PRACTICAL OBSERVATIONS
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The Long Road Back
By Bob Veres
Somewhere around 1990 or so, I sounded an alarm about the insurance industry. I noted that 10 years previously, the mutual fund and insurance industries were roughly even in total consumer investment assets, but over the recent decade mutual fund assets had risen tenfold while insurance assets had remained flat.
Mutual Funds Versus Insurance: How We Got Here
The reason for the difference? I didn’t think it was complicated; the mutual fund industry had embraced transparency. Morningstar was publishing commissions and expense ratios down to two decimal points, and you could see every mutual fund’s track record over any time period. The insurance industry, meanwhile, relied on commission-compensated sales agents to sell cash value products whose internal workings were opaque, using policy illustrations that were flagrantly misleading. The contracts specified that the companies could, at any time, at their own discretion, raise their internal death benefit premiums, which were not visible to the policyholder. Even the agents didn’t know what kind of returns the general account inside these policies were generating.
Variable annuities were even worse, constructed with flashy riders that were designed by clever actuaries to benefit the issuer more than the consumer.
Of course, most fee-compensated advisors opted for term insurance and immediate annuities, which tended to be competitively priced. But for decades, the insurance industry stubbornly held onto a commission-based distribution model for its cash value, managed-assets products, and suffered mightily in comparison with the increasingly no-load, transparent fund world.
In 1990, and for some years afterwards, I wondered when the insurance world would have its “Fidelity moment”—referring to Fidelity’s break from the pack to offer its funds free of sales commissions. Within a couple of years, it became the largest fund company in the world—and I believed any major insurance company could similarly gobble up market share simply by ditching the commissions and offering transparently priced cash value insurance products.
You can judge my profound influence in the financial world by how the insurance industry responded to (ignored) my sage advice, and eventually I gave up. But now, I’m starting to see some tentative moves toward fiduciary cash value products, sponsored by some of the bigger names in the business. The platform managed by DPL Financial Partners now offers no-load, transparently designed insurance and annuity contracts from Allianz, Equitable, Jackson National, Pacific Life, Transamerica, Security Benefit, MassMutual, and TIAA. Prudential has introduced several no-load contracts, and Fidelity is now selling no-load annuities issued by New York Life and others.
Has the Ship Already Sailed?
Is this too little, too late? I doubt the insurance industry is ever going to catch up to the fund world in terms of customer investment assets; that ship sailed long ago. The question now is whether cash value life and variable annuity products really do have a place in the financial lives of advisor clients. When you look at all the floors and ceilings and offsets and riders, it appears that the insurance industry is trying to compete based on actuarial creativity rather than on price or return history—and my own sense is that many of the annuities are designed to, somewhat precisely, address just how much risk a skittishly risk-averse investor is willing to take in the always-bumpy investment ride. For advisor clients, that makes them niche products, but they may be more popular with consumers who don’t have an advisor to talk them down off the ledge in a bear market.
The other possible place in client portfolios is in fixed income. Looking at the insurance industry’s return guarantees on the DPL website, it looks like there are instances where the income from an annuity portfolio exceeds what you could get from CDs or in all but the diciest corners of the bond market. That, of course, is because insurance companies can add investments other than bonds to the income-generating portfolio, and let the actuaries calculate how to do this safely based on the customer base.
But my overall conclusion is that the insurance industry’s fiduciary/transparency/no-commission opportunity was great in 1990 and has diminished every year since—and not just diminished, but hardened into intense suspicion of the entire industry. Today, if somebody at a party is asked what they do for a living, and they say they’re a life insurance agent, the effect is not noticeably different than if they had said they carried a contagious form of leprosy.
The other branches of insurance seem to me to be in various stages of traveling cautiously down the same road. Consumers are gradually becoming aware that “free” Medicare agents are paid more if their customer signs up for Medicare Advantage than traditional Medicare, and the online health insurance exchanges offer a way to cut out the commission-compensated middlemen for people shopping for health insurance in their pre-Medicare years.
A Collaborative Approach
Finally, I’ve been writing about some of the interesting opportunities that are opening up for advisory firms to start helping their clients shop for cost-effective auto, property/casualty, and umbrella insurance policies. John Ryan of Ryan Insurance Strategy Consultants has become a trusted conduit for Fee-Only advisors to find insurance coverage for their clients; he’s working with the Gallagher Affinity brokerage company, which means he can now direct advisors to virtually any type of insurance product their clients might need. More recently, the AiK2 organization—which brokered E&O policies for planning firms—has been purchased by the Starkweather & Shepley brokerage firm. The intent is to make it easy for advisory firms to shop the full insurance marketplace on behalf of their clients.
I continue to believe that risk pooling—the fundamental core value proposition of the insurance industry—is one of the human race’s greatest innovations, a way to sand off some of the rougher edges of life by sharing the risks. I wish the insurance industry as a whole could have followed in the footsteps of the mutual fund industry and normalized its values with the Fee-Only fiduciary community, whose trust it will have to win to distribute its newer product lines. Over the last half a century, insurers collectively have given NAPFA members and fiduciary advisors good reason to be suspicious of their character. It may take that long to gain your trust.
Bob Veres is the publisher of Inside Information and one of the strongest advocates of Fee-Only planning in today’s profession. If you think his columns are full of the stuff that hits the fan, tell him so directly at bob@bobveres.com.
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