John Lefferts' Blog

Friday, January 30, 2015

Insurance Industry to DOL Proposal: "Don't Know-Don't Care"

As the long expected DOL fiduciary proposal nears its re-release, the anxiety levels for all the various stakeholders are reaching a boiling point. There's a great deal at stake that could materially change the retail financial services business if commission products must be replaced by fee based accounts for the retirement marketplace. The argument against it is that the ruling will force all products from commission to fee based putting the small market advisor out of business and forcing the less sophisticated client to go it alone. Another less popular but extremely important part of the proposal shifts the liability and burden of proof from the DOL to the advisor (or firm employing/supervising the advisor) should there be a claim. Moving claims from arbitration to the courts could be a B/D CEO's nightmare. On both sides of the argument, there are multiple groups and associations fighting, but it seems to me by reading the various industry publications that SIFMA and FSI are most often cited as the prime opponents. Clearly, the constituents of SIFMA & FSI, made up of B/D’s and asset managers of varying sizes and types, have something to lose if the DOL gets its way (FSI viewpoint here: ). However, last year advisor comp was made up of about 60% in fees and by the end of this year, that fee number could be over 75% and trending upwards. That tells me that a great many of SIFMA’s and FSI’s constituents are already being held to a fiduciary standard for much of their business. While the threat to securities based firms is certainly there, I’m more surprised by what appears in the media a lack of fight from the insurance industry. The firms that should really be shaking in their boots are in the life and annuity insurance industry.
Ignorance is always afraid of change
The life and annuity insurance business is primarily made up of two basic types; The “career” agent and the “independent” agent. The true independent B/D that does not manufacture product will be impacted by the DOL proposal, but it is the proprietary product manufacturers who maintain a sales force that will be impacted the greatest. While several industry publications categorize many of the career insurance firms as “independent B/D’s” (Northwest Mutual, AXA Advisors, Mass Mutual, Lincoln Financial, etc.) the truth is that they are insurance product manufacturers first and maintain a tied sales force to distribute those products often through their owned B/D secondarily. These B/D’s are not truly independent. The relationship between the insurance company and their agent only works to the extent that the agent sells/recommends/distributes the proprietary manufactured products. For doing so, they receive benefits qualifications, pension contributions, conference qualifications, recognition and managers receive overrides and bonuses. This is the “value proposition” for affiliating with a career company. It worked great in an era gone by where the majority of producers sold primarily life insurance. However, you will find that a great many agents in these career models have drifted away from selling life insurance over the years and towards retirement products/services and asset management. These types of practices will be impacted the greatest.
So fast forward to a DOL fiduciary as proposed becoming the law of the land. These insurance company manufactured products for retirement which are primarily fixed, variable and indexed annuities, will have to be repriced and restructured to accommodate the DOL requirements. The possible implications are the following:
  • Career agents may lose differentiated benefits (benefits, pension cont., overrides, etc) for selling proprietary products over non-proprietary products further eroding the "value proposition". All products would need to be on a level playing field
  • Pricing of the annuities may be forced towards AUM comp and away from commissions impacting agent compensation flows and managerial overrides as structured today Read NAIFA's point of view here
  • If the career insurance company cannot respond to this shift from proprietary manufactured commission based products towards fees AND restructure their career producer “value proposition” towards asset based products, they stand to lose producers to the Independent B/D models (LPL, Cetera, Commonwealth, etc) at a staggering pace
  • Some career models will give up career distribution or drop their B/D to become a “super OSJ” of an true independent B/D (As Kansas City Life did last year with Securities America )
This is not to say the insurance career shops are doomed. Many have the leadership and resources to respond to the market forces in play and some have already moved towards fee-based products. But for those with their heads in the sand hoping for business as usual, it could be a disaster.
Is it ignorance or apathy. Hey, I don’t know and I don’t care -Jimmy Buffet
And what about the independent agent who places product through a Brokerage General Agency (BGA), many of which are not FINRA registered and sell primarily fixed and indexed products. For those who sell fixed/indexed life insurance, they can keep flying under the radar for now. For those marketing fixed and indexed annuities for pension rollouts and IRA rollovers, which includes a great many of them…bulls eye. These advisors who heretofore have been loosely regulated by state insurance departments will now have to meet the strict DOL requirements.
The five stages - denial, anger, bargaining, depression, and acceptance - are a part of the framework that makes up our learning to live with loss. They are tools to help us frame and identify what we may be feeling. But they are not stops on some linear timeline in grief.

Reading both investment and insurance industry publications, it seems that this threat is going relatively unnoticed by the independent agent and to some extent the career agent segment. Most I speak with haven’t even hit the first stage of denial which seems odd given what's at stake. When change happens there always seem to be winners and losers. Should the DOL get this through, the winners for the insurance based models could be the few career firms that have the resources and leadership to implement change immediately. Another winner from collateral damage will be the forward thinking Independent B/D’s who can become the safe haven of choice for those agents/advisors currently stuck in firms that will not/cannot make the shift. And contrary to popular belief, many insurance based advisors have already made the transition towards asset management thereby controlling the client relationship on all levels (asset management and risk management). For those IBD’s that have a robust insurance support offering, and there aren't many of them, these advisors and teams are a real find.
Regardless, it remains a question mark as to if/when either the SEC and DOL will not only pull the trigger, but then get it through. The fiduciary debate is going on 5 years now and still nothing has been resolved. But there is a real sense that 2015 will be the year it may happen. Where there is great change, there is equal opportunity and it will be interesting to see who will seize this opening to take the lead. Are insurance based distribution models prepared to compete in a new regulatory environment? Are IBD's positioned to recruit and support the insurance based advisor as the field harmonizes? Let me know what you think....

Thursday, January 15, 2015

Curveballs and Screwballs

“Life is 10% what happens to you and 90% how you react to it.” -Charles Swindoll

In May of last year, I wrote a post on career curveballs and how I set in place a personal roadmap for the remainder of the year. By October, everything was going exactly as planned. Got triplet kids into college, sold the home in Texas and my wife and I moved to our hometown of San Diego. What seemed impossible at the outset of 2014 was within reach by fall since I had just one more box to check-off...landing a career role in Southern California. Things were rolling and I was certain the year would end perfect according to plan. Then I got a call...

In early November, my son Marshall, a freshman student-athlete at Penn State, called me and let me know he was at the Penn State campus medical offices getting checked for what he believed were symptoms of mono. It seemed plausible since kids in college get these kinds of things. I even had it as a sophomore in college. But then shortly later, I received another call from the doctor doing the examination. "We are putting Marshall in an ambulance and rushing him to Penn State Hospital in Hershey". Shocked by the news, I asked the doc if I should make plans to get there. She said, "if it were me, yes". The blood test for mono revealed that his platelet count was at 3,000 where normal is well above 140,000. At the time I was unsure what this meant although the doctors knew exactly what the symptoms pointed towards. I hopped a flight the next day thinking this all will blow over and he'll be back at school in a few days. How can a healthy 6' 5'' 325lb offensive lineman out with friends on Saturday night and experiencing flu-like symptoms on a Sunday have something life threatening on Monday? This is probably just a viral or bacterial infection and the docs will give him a prescription to clear it all I told myself. Yes, this was a coping mechanism kicking in, also known as denial. In a couple days after multiple tests, the doctors confirmed the diagnosis as they had suspected all along. This was more than a curveball, it was something more unexpected; a screwball. He has Leukemia.

My cousin Craig Lefferts pitched in the majors in the 80's and 90's His signature pitch was the screwball. Most every major league pitcher threw heat and curveballs, but he was one of a handful who threw the screwball. It's startling. At only 75 MPH it drops on you totally unexpected. It freezes you unlike any other pitch. Learning that you have cancer at any age is a stunner. But getting it in the fall of your freshman year really stinks. It's a total screwball dropping on you unexpectedly. This is supposed to be a highlight of your life...the most fun ever. New freedoms, new surroundings, being on the football team, it was all there. Then this happens. But as we know, "It's not what happens to youbut how you react to it that matters".

After about 3 weeks, we got him stabilized to the point he could travel back to our new home in San Diego where he is receiving top notch care from UCSD Medical Center. Marshall's attitude is awesome. After a very short couple days of "why me?" he then adopted an attitude of "I will beat this no matter what!" and sees it as a bump in the road on the way towards achieving his goals. He has to receive treatment for another 6 months and is out of school for the rest of the school year, but we have every reason to believe that he will be ready to go back to school this coming fall. He has responded to treatment phenomenally well and early signs point towards a full recovery. Marshall's positive attitude has been an inspiration to the doctors, nurses, family, friends and in particular to me.

I am convinced that maintaining a positive attitude in the face of a personal crisis is the only way out of that crisis. It's not easy to do, particularly if you're sick and not feeling well. That's true for kids with cancer as well as for parents of kids with cancer. We feel fortunate that we caught it early and have access to the best medical help possible. My last post was in October and then I kinda fell "off the grid" in November and December as supporting my son was front and center. Although the treatments make him feel terrible at times, he keeps on keeping on and is even making plans to get back into the gym next month. He has taken personal responsibility for getting healthy again which frees me up to get back to checking off that final box on my 2014 plan. We all get curveballs thrown at us from time to time. But when you get thrown the more rare screwball, it tests your attitude like never before. I'm a big believer of the quote at the top. It's easy to get down at even the most simple of roadblocks. And I'm sure any problems my son or I have pale by comparison to many others. We are blessed with a positive attitude and I wish the same for everyone.
I believe the most significant decision I can make on a day to day basis is my choice of attitude. It is more important than my past, my education, my bankroll, my successes or failures, fame or pain, what other people think of me or say about me, my circumstances, or my position. Attitude keeps me going or cripples my progress. It alone fuels my fire or assaults my hope. When my attitudes are right, there is no barrier too high, no valley too deep, no dream too extreme, no challenge too great for me -Charles Swindoll