Ever since I entered the financial services business back in the 80’s, the Baby Boomer demographic has been the overwhelming driver of consumer behavior and how companies marketed their products and services. While it remains true that the majority of investable assets remain with the Boomer generation due to a lifetime of accumulation, what seems to be changing is their influence on purchasing behavior and decision making. Why? After multiple decades of demographic dominance, it is estimated that as of last year, there were about 75.4 million Millennials, outnumbering the approximately 74.9 million Baby Boomers. The Boomer has been overtaken in sheer size for the first time in over six decades. Pew Research Article
So far, 20% of Baby Boomers have retired. By 2020, it is estimated that 44% of boomers will have retired. While the Boomer is definitely where the assets are currently, guess who is going to inherit all that money in the coming decades? You guessed it…Millennials. And just as the size of the Boomer generation impacted how we marketed to them, Millennials are today shaping the business models for the future. To be successful for this segment, it comes down to one key word: Digitization. That’s why we’ve seen an explosion in FinTech investment for the financial services industry. It seems everything is going digital whether it’s going direct to the consumer over the web or enabling intermediaries to be more efficient and tech forward in marketing to the shifting demographic. As noted below where you can see the huge growth in FinTech, the clear laggard is in the insurance industry known as “InsureTech”. But that is changing. In this article titled "The Insurance Tech Moment is Coming" , it states, “Insurance is the next FinTech” growing faster in the past couple years than FinTech itself, which includes the “Robo Advisor”. It appears that InsureTech lags the FinTech investment by about 2 years…but it's catching up.
Combine this phenomenon of industry digitization with all all the other drivers of change such as regulations (DoL today and likely the SEC soon), Advisor/Agent demographics on the decline and the demand for financial services products and advice on the increase, and you’ve got an atmosphere ripe for disruption. But not the kind of disruption where the robo will replace the advisor. As we in the business know, people do not make impulse purchases on complex products and services or as we often say, they're sold and not bought. That’s why we’ve seen multiple slick robo offerings struggle with gaining traction only to be bought out by well capitalized human advisor firms. But there will be some direct models that can replace the advisor/agent. Financial services and insurance products that are more straight forward and simple such as simple asset allocation, home/auto insurance, term insurance and health insurance will be easier to buy online in the future through B2C direct models. However, Comprehensive Financial Planning, Permanent Life Insurance and Annuities are more likely to be digitized through a financial professional rather than around them due to the complexities.
Not surprisingly, the majority of FinTech investments early on went towards B2C direct models trying to disrupt the space. Now that we’ve seen a couple of them crash and burn, we’re seeing a reorientation towards using technology to enable rather than replace the advisor. In InsureTech, we’re likely going to see the same. The majority of InsureTech investment is currently going towards B2C models but following the FinTech trend, I think within a couple years just as we’ve seen the robo-advisor shift, we’ll see the same with robo-surance. (Note: Insurance is so tech backward, there isn't even a "robo-advisor" like-kind term, so I made up "robo-surance")
Another emerging trend in insurance is the need to find alternative forms of distribution. With the average agent age at 60 and regulations causing manufacturers to drop their proprietary distribution models (as Met did recently), insurance carriers and BGA's have to find a way to open up sales to grow or else they’ll die a slow death. Coincidentally, the RIA and Independent B/D's are seeing their margins compressed like never before and similar to the insurers, need to find alternative lines of revenue or they'll also die a slow death. With the benefit of technology being able to simplify an otherwise complicated product and service (think Turbo-Tax), there are some technology companies entering the financial planning and insurance space to do the same. By taking a consumer focused approach which is leaning towards digital and reshaping the complexities of insurance products, not only will the traditional channels be more effective, but those who have typically referred this piece of business away such as RIA's may be inclined to keep it in house, particularly if the carriers reprice their products (from commission to asset based) which is the current trend.
One company I've been advising in this space is Assurance. The firm is taking the Intuit Turbo-Tax technology and applying it to the complex life insurance business to format illustrations that not only help the financial professional comply with new regulations, but renders the proposals digitally in a graphic, easy to understand way, viewable on any device (computer, tablet, cell phone) rather than thump down multiple confusing 20 page illustrations on the desk.
We are at the intersection of demographic change (Boomer to Millennial) and regulatory disruption where the natural solution is new technology. Just as it has been said that if you google yourself and nothing comes up, you really don't exist, likewise, if you are a financial services or insurance firm and don't have a digital consumer offering, the firm doesn't exist. It's time that the insurance industry play catch-up with a digital strategy. Assurance is one of a handful of firms that can show them how to do it.
"A horse never runs so fast as when he has other horses to catch up and outpace"
It’s not often that from a business perspective, the sun, moon and stars align to create both tremendous opportunity and incredible change. What we are witnessing now in the financial services business is that exact phenomenon. But in this business, it’s not the sun, moon and stars, but instead, shifting consumer preferences, technological advancements and regulatory change. The alignment of these key components is creating a game changing environment that will further delineate winners from losers while being unforgiving to those prone to maintaining the status quo. The release of the DoL rule last week was the final piece to fall into alignment setting everything in motion that had prior been somewhat paralyzed. Now that we have some clarity, it’s finally time to press forward…game on! Here are some observations about this unique point in time…
Consumer preferences: It’s no mystery that everything is moving towards a digital platform for most anything we need and want. Whether it’s entertainment through Netflix, shopping with Amazon or updating features on the Tesla, it’s no longer an option to opt out of the digital revolution. Brick and mortar stalwart Nordstrom had 8% of their sales online in 2010. It is expected to soon be up to 30% and that’s a store most folks like to physically shop. What about the one’s that aren’t as consumer friendly? I suppose now that my 83 year old mother prefers to shop through her Amazon Prime account, it’s a sure sign to me that the way folks prefer to purchase products and services is profoundly changing.
Technological advancements: It’s been said that if a customer googles your company or name and nothing comes up, you really don’t exist. In today’s world, particularly with the rising millennials, you now have to be seen on tablets and most importantly, smartphones. With the average age of a financial advisor at 55 and the insurance agent pushing 60, there is a strong tendency to do things the way we’ve always done them. When I started in the business we used to carry around “rate books” for insurance products. That gave way to computer illustrations. Now that we’re at the intersection of new technology and changing regulations, you no doubt will see the next evolution of ways to engage and communicate complex products to consumers through the device of their choice, not ours. In the future it is going to be benchmarking data analytics comparing product recommendations and disclosures through graphics seamlessly viewable on any device you prefer.
Changing Regulations: If consumer preferences are the moon and technological advancements are the stars, then the sun (the big one!) is the seismic change in regulations taking place. There is much yet to digest about the 1,000+ page DoL rule, but whether it gets through or not, it is likely the catalyst to get long anticipated industry change moving. Some first impressions:
The DoL was smart to acquiesce on some of the initial language. Yes, the insurance and B/D industry will continue to push back, but how can you argue against doing what is in your client’s best interests? It was a challenge for them to keep it from happening and now it has happened, it will be a greater challenge to stop it from moving forward.
Sales illustrations have long been a tool used to recommend certain products. But in a best interest environment, that won’t be enough. It has been said that without the advent of new technology such as the robo-advisor, this rule would not be possible. Likewise, it’s going to require new technology to meet the DoL requirements. Benchmarking alternatives, providing the necessary disclosures and listing every potential conflict of interest goes way beyond the current illustration of today. Advisors/ Brokers/Agents are going to need a tool to demonstrate that they have met all the requirements of the best interest contract (BIC) to play in this space going forward.
With the DoL “genie out of the bottle” , I don’t think there is any going back. Firms that choose to take a wait and see approach as many have done thus far will find themselves at a severe disadvantage whether the rule moves forward or not. While the large IBD’s such as LPL and the wires don’t like it, they’re not gambling on the rule being overturned and are already moving forward on plans and infrastructure to comply. And with a more “friendly” version of the rule having come out than previously thought, it is more likely that the SEC will fall in line for all non-retirement products as well.
Just as the DoL pulled indexed annuities from the
insurance exemption and under the BIC due to their complexity, I think a “harmonized” SEC best interests rule will pull in complex life insurance as well. If an indexed annuity and variable annuity are “complex” enough to be overseen by the DoL then it stands that Indexed Universal Life and Variable Universal Life will likely be pulled into the fiduciary complex.
In that the DoL has essentially harmonized the regulations for a huge piece of business, it is natural that business models will follow suit. This lends to the Tribrid model of B/D, RIA and BGA under the same roof for ease of meeting regulatory requirements while reducing liability and risk.
It is quite likely that insurance companies will reprice their life and annuity products not only to meet the “reasonable” compensation thresholds of the DoL but also to open up a new line of distribution through RIA’s. If distribution expenses are stripped out of the life/annuity products and they get repriced like an AUM model, RIA’s who routinely refer this line of business out may be inclined to keep it in house.
It is estimated that the DoL covers up to 60% of investable assets. This is the first regulation that universally covers state insurance agents, FINRA brokers and SEC investment advisors cutting across the outdated and cumbersome product silos. It will materially change distribution business models to fall in line with the new regulations. Either business models comply or they impracticably decide not to play in this space from where up to 60% of their business is coming from. I don’t really think there is an option.
I started in this business during the 80’s and have witnessed the evolution through the years. But I have never seen such dramatic change that threatens the very existence of multiple business models as they are structured today. RIA’s and certain forward thinking broker-dealers have been working under a best interests scenario enabled with technology for some time and will only need to make a few adjustments to comply. But the insurance industry has been caught flat-footed on this one. Not only does this change the entire revenue model of high commissions, but the insurance industry has been notoriously slow to adopt new technology. We see a proliferation of robo-advisors, some going direct to the consumer and others enabling the advisor. But where is robo-surance? I suspect that insurance industry executives are thinking long and hard about that right now. Fintech and the robo-advisor have been dominating industry headlines the past several years. The coming trend? Insuretech and robo-surance…stay tuned
"If you change the way you look at things, the things you look at change"