NEW ANNUITY PRODUCTS,
MORE REP TRAINING—BUT 'IT'S WORTH IT'
Feature Article
Andrew Singer

AS BANK ANNUITY programs increasingly zero in on clients' retirement needs, they face the challenge of boosting the knowledge and education levels of their sales representatives.

"The velocity of change requires financial advisors to be experts," observes Bruce Ferris, executive vice president for Prudential Annuities (Shelton, CT).

With all the new variable annuities out there—with their GMWBs (guaranteed minimum withdrawal benefits) and 'step-ups' in account value, and 'post withdrawal step-ups'—it's enough to make a rep's head spin. Proper training is required.

"The good news is, it's worth it," says Ferris.

More flexibility

Variable annuity (VA) underwriters have been "incredible" in terms of the product enhancements that they've added in recent years, agrees LeAnn McCool, national sales manager at PrimeVest (St. Cloud, MN). Withdrawal benefits are a prime example. They are "so flexible."

In the past, there was a stigma attached to annuities: You had to annuitize to get guaranteed income. That's no longer the case. You can purchase a rider—20-30 basis points on the low end, 40-50 basis points on the high end—and with that rider receive guaranteed income, as much as seven percent annually in some cases, notes McCool.

But all this means that reps have to take down more information now because of increasingly complex suitability concerns. And with IRAs, they have to look at other needs, beyond tax deferral.

More education, then? "Yes," answers McCool. "Even though these products are more consumer-friendly, they can be more difficult for the salespeople to understand." More wholesaler training is in order.

"We do more continuing education in all channels," observes Ferris. More training was conducted this year than last year, for instance, which in turn was more than in the previous year. Reps now are taught to discuss potential financial problems and challenges with clients first—before they even begin to talk about specific products.

Indeed, Prudential has been sending bank reps (as well as reps from other distribution channels) to school—to the University of Pennsylvania's Wharton School for a two-and-a-half day program designed to hone their financial retirement skills.

When the new program was introduced this year, it was fully subscribed in less than 24 hours. Prudential will be offering it again in 2008, sending 100 reps at a time, in at least three separate Wharton sessions.

The old paradigm for such training was that if you wanted to get reps to attend, you had to conduct it in a nice location, like a resort, and really convince them that they needed to know what was being taught, notes Ferris. No longer.

In its bank programs, Prudential has been focusing lately on what the company calls the "Retirement Red Zone," or the critical five years before and five years after retirement. "That resonates quite well with our bank partners," says Ferris.

'Even though these products are more consumer-friendly, they can be more difficult for the salespeople to understand.

—LeAnn McCool, PrimeVest

They discuss the 'behavioral risk' associated with this Red Zone. An example? It's a common assumption that you should assume less risk as you move closer to retirement—put more assets in fixed-income vehicles, for instance, says Ferris. "That may not be the best decision for an individual investor." After all, many could be facing 30-35-year retirements. "This is not your father's Oldsmobile," says Ferris. Retirement is different than it was in past generations.

Overall, one sees less of a product push and more of a planning stance, notes McCool. PrimeVest had a marketing campaign last year, "Retire on Your Terms," that dealt with retirement income planning and included a substantial education component. It also gave a nice boost to sales.

In the past, bank annuity programs emphasized accumulation—almost exclusively; but now with the aging Baby Boom generation, there comes increasing focus on asset distribution. When PrimeVest recently asked its reps if they wanted to focus on 'income' or 'accumulation'—or both—most reps opted for income, McCool notes.

Is the median age of the VA customer rising? "More Boomers are turning 60, so that is making a difference," says McCool, who notes that it is "amazing how the mind switches [at that age] from accumulating wealth to asking: Will I have enough income?"

"Only a few products can offer peace of mind [like variable annuities], particularly about out-living one's money," McCool notes.

The education challenge is likely to loom large for some time. Axa's "Wake-up Campaign," to cite another example, makes use of client-approved inserts to talk about the importance of asset allocation and retirement. Specifically, it asks: What happens in the early years of retirement?

Increasingly, these early retirement years are being seen as presenting special risks, particularly if one is planning on living 20 years or longer, notes Anthea Perkinson, senior vice president and national accounts manger for AXA Distributors (New York). If you withdraw too many assets too soon, you could be caught short. Similarly, adverse market performance in the early years can have a big impact.

Discussing such risks is a useful way for a rep to begin a conversation about retirement, says Perkinson. The Wake-Up inserts provoke such a discussion. Any mention of the company's variable annuities comes later.

A 'soft' sell

Obviously, this is 'soft' sell. "It's not about positioning our variable annuity," says Perkinson. Rather, it identifies a problem and then proposes a solution—for example, guaranteed income. Of course, nothing says that the rep can't continue with: "…and I have a product that can do that…that can provide guaranteed income (i.e., a variable annuity)."

By contrast, if a rep begins a client conversation talking about a product, such as a variable annuity, describing its product features—its bells and whistles—then a customer can become overwhelmed.

There are three risks traditionally associated with retirement: longevity, inflation, and a market downturn. But there is also a fourth risk, according to Mary Fay, vice president and manager of the Annuity Division, Sun Life Financial (Wellesley Hills, MA): lifestyle risk. More people are determined to live in retirement on their own terms. Spending is no longer a flat line. "The Baby Boomers are probably spending more in early retirement," says Fay. Retirement spending tapers off later.

'The velocity of change requires fianncial advisors to be experts.'

—Bruce Ferris, Prudential Annuities

Sun Life's new product idea is that if you don't need a withdrawal, you can store it and use it later. It's no longer 'use it or lose it' with that 'five-percent withdrawal for life' feature. The company now has an 'income storage benefit.'

The product was introduced in early March, and it already accounts for about half of the company's VA sales.

Discussing the special risks associated with early retirement can be a good way to begin a conversation about retirement. Variable annuities might not be even be mentioned.

—Anthea Perkinson, AXA Distributors

Along these lines, Fay was asked what a bank-sold VA must have these days. It should have principal preservation—a "floor," answers Fay. After all, bank customers are used to such guarantees with CDs. It should also have an income guarantee; five percent seems to be what consumers are consistently getting on other products these days. And it should have an upside, too, something that VAs have long offered.

'Wherefore art thou' fixed annuities?

With all the buoyant talk of variable annuities, it is easy to overlook fixed annuities. Sales have been in the doldrums for months now. But fixed annuities have been the traditional bulwark of most bank brokerage programs. Where do fixed annuities stand today?

New York Life is the second-largest provider of fixed annuities through banks, says Andy Reiss, vice president of the Individual Annuity Department, New York Life Insurance Company, and the company remains "committed to fixed annuities in the bank channel" despite several difficult years due to an inverted or flat yield curve. New York Life's own bank sales have been flat, confirms Reiss, but the company has managed to increase its market share; it is well positioned if and when the yield curve assumes a more traditional shape.

In recent years, "the big buzz is retirement income," notes Reiss, and New York Life is active here, too, with its single-premium immediate fixed annuity (SPIA), which offers "guaranteed lifetime income."

New York Life currently has 31 wholesalers working in banks, and they have embarked on an extensive push in retirement-planning training and education. They've developed a modular selling system, explains bank channel chief Karen Dann, that revolves around retirement income planning. Is there an income gap? What are a client's (anticipated) basic expenses? What are discretionary expenses? Is golf, for instance, seen as a basic or discretionary expense in retirement? (A surprising number say that golf is a "basic" expense, she adds.) What about country club dues? ("Many say their country club is a big part of their social life, and they wouldn't give it up," says Dann.) The company's wholesalers teach bank reps to find out just what kind of retirement their bank clients envision—and then advise them on how to achieve it, discussing issues like when to begin taking Social Security, for instance.

Despite its usefulness for retirement, the SPIA is hardly entrenched in banks, however. Single premium deferred annuities (SPDAs) still account for about 90 percent of New York Life's bank sales, says Reiss, compared with only 10 percent for the immediate annuities. But he is optimistic. They are now on their third-generation SPIA, one that offers a rider with increased income flexibility, such as allowing a client to take more income in earlier years—before they begin taking Social Security for instance—and less in later years—or vice versa.

Sales of the SPIA product have been growing at 50 percent a year, says Reiss, and he expects that to continue into the future—though, admittedly, this is from a small starting point. Still, at some point, "we should see a dramatic spike," he opines.

Might it even surpass SPDA sales one day? "It could," says Reiss, although it's anyone's guess whether that will occur in 5 years or 10 years, or at some other time.

The next 12 months?

Looking ahead, what is the prognosis for VAs and fixed annuities?

If you examine VA sales over the past 10 years, they fairly closely track the performance of the S&P 500, says Sun Life's Fay. "There's a close correlation of industry sales and stock market performance." There is also a correlation between fixed annuities and interest rates. (An inverted yield curve depresses fixed annuity sales in banks, because customers can usually do much better with a CD.) If one wants to know what VAs and FAs are going to do, look first at the stock market and interest rates, respectively, she suggests.

What is a 'basic' retirement expense? A surprising number of consumers say that golf is a 'basic' expense.

—Karen Dann, New York Life

Fay says Sun Life is doing "okay" with fixed annuities, but there isn't much enthusiasm, given the difficult interest rate environment. By comparison, bank-sold VAs were up 32 percent year-to-date (YTD) as of October compared with the previous year.

In October, PrimeVest's YTD variable annuity sales were 17-percent ahead of 2006. They accounted for 32 percent of PrimeVest's product mix. By contrast, fixed annuity sales were down 14 percent YTD. "The flat yield curve has definitely hindered fixed annuities," says McCool.

Retirement spending is no longer a flat line. "The Baby Boomers are probably spending more in early retirement."

—Mary Fay, Sun Life

More recently, Federal Reserve Board actions have caused the yield curve to become steeper, notes Dann. It is approaching a more traditional form, "so at the end of the day, it does look like CD rates are beginning to move lower"—which should, of course, help fixed annuity sales.

Education is required with the SPIAs, too. Dann notes that New York Life has been conducting more educational seminars in banks these days. Although they work with all sizes of banks, the SPIA seem to be finding the most resonance these days among regional bank clients.

Prudential, for its part, conducted a consumer survey in 2006 that revealed that 73 percent of consumers were unaware about the existence of financial products that would protect principal, but also enable them to lock into market gains, notes Ferris. Yet 71 percent said they would be interested in such products if they were available. This, in his view, says something about the consumer-education challenge that still remains.