feel that the carriers need them more than they need the carriers. I am certain that this could be argued a few different ways. But the truth of the matter is that today, the carriers really do need agents and FMOs. It's the reason they haven’t all secretly met together and cut us out in one big swoop. Carriers with established distribution are nervous to be the first one to go direct and let consumers buy right off of their website (even though they have the technology ready to do it) and they fear that their business would suffer drastically in the short term from an irate distribution force. The airlines let the distribution model make literally billions in commissions while many of the carriers lost money each year, and they continued to let it happen because they were scared of what would happen if they cut out the middleman. But it only takes one event to begin the domino effect that we saw with travel agents. And when it did begin, the direct-to-consumer model swallowed them up before many of them knew what happened.
Similarity No. 4: Carriers are finding ways to cut us out today. As an agent, FMO, or wholesaler, you might not want to acknowledge it, but it is happening. Have you ever heard of Aetna? Although not a carrier that has traditionally been in our annuity and life distribution space, they recently landed a deal to start distributing their annuities through Costco. Pretty brilliant, really. They cut out all of the commissioned agents and the commissioned FMOs and go directly to a group like Costco that has a tribe of millions of loyal followers. I assume you know that thousands of people buy their wedding rings, book vacations, home and auto insurance (and yes, airline tickets) through Costco. There is a minimal distribution cost to Costco to add to their long list of products, thus they can work on really low margins, as they always have. To think any agent, agency, or FMO can compete with this is crazy. So keep a close eye on this and other developments like it. I can assure you that all of the insurance carriers are.
Signs to look for
The first things to look for are the simplified products which, in turn, lead to simplified ways for consumers to buy direct. Let me ask you, what has been the hottest feature on the fixed indexed annuities over the last five years? Income riders, right? The good news for the agents selling them was that many of them were somewhat complicated for consumers to understand. The two different buckets (accumulation and income) confused many people. Thus, consumers needed a specialist to explain all of the features and moving parts. Good news for agents and FMOs!
Well, have you seen the latest longevity-deferred income annuities that look exactly like pensions? Even some of the new FIAs have these easy-to-understand income features where you can simply look down a chart and see precisely what you will be contractually guaranteed in income based on how long you defer. No more two buckets. If a carrier makes the purchasing process easy and painless and the products simple to understand, don’t you think a consumer can figure this out by themselves? More importantly, don't you think some carriers are already doing small test cases in a direct model with these kinds of products? You better believe they are. Many of the carriers have enormous brand equity, and they certainly have the technology ready to take on direct sales. You will see many more of them begin to test this in the very near future. Some of them might try “proprietary distribution,” where they pick a few FMOs to distribute the product but also have a direct-to-consumer line, as well. The FMO and interested agents can either deal with it or give the proprietary distribution spot to someone else.
Some will skip the current distribution completely when they launch their next new product, but keep the old products in the current distribution model. But mark my word, just like the airlines, the carriers will start testing and finding ways to use the Internet and simplified products to create revenue from direct sales, and we really can’t blame them. Nor can we stop them. If I were CEO of an insurance carrier, this would be my main priority. The first carrier to figure it out could be like Southwest Airlines and become the most profitable insurance carrier out there by a landslide.
Here is what we all must remember. Whatever your role in this industry — carrier, FMO, agency, agent, or educator — at the end of the day, we all work for the consumer — the end user. And if technology like the Internet, or new distribution partners like Costco or Walmart (Metlife is currently testing out selling “life insurance in a box” directly to consumers through Walmart stores) greatly benefit the consumer, it will be impossible for you to win. If new products and distribution benefit the consumer in terms of higher contractual guarantees and policy features, how can we justify the old distribution and its compensation model? We would all like to think that because this current distribution system of agents and FMOs brought many of these carriers to the dance in the first place, they won’t leave us out to dry. But at the end of the day, this is business.
Now, before you start sending me hate mail, make sure to read the remainder of this article. You might be surprised to find out that there is some extremely positive news for some of you.
The annuity and life insurance distribution model will see some truly significant changes over the next decade. Will it be as severe as the airline industry? Will 50 percent of the FMO’s sales be taken away from the FMOs and independent agents almost overnight? Only time will tell. But my analysis predicts that a huge chunk of annuity sales will be direct-to-consumer by the end of this decade. And if you think the carriers aren’t already discussing, planning and building the technology and infrastructure for this, then you are gravely mistaken, because it is happening even as I write this article. But with change comes immense opportunity. Some of you reading this will be the founders of companies like Travelocity, Expedia, and Priceline that will control billions. And did you know that many of these travel comparison sites were founded not by big travel agencies, but individual travel agents who had the foresight to capitalize on the changes? Also, these changes ushered in an entire new industry of companies that compare digital travel agencies. Have you ever heard of Kayak or TripAdvisor? Those two companies never sell a single airline ticket or travel package, yet do extremely well. And then you have groups like the company that I came across in Atlanta who specialize in niche markets of travel.
For certain advisors out there who take advantage of RIA, you could gather all assets, charge fees for financial advice, and still write annuities while creating a residual (and perpetual) income stream. In fact, one of the fastest growing RIAs in the country is run by an incredibly sharp 33-year-old advisor who does all of his business remotely. He is what we call a digital commando, working from home in his shorts while creating over 100 consumer leads per month on the Internet and capturing millions per month of assets and annuities. Most of the time, he doesn't see his clients face to face. This is happening around you already.
In the next 7 to 10 years, we will see much of this unfold, whether we like it or not. The big question we will have to ask ourselves is do we want to be a Travelocity or a typewriter?
Author's note: Please leave comments, as I really would like candid feedback on this. And don’t hesitate to reach out to me personally as I will openly discuss what I am doing to take advantage of the upcoming trends I see coming. There will be more than enough to go around for the early adopters. Best of luck as we embrace these exciting changes.