In my professional lifetime the financial services industry has seen massive changes. The advent of the internet brought online banking and online brokerage services which changed the way services were delivered and priced in those industries. Technology brought transparency to those industries in ways that had not been seen before. Now, at the precipice of the implementation of the DOL Fiduciary rule, the insurance industry will experience a similar transformation, not because of technology (yet!) but because (of all things) regulation!
During my career I have been fortunate enough to drive some of these revolutionary changes. I started by financial services career as Chief Marketing Officer of TeleBank, the country’s first internet bank. After a merger with E*Trade, I spent time launching the country’s first online banking and brokerage offerings. Most recently I was the COO at Jefferson National where I successfully targeted and penetrated the RIA market with a variable annuity product before RIAs were all the rage. These experiences have shaped my viewpoints of the industries where I have worked and disciplined me to look toward the future.
Looking into the future of annuities I see some massive changes coming and coming fast. I believe the genie is out of the bottle with the DOL Fiduciary Rule and, regardless of the on-going attempts to kill it, a fiduciary standard will take hold. With this conviction, I am making 3 bold predictions for the future of annuities:
1) Within 5 years there will be more fee-based annuity product sold than commission-based
The pending implementation of the Fiduciary Rule has carriers and distributors pushing hard to prepare for fee-based products. From new products being filed and launched to changes in systems to support fee-based business, there is heavy investment throughout the industry to prepare for a migration to fee-based product.Adding to the transformation will be advisors and registered representatives who will shortly come to prefer fee-based product for several powerful reasons:
2) Commission products will eventually vanish
Already experiencing diminished use for the reasons listed above, commission-based products will eventually all but vanish. For firms relying on what I call the "Myth of Main Street" — that lower balance policies are better served by a commission structure — harsh realities will set in for reasons that are already emerging:—Advisory fees are already being compressed and technology-driven methods of efficiently serving lower asset balances (Hello, robo-advisors!) are taking a strong foothold throughout the advisory industry. Commission-based compensation will not be competing with 100bps advisory fees for the policies, it will be competing with 10bps advisory fees for smaller, less complex accounts.
3) 1035 exchanges will become almost non-existent
The 1035 exchange is the lifeblood of sales for both carriers and advisors and in a fee-based, fiduciary world, they will quickly become a rarity.—While bringing clients the latest product innovation is the stated reason for many 1035 exchanges, the unstated reason is to create income for the advisor. Churning accounts has long been a focus of regulatory scrutiny, but fee-based accounts (and the steady income they provide) will dramatically reduce an advisor’s need to exchange products.
Big changes are coming to the insurance world and they are coming fast. The opportunities for those who adapt are tremendous while the implications for those who don’t are dire. Look for my next article which will both explore the growth opportunities and lay-out the negative implications.
David Lau is an executive with more than 25 years of professional experience directing strategy for innovative financial services companies. Mr. Lau has expertise in financial services sales, marketing, technology and operations.