I have seen the beginning of the end for the insurance industry as we now know it, and independent financial advisors - whether you sell insurance or not - have an interest in following these developments closely. The disruption wreaking havoc in the securities industry because of the Web has begun to take hold in the insurance industry, and it will provide opportunities to independent advisors who pay attention and hazards to those who do not.
A few weeks ago, I was invited to Dallas to debate the president of an insurance B/D. The whole thing was really scary. For one thing, I was invited to speak at the last moment because another speaker could not attend. I didn't have time to prepare. To make matters worse, I was asked to speak about why the fee-only mode of compensation is better than working on a commission basis. Now, I do believe that working with clients on a fee basis is a better way of practicing because it more closely aligns an advisor with a client's interests. But I'm not a dogmatic sort of guy who thinks all advisors who accept commissions are evil.
| In the new era of Internet insurance, expect new professional designations, low commissions, and insurance brokers offering financial advice |
What's more, the advisors attending this conference were almost all affiliated with insurance B/Ds. So I had everything going against me: I wasn't prepared, I wasn't who they were expecting, and I was speaking to a group who would hate my message.
However. In researching my case, I came quickly to realize that even a stuttering fool could win this debate. The controversy over fee-only versus commissions has been completely transformed by the Internet. Even the old business model in the commission-driven world of insurance is being supplanted because of the Web.
The debate between fee-only advisors and those working on commissions is no longer just about conflicts of interest, incentive sales systems, and morality. Insurance agents will need to move toward fees as a business decision. The same thing that is happening in the securities business - where discount brokers have driven down commissions on stock trades and forced Merrill Lynch and other wirehouses to cannibalize their business models and charge fees for advice and to create Web sites for self-directed investors - is starting to happen in the insurance business.
Until now, insurance companies have not created special products to be sold on the Web. When consumers go to www.quotesmith.com, they are buying a fully loaded product no different from what you get when you call your agent.
But sites are starting to pop up offering consumer insurance products specifically created for distribution over the Web. These products recognize the cost savings of doing business over the Web.
"When people go online and do the work themselves, we reward them by giving them Internet pricing," says Diana Scott, VP of e-business and retail partnerships at John Hancock Financial Services. "Depending on your age and term, it can be up to 20% lower than the off-line price."
For now, mindful of the channel conflict involved in competing with its sales force, Hancock has rolled out a very simple term product with no bells and whistles.
Just as Merrill and other wirehouses are moving toward cutting commissions and catering to self-directed investors in recognition of the Web's impact on their business, so too will insurance giants create self-directed Web sites. It's a simple business decision. Large insurance companies who are publicly held nowadays have a duty to shareholders to make money - even if it means competing with their own sales forces.
The gentleman I debated in Dallas, Larry Rybka, pooh-poohed the Hancock offering, saying it was an unattractive term insurance policy that nobody really wanted anyway. The crowd applauded and cheered. But they're in denial. It's like rooting for the rebuilding of the Berlin Wall.
Hancock has seen the disruption the Web caused in the securities industry and anticipates a similar spillover into the insurance industry. "We've decided that we are going to capture the self-directed consumer and the consumer needing advice," says Scott. "We want our product to be in as many channels as possible. A B/D could eventually be selling our term policy and we can serve up the product so they can sell the customer this simplified term policy through an advisor Web site."
Hancock is not alone. AnnuityNet.com is also creating insurance products that are created expressly for distribution over the Web (see cover story in this issue, "Fertile Ground"). AnnuityNet is partnering with insurance companies and fund sponsors such as Lincoln National, Keyport (which is part of Liberty Mutual), and PFL, a subsidiary of Aegon, to offer variable annuities for Web distribution. Steve Dunlap, AnnuityNet's marketing director, says the company is trying to sell variable annuities over the Web much the same way mutual funds have been sold directly to investors for years: "We try to get consumers to think of this as a tax-deferred mutual fund. This removes a lot of the obfuscation that is so useful to brokers in selling."
Consumers "regard commissions as bad," says Dunlap. That's why online discount brokers now get one in five retail trades. The Web has encouraged transparency about commissions and that trend is spreading into the insurance business.
Sites like www.quotesmith.com and www.insweb.com help consumers compare prices. The price pressure will force insurers to reprice policies sold on the Web, just as Hancock is doing. Dunlap notes that State Farm recently killed its relationship with www.insweb.com because its policies were consistently coming out as the most expensive.
It's likely to take a couple of years for the Web to deeply affect insurance sales. But insurance agents ought to seriously consider the possibility that it really is different this time. Sure, selling policies to resolve complex estate planning issues is a lot different than selling a simple term policy. But this is how the Web services in insurance must start. Eventually, the Web will find a way to handle the more complex cases.
Maybe the complex cases will be handled on an auction basis. Consumers will go to a site and fill in a form describing their estate planning situation. Licensed agents or fee-only insurance advisors could bid on the case. Need an irrevocable insurance trust? Click here. Need a second-to-die policy? Click here.
The erosion of insurance commissions is going to increase the importance of delivering real financial planning advice. At the same time that Hancock is preparing to sell insurance direct over the Web, it has also remade its advisor division, now called Signator Financial Network. SFN is Hancock's RIA and broker/dealer, and it has about 4,000 registered reps. Recently, Signator entered into an agreement with KPMG, the Big Five accounting firm, to provide fee-based comprehensive financial planning.
"The firm's advisory platform offers advisers access to an array of fee-based programs," says a press release from the firm. "Programs range from traditional mutual fund wraps, separate account wraps, and private money manager services to unbundled tools that enable individual asset management by Signator senior financial advisers."
The idea is to allow agents to sell a range of products, not just Hancock products, and do so while working on a fee basis for their investment advice. Hancock is just one of a number of giant insurers that is stressing financial planning education of its reps. They have to.
These developments in the insurance industry have serious implications to independent advisors. If you now sell insurance and depend on insurance commissions for much of your livelihood, think about - and I know this is a scary suggestion - offering advice about insurance on a fee basis. For advisors who do not sell insurance, the changing competitive landscape poses a threat that is just as great. A flood of insurance agents is going to be moving into your space, offering financial planning advice.
As we reported last month, the new thing among big insurers and wirehouses is to send their reps and agents to school to become CFP licensees. Corporate contracts from wirehouses, banks, and insurers are way up at the colleges and universities that are accredited by the CFP Board.
And these giant firms are taking shortcuts, too. While many of the wirehouses and insurance giants have indeed encouraged and paid for brokers and agents to get the CFP, others are taking a shortcut by creating their own designation, such as Merrill Lynch's CFM designation.
"These companies see the CFP as time-consuming and difficult to obtain, not to mention expensive," says Jesse Arman, vice president of academic affairs at the College For Financial Planning in Greenwood Village, Colorado. "Nonetheless they want to bring employees to certain level of competence that may not be the same as that of a CFP."
The College is the largest provider of distance learning materials to CFP candidates and is one of the only providers of correspondence courses preparing you to sit for the CFP exam. If the College says it's starting to produce more correspondence courses for these private designations, that means in two or three years, you'll have these financial services companies promoting their private designations.
"There is nothing inherently inferior about an intermediate designation," says Arman. "There are huge numbers of highly successful, competent individuals who do not have the CFP, but who feel some designation will give them more credibility. To the public, it doesn't mean they are necessarily receiving an inferior financial planner. Look at other professions. Is a psychologist with PhD. necessarily better than a psychologist with a Master's degree? No."
Arman recognizes that "all things being equal, people would probably prefer the PhD." But he says the educational programs for the new private designations will promote planning and provide consumers with better advice. Typically, he says curricula for these programs are about one-fifth the length of the CFP education materials. They cover the same ground, just in less depth.
Between the newly minted CFP licensees working at the financial titans and the private designations backed by the marketing muscle of the big insurers, wirehouses, and banks, the cottage industry of independent financial advisors will look a lot different in a few years. It will be easy for an independent financial planner to get lost in this mass of advice givers.
Independent advisors should plan for the changes that will occur over the next few years as the Web reshapes the insurance industry. Some ideas? Build your brand identity, emphasize the personal nature of your services, provide more specialized financial services that target particular types of consumers, and apply more sophisticated planning approaches that the giants will have a hard time countering with junior-level planners.
