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:

  • Their customers will prefer to work with a fee-based advisor who is compensated for advising rather than selling. Astute advisors will see this as a point of differentiation and other advisors will quickly follow their path to success.
  • Advisors will come to enjoy the predictability of their income which comes from having a fee-based book of business. Rather than rely on endless prospecting and transactions for their next paycheck, they will have a steady income from their book.
  • As laid out by the Fiduciary Rule, the regulatory scrutiny of fee-based product sales will be less strenuous than that on commission sales. Advisors will prefer to work under the requirements of "BICE-light" rather than full-blow BICE scrutiny.

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.

  • The dual dynamics of the growth of hybrid advisors (who use insurance products) and advisory practice consolidation will create larger independent firms utilizing insurance products in their practices – practices with efficiencies of scale and technology – that can cost-effectively manage and deliver advice for accounts of all sizes.
  • The combined pressure of regulatory scrutiny and low-cost advisory fees to serve smaller policies will require commission rates to drop making commission-based sales even less attractive for advisors.
  • Consumers will continue to show preference for the fee-based model. The notion of upfront commission to supposedly pay for years of financial advice is silly. Does your boss pay you years of salary on your first day of work and then expect endless productive service? Of course not!!

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.

    • Apart from the powerful reality that advisors will no longer need to rely on 1035 exchanges for income, regulatory scrutiny of 1035 exchanges will be dialed-up in a post-DOL world furthering the rationale for advisors to avoid these transactions.

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.

Meet the Author

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.