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Deferred Compensation Ins and Outs
Posted by:Deferred Compensation Ins and Outs, and Interview with Matthew Schiff
This is the Third Clip in a series of three. Check out our articles for additional videos.
The Future of Life Insurance
Posted by:
Micki Hoesly, CLU, ChFC,
entered the financial services business 34 years ago with Mutual of New York, which is now part of AXA Advisors. In 1983, Micki began her own company, Capital Resources, specializing in pensions. Micki is also principal of Resource 1, a registered investment advisory firm. She is a 32-year Qualifying and Life member of the Million Dollar Round Table (MDRT) with three Court of the Table and eight Top of the Table qualifications. She also currently serves as the association’s second vice president. (Investment advice through Resource 1 Inc. Securities offered through Ceros Financial Services Inc. — not affiliated with Resource 1 Inc. Member FINRA/SIPC.)
Stephen O. Rothschild, CLU, ChFC, CRC, RFC,
is president and owner of M21 Consulting in Scottsdale, Ariz. His organization works exclusively through and with the high-net-worth and business clients of independent registered investment advisors, independent broker dealers and a few other financial professionals. M21 Consulting does not solicit clients directly. Stephen also has a long history of industry leadership. He is a Life and Qualifying Member of the MDRT and holds numerous Top of the Table and Court of the Table qualifications. He served as MDRT president in 2006-2007. Stephen also has served on the board of directors with both the International Forum and the AALU.
Matthew E. Schiff, CLU,
is the president of Schiff Benefits Group, specializing in the design, implementation, financing and ongoing administrative support of supplemental executive benefits programs. With more than 20 years of experience in the financial services industry, he is recognized as a leader in the deferred compensation field. Matthew is a Lifetime Member of the MDRT, with nine consecutive Top of the Table distinctions.
I’ve been a part of the life insurance business for the past 30 years, and like a lot of industry veterans, I’ve seen my share of change. A lot of the more experienced agents back in the early 1980s used to tell me — a newcomer at the time — that the business had shuffled along at a fairly slow pace until universal life burst on the scene. That single product brought an era of change and challenges, and although UL is now viewed as a traditional product, it seems like the business is still living in that era of rapid change.
At the risk of stating the obvious, though change is often difficult, it’s clearly not all bad. Whether change is good or bad for producers depends much upon how the producer integrates new developments into his or her business, and how willing he or she is to look beyond the immediate challenges toward a more successful future.
The best producers do just that, and for this month’s roundtable, we are asking some of the most talented, most forward-thinking and most articulate producers around to share their thoughts on the future of our business. No doubt we face some real challenges. But the future also provides some tremendous opportunity, and we’ve asked the following panel to share their thoughts on just what lies in store: Micki Hoesly, CLU, ChFC; Stephen O. Rothschild, CLU, ChFC, CRC, RFC; and Matthew E. Schiff, CLU.
Question 1
Charles K. Hirsch, CLU: There continues to be a tremendous focus in the life insurance business on the boomer market. That seems sensible when you consider the financial needs of the large number of people in that age group. But it also makes one wonder whether the business may be neglecting the needs of other demographic groups — like Generations X and Y. What are your thoughts on that?
Micki Hoesly, CLU, ChFC: There seem to be several logical reasons for the current focus on boomers. First, the boomers are now in the pre-retirement and early retirement years, which are critical times in their financial lives. Additionally, the average age of advisors has been getting much older, meaning that many of the advisors are also boomers.
It wouldn’t be surprising for their focus to be on people of their own demographic. There is also the wealth of the boomers’ parents’ generation, which is beginning to transfer, prompting an even greater need for financial advice.
We can do that by either strategically making multigenerational planning with specialized products and services for each generation, or we can do that by apprenticing X and Y generation agents with our boomer agents to create multigenerational practices serving multigenerational families.
Stephen O. Rothschild, CLU, ChFC, CRC, RFC: Our industry has aged, and it is only natural to work with prospects close to your age. I worked with boomers before the name existed. Sadly, we do not have enough younger agents to work with their own age group, like Generations X and Y. Thus, it is not neglect but lack of younger entrants in our industry. As Generations X and Y age, they will get more attention paid to them as they will earn more and inherit more. They are also being addressed in some non-traditional ways. They are more likely to buy over the Internet, through worksite marketing, and through agents who have set seminar methodologies that address their market and needs.
Matthew E. Schiff, CLU: The insurance industry, as well as the professionals in it, has always looked at the demographics of a population and tried to focus its energy on the largest population. In this case, the baby boomers have been, and probably will be, the industry’s focus for the continued future because it’s the largest demographic. This does leave the under-45 market underserved, and I believe that the best way to help those in this market is by fostering the hiring of financial advisors under that age who can relate to their peers.
Question 2
Hirsch: Some companies and some producers are doing a lot of work in various ethnic markets. Is this a trend that makes sense to you, and do you see it continuing? Where do you believe we are headed in the area of serving the financial needs of specific ethnic groups?
Rothschild: Those addressing the various ethnic markets are simply following demographics. Population trends and birthrates show the ethnic markets are growing at a faster rate than the non-ethnic markets. The same logic applies to entrants into our business, as new insurance agents will often address their own ethnic market.
Schiff: This is not a new trend. New York Life prides itself in its ethnic marketing and has for many years. Their company, like many others, is focused on diverse markets. It’s just that, to be effective in those markets, just like any specialty, it takes time to establish a reputation and a presence in the specific market.
As for where we’re headed, the industry as a whole in the United States has to hire more diverse agents. Carriers that develop career agents understand that. But because of the drop in new agents over the years, it may be difficult to have a large impact in ethnic markets.
Hoesly: Many top-producing advisors have built practices that strategically focus on one market or one client demographic. Narrowing the focus allows the advisor to completely understand the needs of that market and become a recognized expert. With the United States becoming increasingly diverse, it makes sense to serve the needs of a defined demographic and provide specialized services that are specific to that market. This could be based on ethnicity, on age, on the type of business or those who need a certain type of service.
Question 3
Hirsch: When you look around at the competition these days, it seems there are more sales coming from or through non-traditional sources — like banks, the Internet, etc. Is this type of competition something that producers should fear? Or are there good ways to partner with these non-traditional sources to benefit everyone? And looking even further ahead, what type of competition do you believe has the potential to negatively impact the producer’s business to a significant degree?
Schiff: No. “Insurance is a product that is sold, not bought” is a well-known anonymous quote that describes our product. If agents get concerned that the commodity portion of our products are being sold through different channels, then we as agents have brought no value to our clients.
To partner with the non-traditional channels, you need to be a specialist at what you do, like a doctor (OB/GYN, orthopedist, family doctor, etc.). This brings value to them where they don’t normally have the expertise. But in my 21 years in the insurance industry, the only thing that can negatively impact the potential sales of life insurance is not competition, but rather legislation.
Hoesly: There is more need for life insurance and financial advice than our current advisors have been able to reach. Offering good products and services and reaching more people and encouraging them to take hold of their financial lives makes us all better. I don’t believe that producers should fear alternative distribution as long as it is reputable and builds on the good character and values of putting clients’ needs first.
The risk I see is competition that is deceptive, products that are financially unsupportable, or companies that put the guarantees of the industry in question. I think the greater risk today is the onerous disclosures and restrictions on advice that make it difficult for clients to understand their options and sift through the complex array of products and strategies. It seems backwards to me that the more licenses one holds, the more the advisor is restricted in how he or she can communicate and advise clients. Often, procedures appear to be primarily driven by the need to defend and not by the need to inform.
If we lose sight of our primary purpose — helping the client do what is in his or her best interest — then our service loses its value.
So where do I see future competition? I see it coming from the bold firms that believe clients need advice and that are not fearful of having that advice subject to fiduciary standards. I see it coming from advisors who understand that clients are overwhelmed with too much information and that a valuable service we provide is helping them find which information is significant and meaningful to them.
Rothschild: Producers who have not grown or changed should have great fear. Competition is coming from banks, registered investment advisors, broker-dealers, casualty brokers, accountants and a few attorneys. Many life producers have entered some of the competitors’ arenas as well, particularly in the investment arena. The key is your ability to differentiate yourself.
Frankly, most life producers are being commoditized, just like the insurance carriers. If you hold up two ledger statements from two different carriers, they look the same. Unfortunately, the prospect will determine value by looking at the premium and as we all know…
This analogy applies to the producer as well. Being a trusted advisor is no big deal. Rather, it is just table stakes. Is a prospect going to work with someone they don’t trust? Becoming the most-valued advisor is what is important. How is the advisor bringing value to the prospect? Are you leaving it up to the prospect to determine the parameters of value? Or are you helping them determine these parameters?
At our firm, M21 Consulting in Scottsdale, Ariz., we work primarily with independent registered investment advisors and independent broker-dealers. We do not go after the retail market directly. We bring our expertise to those who want to deepen their client relationships and diversify and increase their revenue. Their high-net-worth clients are our target.
Other producers can partner in other ways, or others can partner with life producers. It depends on who is doing the marketing. I am never concerned about a negative impact on the producer’s business, as there are still way too many prospects who are never called on or do not have a life insurance advisor. Again, those who don’t make changes to their practice will find themselves out of the business.
Question 4
Hirsch: Two trends that sometimes go hand-in-hand are improved technologies — or the improved use of technology — and better products for you to sell. As you look ahead, what do you see — or what would you like to see — in terms of technology and new product development? In addition, is there an existing opportunity in using technology to market and sell that producers aren’t capitalizing on?
Hoesly: Our business is all about relationships. Technology that helps us get more customized services to our clients and that makes it easy for them to do business with us is technology that will help us build our practices.
I believe technology that allows us more time with the client and better access to useable information will be technology that builds a relationship and not technology that replaces a relationship. Albert Szent-Gyorgyi, the 1937 Nobel Prize winner for medicine, said, “Discovery consists of seeing what everybody has seen and thinking what nobody has thought.” So the challenge is to use technology in a unique, experience-enhancing way.
But there are many things that product providers could do that would help us do a better job for clients. Information access in a usable form is key. Old products should have the same level of technological support as new products. Clients with existing products that become outdated should have the option of enhancing them or exchanging them without punitive costs.
As new products are developed, it would be helpful to be able to test their sensitivity to many assumptions, not just a level return assumption or guaranteed mortality rates. Understanding how providers are self-insuring or re-insuring their risks would help producers understand how good a guarantee might be in the future.
Broker-dealers should be proactive instead of reactive in utilizing technology to seamlessly use new client contact opportunities like social media and Web-based client meetings. I have been seeing a lot more creative uses of technology to provide asset allocation models, fiduciary review of mutual funds, and client access to data and information.
I have also seen products developed using technology to limit portfolio risk and the need for client action. Retirement products have developed behavioral finance-based applications that allow participants to elect now to save later and to automatically increase their savings over time. It is these types of technology applications that help producers help their clients do a better job of reaching their goals.
Rothschild: I haven’t seen many better products recently. I have seen innovation through combining needs within one product, such as long-term care and life insurance. Most life products today push too much of the compensation upfront and too little in renewals. Service on existing clients will decrease unless there is future sales potential. I would like to see carriers reduce first-year commissions and increase renewals. 50% to 75% of the renewal should be a servicing fee.
The balance would go to the original writing agent. When one gets a new client, the servicing of the old policies is done for free, which is certainly not a good business model. If carriers would allow an agent of record change, the new agent would be paid the servicing fee, and the writing agent who neglected the client’s proper service would no longer be paid for doing nothing.
The World Wide Web is attractive to younger prospects, wealthier prospects and educated prospects. It is a good marketing tool. Face-to-face sales are still in style.
More important for life insurance producers than products or technology is sales training. Producers and especially carriers are living in the last century. Sales skills used by the Fortune 500 sales forces should be used in our industry. Our industry’s sales methodologies are in a huge silo, walled off from reality. Properly trained sales professionals can sell helicopters or life insurance. As a result of poor training, too many resources are used generating proposals, ledgers and informal application underwriting, let alone wasting time that could allow producers to see more prospects.
Schiff: When I started in the business in 1991 with Michael Goldberg, CEO of FDP Corp., he told me when he hired me that we would be able to do financial plans on a handheld computer in the near future. Twenty years later, we have the iPad that can do all that and more.
But in an ideal world, the best technology is integration, like the cloud concept. The closest thing for agents to that concept is their database. They can control and share data through encrypted means, and by doing this, an agent can take his or her marketing efforts to a higher level, with the client management system at the center of it all.
The database over time and a sizeable learning curve would provide all of the following:
- Collect website data.
Create marketing campaigns to different markets:
- Clients
- Advisors
- Referral sources
Drive your traffic to your website through mailing lists (if that is what you are successful at).
- Share that data, electronically encrypted for protection.
- Upload application data.
- Download policy data.
- Download securities data.
Question 5
Hirsch: In this age of huge deficits and a government apparently starved for cash, how seriously at risk is the current tax treatment of life insurance? And what can the average producer do to combat the threats?
Rothschild: The risk on the taxation of the inside buildup is high, but not on the tax-free nature of death proceeds. This will not have an effect on those who sell the life insurance product for its death benefit, but those who sell otherwise should be concerned. It is simple to design a product where the cash value is never greater than the cumulative premiums, but this does not address the needs of those who sell the product as a device to supplement income. Thus, the average producer should go back to selling the death benefit.
Schiff: Every agent has to be ready to step up on behalf of their clients and the products we provide them. Every tax-preferenced item is on the table. Because of that, we have to be proactive. I suggest that producers create relationships with those who make the rules — members of Congress and your state legislature. If they don’t know you, then they don’t know your needs and the needs of your clients.
We need to support what is good for our clients, even when those changes might dampen our business or revenue. We should support NAIFA, AALU and the LIFE Foundation, and their clear messages of the value of life insurance. In all areas of our practice, we should focus on the “why” of our products, including creating a secure retirement, building funds for college education and protecting families that have lost a breadwinner. We should not suggest that the tax benefit is the primary reason for doing any investment.
Question 6
Hirsch: A major change is to occur in the U.K. in 2012, when obtaining commissions from the sale of life insurance and some other products will be banned. Do you see a similar ban on commissions as any kind of a threat here in the United States? Why or why not?
Schiff: Not in the near future. But when a nation that is so close to the United States in its design and operation decides to ban commissions, we have to pay attention and not wait for something to happen. I say this because, so far, commissions haven’t been the hot item when discussing financial reform.
Hoesly: One of the many advantages of being a member of the Million Dollar Round Table is that we get to share ideas with other top producers from many countries. Seeing the impact of the changes in the U.K. should make us all the more proactive in helping our legislators understand the value of what we do and the differing types of compensation arrangements, whether they are commissions, fees or salaries.
I see a trend in the United States toward disclosure. I also see a trend in the United States of short-sightedness. Quarterly profits, monthly returns and current costs all seem to get more attention and weight than long-term profits, long-term returns and long-term costs. As a result, there could be a lot of pressure on short-term cost disclosure without taking into account the long-term performance of any product.
Rothschild: No, I do not see a commission ban happening here. I do see the rest of the country following the state of New York with full commission disclosure. Hopefully, this will lead to compensation changes between first-year and renewal/service fees as I discussed earlier.
Charles K. Hirsch, CLU, is a contributing editor to Life Insurance Selling. He is the president of Hirsch Communications Consulting LLC, in Florissant, Mo.
