Integration: The Natural Evolution for Financial Services Business Models

“Our dilemma is that we hate change and love it at the same time; what we want is for things to remain the same, but get better” Sydney J Harris

The silos from which the financial services industry have evolved are breaking down, yet the noise we hear from each segment trying to protect their respective turf is louder than ever. The perspectives and arguments from each are becoming old and running thin:

Fee only advisor: Blow up FINRA and force everyone who gives advice to be held to a strict fiduciary standard

Broker: RIA’s serve only the top 1/3rd of households who can afford their fees while holding an unfair advantage escaping oversight and supervision by FINRA

Insurance Agent: How can brokers and RIA’s say they are acting on behalf of their clients best interests when they fail to address the most important financial risks of living too long and dying too soon?

So, in the ongoing debate about the direction of the financial services business, who’s right? My perspective...Separately, none of them but collectively, all of them.

I think the quote above says it best. We’re all for change so long as we personally don’t have to change. Doesn’t that sound like the Albert Einstein’s definition of insanity?- “doing the same thing over and over again and expecting different results”. I’ve been in this business now going on a fourth decade and I’ve observed a fair amount of change during that time. This “wisdom” has taught me a few things over the years:

1. There are few new ideas, just old one’s updated and repackaged
2. Compensation drives all perspective and behavior
3. While it is smart to recognize and learn from the past, you have to let go of it to grow and succeed into the future

Today’s hot button issues are not too different than what we’ve seen before. New ways of distribution threatening traditional methods and shifting regulations have been a common theme since I got into the business. However, what seems different today is the pace of change. The impact of “Moore’s Law” on technology and the massive amount of information and velocity of communication is driving it to a point where no business model can keep doing business as usual. It’s a case of change or be changed. In 2006 when Webster’s Dictionary made “Crackberry” the word of the year, few of us could predict what we have witnessed in the smartphone business landscape. It’s hard to believe that the first launch of the i-Phone was June 29th 2007 and in 2010, Blackberry had a 40% share of the smartphone market. Today Blackberry has less than 1% of the smartphone market. And similarly, as changing marketplace dynamics shape the financial services business of the future, within 5 years there will be some household names that disappear and others not yet launched that will quickly emerge as market leaders.

I'm fascinated by the divergent points of view held by leaders of the various industry business models. And just like our political climate, it seems that the most vocal and inflexible are those on the fringe while the majority are somewhere in the middle. I'm reminded of the quote "There are three types of people in this world; Those who make things happen, those who watch things happen and those who wonder what happened" Apple made things happen and Blackberry is still wondering what happened. From my unique perspective, here are some moves I think industry leadership in the camp of making things happen should consider:

1. Change compensation models

I mentioned above my belief that compensation drives all behavior. The structure of current compensation models are largely inconsistent with the direction of the business. And this includes fee only models. The drift away from commissions and towards fees over the past decade is not a fad. It is estimated that by year end, over 75% of all industry compensation will have been generated by fees driven largely by the wires and regionals rapid transition away from commissions. And since fees for AUM have been on the increase, the activity of providing financial planning has been on the decrease. Why? When you’re getting paid to capture more AUM, why do the hard labor intensive work of financial planning. But this is changing. As even traditional insurance agents have been evolving towards a fee for AUM model and robo’s gain traction, investment management has become a very crowded marketplace with little differentiation. Not surprisingly, financial planning is seen as a key differentiator. What I expect to see happen will be more firms starting or restarting their financial planning activity (modular and comprehensive) and charging separately for it on a retainer basis while they reduce their % fee for AUM from about 1% to about 50-75bps. This split of investment management and financial planning from bundled to being separate services better recognizes and aligns the activity. Additionally, as there will be a need to diversify revenue models, I believe those who have been marketing themselves as “fee only” will come to realize that advertising one’s compensation model is hardly good for business, not to mention overlooking the huge revenue potential in offering insurance based products. Life Insurers are now manufacturing life insurance products that pay 75bps on assets in the policy with a very slight and quickly disappearing surrender charge. This opens a whole new asset class for advisors to add to their practice while truly acting in their clients’ best interest by addressing risk management.

2. Integrate platforms

Similar to the merging of compensation models, expect to see the same with business models formerly hatched in their regulatory silo of SEC RIA, FINRA broker and state regulated insurance agent. Whether the regulators/government wise up and eliminate triplicate layers of regulation and harmonize or not (and I have little faith that they will), the business models will harmonize more as a business necessity than a regulatory requirement. Any model that relies solely on commission revenues for sustenance has its days numbered. Likewise, those who rely solely on fee based AUM will also need to diversify revenue streams. I believe the landscape will begin to look like the technology platforms where the largest in the business (i.e. Samsung and Apple) have integrated smartphones, tablets and PC’s/Mac’s each seamlessly talking to each other. Except for our business it’s not integrated devices, but integrated business models of RIA, B/D and Insurance BGA, or what I call the “Tribrid”. And I wouldn’t count out the wires just yet. They have such size and scale that if (a big IF) they made some adjustments, they could easily become a model of choice for a new harmonized marketplace while solo RIA practitioners are forced to join larger scaled models or scream “But I’m fee only!” all the way to irrelevance.

3. Diversify revenue sources

It is now recognized that the robo-advisor is redefining the value and pricing of investment management. This will continue to force margin compression on firms/practices that rely on the AUM only model of revenues. It places a higher value on those products and services that are more complex and require a human advisor to implement. For RIA’s and Independent B/D’s, this will likely be additional fees for financial planning (not just investment management) and insurance products and services. Similarly, insurance based platforms will continue to see a trend towards levelized and lower front end commissions, and will need to diversify into fees for AUM and financial planning as well.

4. Embrace technology as an enabler versus a threat

I find it interesting that the financial media is so locked on the thought that robo-advisors will replace the human advisor. I suppose it makes for a good story, but it’s simply not true. However, the robo’s will expose those who do not use new technology to enhance the client experience and they will also drive down the going rate for investment management. As more and more robo technology platforms come to market, we’ll see them getting snapped up by the large scaled platforms as we’ve seen recently since they have created smart platforms, but lack the client acquisition skills to remain as stand alone entities. They are not a threat unless you don't integrate them into your practice and business model. 

5. Create a career path for “newbies”

The demographics in the business are quickly going from bad to disastrous. The average age for advisors is over 50 with a full 1/3rd expecting to retire in the next decade (according to Cerulli). The insurance industry is worse with the average age at 59 and 1/4th expected to retire by the end of the year (according to McKinsey). Heretofore, the primary source for “newbies” (young inexperienced entering the business) has been the career life insurance companies and wires. However, as the economics for proprietary based platforms continue to get squeezed (or potentially eliminated), that source of new blood will dry up. This places the responsibility for the future of the business back onto the independent platforms of which none has been successful in executing on a strategy. LPL made an attempt with NestWise a few years back but it failed miserably in execution running it as a stand-alone rather than integrating it with the greater whole. But I have a strategy in mind that solves two big industry challenges. Cerulli did a study on financial planning and found that of those firms that self-identify as members of a financial planning practice, only 38% were actually doing financial planning. Further, the number of those who do actual financial planning has been on the decrease in recent years as they’ve been focused on asset accumulation (AUM) instead. Coaxing established advisors back into financial planning is a tough sale since it’s labor intense and not as profitable as a focused AUM practice. But guess who will do financial planning?…newbies. Recruiting, inducting, training and developing young inexperienced talent into a financial planning career track is proven to be the most successful way to get them into the business. The solution to the financial planning and succession planning challenges facing the industry lies in a strategy giving a career track for “newbies”.

6. Enable modular and comprehensive financial planning at the enterprise level

As mentioned above, financial planning has been on the decline while the greatest need to provide value added services going forward is in fact…financial planning. Many who have strayed away from offering planning services cite the complexity, time commitment and relative ease in focusing on asset accumulation for more revenues instead. But today's tools for financial planning make it far easier to provide the service than just a few years ago. I’ve written before about having built a $30 mill centralized financial planning center for AXA Advisors about 15 years ago. That was painful. Today, the same service can be built for a fraction of the cost providing a virtual paraplanner to each team of advisors. Michael Kitces wrote about the concept of a Turnkey Financial Planning Program (TFPP) in his blog. Providing this service on an enterprise level will be an important value added service for advisors going into the future.

7. Favor ensemble firms over solo practitioners

For generations, the retail distribution firms had a focus on the solo practitioner with individual rep codes. Today, the ensemble team is taking hold yet many B/D’s/RIA’s/Ins platforms continue to identify on individual rep codes rather than aggregating as a team. And naturally as ensemble firms continue to increase their influence, it forces business models to integrate all product lines and services (hence the Tribrid) in order to serve the various roles and specialties of team members. 

"We live in a time of paradox, contradiction, opportunity and above all, change. To the fearful, change is threatening because they worry that things may get worse. To the hopeful, change is encouraging because they feel things may get better. To those who have confidence in themselves, change is a stimulus because they believe one person can make a difference and influence what goes on around them. These people are the doers and motivators" -Buck Rogers

Holding onto the familiar is a natural response to the rapid change impacting our industry. But as Socrates is quoted, “The secret of change is to focus all of your energy, not on fighting the old, but on building the new”. Blackberry grew up as a force in a closed system. It’s what gained them rapid growth but at the same time, sticking to it is what has caused their downfall. I think our business is much the same. Financial Services retail distribution grew up on closed platforms (siloes) of RIA, B/D and Insurance BGA. But much like Blackberry, sticking to these soon to be dated platforms could lead to their demise. The future of the business is through the integration of platforms, compensation models and product and service offerings. It will be interesting to see which firms have the foresight to remain relevant into the future and which will fight change to the death.

"Ignorance is always afraid of change”

Eat Your Own Cooking

The other day I took my car into a Discount Tire store for what appeared to be a slow leak in my back tire. I was prepared to have to buy a new tire, but asked that they try to fix it first. They said it would be ready in an hour, so I went to a nearby coffee shop to get work done while waiting. In 30 minutes, I got a text, “Your vehicle is ready for pick-up”. I got back to the store and the rep told me there was a nail in the tire about 3 inches long. He said they removed it and sealed the tire, then checked all the tires, rebalanced, buffed them and reset the calibration on the Tesla (I live in California where it’s the state car). I then asked, “How Much”. He said, “nothing…we just want you to be safe”.  I was dumbfounded. I’ve purchased tires from them before, but the tires on this car were the originals. The whole experience from their professionalism, exceeding expectations and then not charging me caused me to think, wow, I’m never going anywhere else ever to buy tires. And I’m telling everyone now about my experience. I’m a raving fan.

This caused me to think about my positive experiences in purchasing products over the years which led me to a conclusion I’ll share at the end. Some time ago, when I was in high school, my first real job was at Nordstrom. I sold ladies shoes…yup, I was a shoe dog! We’ve all heard the stories about when someone brought a tire back to Nordstrom for a refund and they gave it to him. And Nordstrom doesn’t even sell tires! The culture of the company to give top customer service permeated all the way down to me as a 16-year-old shoe salesman. To this day, I seldom shop anywhere but at Nordstrom because of it.

Then my first job out of college was with Frito Lay starting in the plant where they made Frito’s, Doritos, Lays and Ruffles. The quality control there was insane. The floors were always sparkling clean. If the batch had the slightest amount of too much/little oil, salt or the color of the chip was off, they would throw out the entire batch. Like Nordstrom, it is because of this experience that I will never buy a brand other than Frito Lay.

Then I entered the financial services business with AXA-Equitable. Equitable launched the first variable life insurance product back in the day and prided itself for always having one of the best performing Variable Universal Life products in the business. I bought a VUL in the mid-80’s and over the years have increased the death benefit several times and max funded it. To this day, while I’m fortunate to own several assets, my Incentive Life VUL is one of the most cherished assets I’ve ever owned. Having the ability to participate in market appreciation but growing tax free, being able to take money out with no taxes while having a death benefit in case I didn’t make it to retirement is like the best features of several financial products all wrapped into one. All for a net cost of less than 2bps that was more than made up by the tax savings (after tax equivalent for a high earner in California for 12% equals about 24%!)

I’ve had similar experiences with Lion Street which strives to affiliate with the best in the business and now with Assurance creating cutting edge technology for the financial services industry. The common thread among all my work experiences is that I had a true belief in the products I was building and/or selling. And, I ate my own cooking! (literally so in the case of Frito-Lay). The power you gain by owning or buying the products you sell is beyond description.  Like I did above with Discount Tire, I’ve shared my belief in Nordstrom-Frito-Lay-AXA Equitable products with many people over the years. And owning/buying those products have made my convictions even stronger. Or put another way, I’ve had “skin in the game”.

If you don’t buy products from the firm you are with, ask yourself why. Is it because you don’t believe in the products? Or maybe you don’t believe it the products because you haven’t committed to buying them? Whatever the case, the advice I would give you is to eat your own cooking!

It’s not what you look at that matters, it’s what you see

-Henry David Thoreau

When I was 22...

I first wrote this article 4 years ago prompted by Linkedin. Given that today is my triplets 22nd birthday and AXA has given "Mother Equitable" back to the US via EQH IPO, I thought I'd repost "When I was 22...". Heading out to Chicago for the first college graduation this weekend. Whoo Hoo!

I enjoy the privilege of having triplet children graduating from high school this year. The household is about to go from semi-controlled chaos to total silence as they each venture off to college. One and Done! They're tired of hearing it as I say over and over, "the next 4 years are going to be the most exciting, fun and transformative years of your life".

Entering college, I really had no idea of what I wanted to do except play football and pursue "something in business". But there was one thing I KNEW I didn't want to do which was to follow my father's path into the insurance based financial services business. Dad had been a successful Agency Manager with The Equitable (now AXA) while I was growing up. As a very family oriented company, we were known as "Equi-kids". For some reason, I wanted to "be my own man" and carve my own career path. Upon graduating, I was offered a career path with Frito-Lay in the San Francisco Bay Area. To be exact, I was in Silicon Valley before it became “Silicon Valley”. And I was in the wrong kind of chips…potato chips! But it was a great experience and their management training was the best I could have ever received. However, after 2 years doing everything from ordering potatoes for the fryers to stuffing bags of chips in grocery stores, I came to the realization that folks in the food services industry didn't enjoy the lifestyle that a more entrepreneurial financial services career could offer. It simply wasn’t going to be like the one I enjoyed growing up (that is unless you own the food services company).

So I began interviewing with large financial firms such as Merrill Lynch, EF Hutton, New York Life and others and then decided to take an offer from Mutual Benefit in what appeared to be a financial planning career path. For some reason I didn't connect the dots that what my father had done as I was growing up was essentially the same. So I called my Dad and said "Guess What?!. I'm going to work for Norm Levine in San Francisco with Mutual Benefit" My Dad had known Norm professionally through the industry and chose his words carefully, but essentially said, "The Hell you are! Now you've decided to come into my business, you're going to come down to San Diego and work with me!"

I started my career in San Diego working first for my Dad learning the ropes the "old school way" and through the years kept working up the company food chain to find myself 20 years later in New York City as President and CEO of the very firm my Dad had worked for as I was growing up. Yes, the very and only one I KNEW I didn't want to work for as I entered college. The theme of this post prompted by Linkedin is to share stories and advice to the 22 year old college graduates #IfIWere22

Given my experience I suppose the first thing I should say is don't rule anything out and sometimes the "old man" is right. But there is so much more I would say to my 22 year old self now having the wisdom that experience and years provide. Here's a bullet list:

Know yourself. Be honest about what you're good at and what you're not so good at so you can maximize your strengths and minimize your weaknesses. Once you identify your unique skill, find a career that lets it shine. You also need to know what motivates you and what does not. If you're money motivated, don't be a social worker! If you hate conflict, ego's and rejection, don't pursue a career in business!

If you commit first, it commits back to you. You must take a leap of faith and close the back door once you enter any career path. If you wait for good things to happen before you mentally, emotionally, and physically commit, it’ll be a long wait. The happiest people are those who commit to the situation they are in and make the best of it while unhappy people are continually looking to external factors for their success or to blame for their failure. Take 100% responsibility, commit and enjoy the results, but you have to make the first and continuing move. Don’t be in the backyard looking for four leafed clovers while opportunity is knocking on the front door. And if after you've committed and have given it your all, but unsuccessfully, then learn from the experience and move on.

Simply showing up is half the formula to success. Exercising self-discipline in your time management is vital. You cannot maintain 9-5 hours and expect entrepreneurial pay. Show up whether you have something to do or not. You will create your own opportunities by being “in play”.

Effort, at times, defeats itself. If you maintain a consistent, steady pace of doing first things first and last things not at all, then you are on a path to success. By forcing everything, you can come across as desperate. People will buy into strength but will walk away from desperation. Keep the pace, let it flow, be patient, and success will follow.

It really is a numbers game. As much as we want to believe that there is such a thing as “working smart”, the fact remains that successful people simply make more calls and see more people. Don’t let your mind trick you into believing it’s otherwise. There is no substitute for hard work.

“Fatigue makes cowards of us all”. This quote says it all. If you are not well rested, are ill or lack energy due to little or no exercise, take care of it. Employers/Prospects buy strength and push away weakness. You need to be in top shape and good health to convey a positive and impacting impression. Get adequate rest and put yourself on a routinized exercise schedule. And by all means, make getting a good nights sleep a priority.

You are being judged by first impressions. The saying “You can’t judge a book by it’s cover” does not always apply in the professional world. People are judging us the moment we meet them and draw conclusions about you within a minute. Dress impeccably, drive a clean, well maintained car and be sure your props (pens, presentations, etc.) are first class. A common theme I have is, “Do it first class or don’t do it at all”

Believe, even when you don’t want to. Much of your success in anything will be predicated on your ability to maintain a positive mental attitude. Believe in your industry, believe in your company, believe in your products. You can choose to believe or not to believe (being indifferent is not believing). As motivational speaker/writer Brian Tracy says, be an “inverse paranoid. A paranoid is someone who thinks the world is conspiring against them. An inverse paranoid believes the world is conspiring FOR them. Believing, even when it’s difficult, will open doors and attract the opportunities you want where not believing closes the doors. Besides, given the choice, it’s a lot more fun.

It’s not what you say, but how you say it. Many of us spend agonizing time trying to figure out the catch phrase or line that will sell our product or service. It’s not entirely what you write or what you say, but the confidence in how you present yourself that will win the day. This is a proven fact that is counter-intuitive and must be worked on by all of us.

Set a single major life purpose and then 5 year personal and business goals for yourself. Of all the things I have done, this is one I adopted early in my career that motivated me towards success. Every 5 years I set goals some of which I met in 3 years, some I never met. But it's almost freakish how spot on my actual results often met my 5 year goals. A goal is written down and shared with someone who can help you achieve it. Anything not written down or not shared is simply a wish.

You become and get what you consistently think about. Any thought you carry repetitively, will become your reality. The picture in your minds eye of how you look, your level of success and your lifestyle, will eventually become reality if it isn't already. If you want to make $500,000 per year, then wipe out any thoughts in your mind with other figures. Think the unthinkable, dwell on it daily and your belief will create its own talents to get you there. Only you control this. Is your mind disciplined enough to hold the pictures of what you want to become rather than what you don’t want to be? All successful people know this universal key to success and practice it continually through prayer, meditation and visualization.

I've enjoyed a successful career and had I known what I do now when I was 22, I'm not certain everything would have turned out all the better. Life throws us all curve-balls and we don't know when and the magnitude of them. You simply have to be prepared to respond when they do come your way. The important thing is to find what you're good at, develop a passion for it, commit to it, set 5 year goals for it and most importantly have fun doing it. We live at such an amazing time with so much change and opportunity. I wish all the success to the class of 2014 and for my triplets in the class of 2018? Stay tuned. I'll be giving you more advice than you can probably stand.

“Parents can only give good advice or put them on the right paths, but the final forming of a person's character lies in their own hands”

-Anne Frank

Will Life Insurance go "Blockbuster" or "Netflix"?

Results from a 2018 Life Insurance Needs survey completed by Allianz confirms what we in the financial services business have long suspected. Whatever we’ve been doing to sell/recommend permanent life insurance is no longer working. Some interesting findings as follows:

·        66% of consumers are unsure or don’t believe benefits paid from life insurance are not taxable.

·        51% are unsure or don’t believe cash value from permanent life insurance can be used to help fund college educations, supplement retirement income or meet other financial needs.

·        85% said that a source of tax-fee income in retirement is what they find most valuable in a financial product

According to LIMRA, the share of Americans with at least some life insurance has fallen to less than 60% from 77% in 1989 and the sale of individual life policies has fallen by 40% since the 80’s. These are all fairly dismal statistics that beg the question, what is the industry doing about it? All other industries have gone “Netflix” where the life insurance industry is stuck in “Blockbuster” mode. 

The life industry continues to operate like Ned Ryerson (remember the pushy salesman in the movie Groundhog Day?) with hard to understand multi page paper illustrations that are impossible to sell from. This causes producers and agencies to slight compliance procedures and create custom spreadsheets by taking hours to “cut and paste” from the illustrations onto an Excel file. This while all other industries are selling their products and services online and digitally. But just like Netflix had the vision.to stream digitally in 2007, then in 3 short years pushed Blockbuster to bankruptcy in 2010, I believe the life insurance industry is currently at that same stage. Adapt or die. Life insurance carriers and distribution must develop a digital strategy to adapt.

What if I told you that there is a platform that takes illustration data for up to 40 carriers and 280 plans and creates automatic spreadsheets and an interactive visuals called “The Morningstar of Life Insurance” by Financial Planning Magazine. Finally, a digital platform that is built for today’s consumer that enables the agent/advisor to educate and explain how cash value life insurance works. The platform is called Ensight made by a tech firm in California named Assurance. Some key features that Ensight provides:

Single Entry of data: You enter the insured information and case design details once and then select the carriers and plans you want to illustrate. No more toggling between carriers to rerun illustrations

Automated spreadsheet: With the push of a couple buttons you can create side by side comparison spreadsheets with the complete carrier illustration attached.

Fiduciary compliant: Through a revision history, the platform retains every illustration added, taken off, printed and sent to a client. It is also a platform that shows features and benefits of several options enabling the demonstration of “best interest”.

Speaks Robo: While the illustrations is able to be shown in side by side comparison spreadsheets, they are also rendered in linear graphs that are interactive.

Enables online selling: Since Ensight is a visual digital platform, it is best suited to be shown either on a tablet in front of the client or through video conferencing. No more flipping through endless pages of illustrations. A simple, clean visual proposal platform that clients can actually understand.

Platform Video here: https://vimeo.com/252256256/bc46e300b7

When I first got in the business too many years ago (which predates carrier illustrations), I was taught to recommend permanent life insurance through a method we called “Educate to Sell”. It was a process by which we would do an initial fact finder, identify the potential needs of the prospect and once we had done that, educate them by explaining the various types of life insurance through graphs. Then after having explained visually the differences between Term, Variable, Whole Life, UL, etc, we would ask the client, “what type do you think makes the most sense for your situation?” while looking at the graphs. After having been educated on the various types of life insurance, they could make an educated decision on what product type made the most sense for them. Ensight is essentially “Educate to Sell” for the digital age. The majority of prospects and clients simply won’t buy what they don’t understand (and if they’re coerced into buying, it won’t stick). Educating them through a clean interactive visual format is by far the most effective way to do this type of business in the Netflix and Amazon era.

So I have hope that the industry can pull away from the statistical downward spiral as the tools used become more current and easier to use. The next several years will see some carriers and distributors go the route of Blockbuster while others will see the future and go the path of Netflix. How about you?

“You never change things by fighting the existing reality.To change something, build a new model that makes the existing model obsolete.”  -R. Buckminster Fuller

PS-Full Disclosure: I am involved in the tech start up Assurance that has developed the Ensight Platform trying to drag the industry kicking and screaming into the digital era 

Insurtech: Ned Ryerson meets Silicon Valley

   

I’ve always been somewhat of a gadget guy. When 4K TV came out in an 85 inch screen, I had to have it. Got the solar panels on the house and a Tesla in the garage. And like many of you, I’ve got drawers full of old blackberrys, nokias and iphones as I’ve continually upgraded to the newest, fastest and shiniest gadget available. Juxtapose this to the industry I’ve been in for 30+ years, the insurance based retail financial services business. Of all the business models out there, it is arguably the least technology driven. While most other industries have gone Netflix, the insurance industry is still Blockbuster. The basic premise for this is that the products are sold and not bought. It’s a people business and technology will never replace the human touch. It’s the ultimate relationship business. All these premises are historically correct. It is a relationship business…but the relationship is changing. Ned Ryerson…meet Silicon Valley.

As some of you have noticed (Thanks for the congrat notes on Linkedin!), I recently joined a technology firm specializing in an industry sub-sect of Fintech known as Insurtech. Yup…traded in the pin striped suits for more casual attire and I’m developing new lingo like UX, UI and API.  Somewhat ironically, when the HBO series “Silicon Valley” first came out in 2014, I took a pass. It looked like something that would be of more interest to my 20 year old kids than a boomer like me. But recently at the office after hearing the team make multiple references to the show, my wife and I fired it up and plowed through 3 seasons in a matter of days. Very funny. When they quote Reid Hoffman as saying “If you are not embarrassed by the first version of your product, you’ve launched too late”, I can actually relate to it now.

In season 3, Silicon Valley introduces a new character into the show named Jack Barker. Given my perspective having been in the insurance industry and now the tech business, there seemed to me like a bit of symbolism in this. The character actor, Stephen Tobolowsky, who plays Jack Barker in Silicon Valley is the same actor who played the role of Ned Ryerson, the annoying insurance salesman in Groundhog Day twenty years prior. Check out the short video clips of these two scenes and you’ll see the similarities in the characters down to even holding the briefcase in the left hand. Ned Ryerson is often cited as the symbol of the obnoxious insurance salesman and of course Jack Barker is the symbol of a rich tech CEO. This got me thinking, is the insurance industry ready for technological change? Is it time for Ned Ryerson to become more like Jack Barker?

Obviously, I do believe it’s time for the insurance industry to digitize. Why? While it remains a relationship business, increasingly, the preferred customer relationship is going digital. But unlike most digital disruptors, I don’t think it’s going to bypass traditional distribution of the products and services. We see what is happening in the robo-advisor world where the cost of customer acquisition is financially bleeding the tech start-ups to the point where they are forced to sell out to traditional distribution platforms. While this is evidence that digital B2C is a risky financial services business model, it is increasingly more apparent that the traditional distribution platforms that integrate digital technology tools to enable their advisors will be far better positioned to thrive than those who stick with “the good ‘ol days”. Here are a couple trends and thoughts on why I see it this way (and why I’m bullish on Insurtech):

• InsurTech investment is growing faster than FinTech: FinTech ($5.4 Bill investments in Q-1 2016) is large but mature. Most Insurtech investment is going towards the Property & Casualty insurance segment and B2C models. Investment in the Life/Annuity segment is far behind creating a substantial white space opportunity
• The DoL is driving digital solutions: The U.S. DoL fiduciary rule impacts up to 60% of annuity sales and technology solutions are believed to be the predominant tool to comply. This will eventually bleed into other lines of business as it will be difficult to operate a distribution business model that is inconsistent across all product lines
• Insurers are partnering with digital firms:Technology is expected to replace up to 25% of insurance jobs (McKinsey). Life Insurance carriers and distributors do not have the depth of talent nor budgets to build digital platforms and are choosing instead to partner with digital technology firms
• Margins tighten/Scale matters: In a protracted low interest rate environment, the margins for insurance carriers are extremely tight. Overhead currently consumes up to 40% of premium revenues. This is forcing cost cutting efforts, industry consolidation and a desire to find lower costs methods of distribution using digital technology
• The “insurance is sold-not bought” prevailing belief is changing: Historically the industry has been a top down product push model. Shifting demographics and technology are moving that to a bottom up customer centric model. Digital technology is at the root of placing the customer first.
• Demographics are a driver: The vast majority of current sales come from the traditional agent channels. With an average age of 60, the agent/advisor channel is in decline and insurers need to find alternative lines and methods of distribution. Not surprisingly, the Independent Broker-Dealer model is growing sales of insurance products more quickly than the traditional independent agent channel.
• Aligning with trends: Millennials are now the generation in the majority and are driving the shift in consumer preferences to digital. The mobile phone is quickly becoming the main screen
• Augmentation Beats Automation: As revealed by the robo-advisor trending towards enabling rather than replacing the financial advisor, the same can be expected in the insurance industry as “Insurtech” matures
• We have "robo-advisors" but where is the "robo-agent"?: There are multiple digital offerings to manage assets but surprisingly few to protect them in the life/annuity space.  
• Digital has taken root with the customer:Cited by AM Best, 83% of consumers would use the internet to research life insurance before purchasing a policy if they had that option. One in four consumers said that given the option, they would prefer to research and purchase life insurance online. In addition, global mobile data traffic will increase nearly eightfold between 2015 and 2020.
• The current distribution model is not
  
  working: LIMRA estimated that life insurance sales would increase $9.5 trillion if the 48 million under-insured households bought the amount of life insurance coverage they said they needed. However, a quarter of under-insured households said they were not approached to buy life insurance.

 Insurance carriers and distribution platforms will need to decide whether to continue down the traditional path and hope for different outcomes (i.e. definition of insanity) or transform their approach to customers and products using digital technology. As the Ned Ryersons' of the business age out and go away, the industry needs to adopt digital technology not only to attract a new generation of insurance based advisors, but to meet the standard set by Amazon, Google and Tesla for a digital buying experience. As actor Stephen Tobolowsky has done, it's time for the industry to morph from Ned Ryerson into Jack Barker. There's an app for that!

“The best way to predict the future is to create it”

–Peter Drucker

Life Insurance 2.0 is coming

“Life insurance is a product that is sold and not bought”

This quote has been the mantra of the insurance industry for generations and somewhat an excuse for a lack of innovation. Life insurance is perhaps the most difficult financial product to sell and by far the most painful to buy. It’s also the reason that commissions are extremely rich while those who don’t specialize in it such as Independent Broker-Dealers and RIA’s often don’t even touch it. (so much for giving “Holistic Advice”!). But the financial services business is undergoing transformational change driven by new regulations, digitization of everything and huge demographic shifts.  And the life insurance industry is not exempt from these forces of change. Here are some influences shaping the life insurance business going into the future…kind of a “Life Insurance 2.0”

The purchasing process has to change

The life insurance buying experience is in the dark ages.  The buying experience for most every product is moving digital through social media that is real time and on the mobile phone.  Contrast that to the way life insurance is sold…think Groundhog Day . First, you have to find someone who needs coverage. Anyone want to talk about dying?…not an easy discussion to initiate. Then if you do find someone who will listen, the primary method for helping a prospect find the right coverage is by thumping multiple 20 page+ illustration’s on their desk complete with numbers they won’t understand and legalese they can’t comprehend. At this stage, perhaps after several meetings weeks apart, if they do trust your recommendation you have to fill out a very detailed multi-page application digging into some very personal and private information. Then comes the bleeding and peeing in a cup part scheduled whenever the paramedic can get to the client. Finally after requesting all their doctors information (APS) which can take months to secure, the underwriter mulls over all the information and if the history matches the underwriting guidelines, a policy is approved. It takes up to another month before the actual policy is issued and ready for delivery. All told, the buyer will have endured a 2-3 month process with very little communication along the way. Could we make this any more difficult? It’s the very opposite of how today’s buyer wants to transact…anti-social, the opposite of real time and totally paper driven.

Investment in InsurTech is hot

As noted below where you can see the huge growth in FinTech, the clear laggard is in the insurance industry known as “InsurTech”. But that is changing. While investment in FinTech is beginning to show signs of maturity, InsurTech is just getting started. A highly respected consulting firm in the space estimates that investment in P&C insurance technology lags banking (ie.FinTech) by up to 5 years and Life and Annuity lags by another 5 years. But with the increased investment and new technology players entering the space, that lag time will close. Tell someone you’re in the insurance business and nobody wants to talk to you. Tell them you’re in the InsurTech business and everyone wants to talk with you. Technology makes a relatively staid and boring industry a bit more exciting. The insurance industry is beginning to attract tech talent like never before which will drag the industry into the digital age, albeit kicking and screaming.

Mortality and underwriting meets bio-technology

At this year’s AALU meeting, one of the speakers was Dr. Craig Venter who runs the human genome project in my neck of the woods here in La Jolla, CA.  Dr. Venter has been instrumental in sequencing human DNA and like all things technology, the advances over the past couple years have been astounding.  Sequencing a human genome now costs just $1,345 compared with the $95 million it cost in 2001, according to the US National Human Genome Research Institute. In a few years, you could possibly get your complete DNA for a fraction of today’s cost. Having your DNA tested can give you tons of valuable information that can prevent a health catastrophe. Not only can it help prevent a life threatening disease, but it presents valuable information to an insurer. What if you knew that in 20 years you would have a high likelihood of getting Alzheimer’s disease?  There are measures you can take today to prevent that from happening if you knew it. The same with various cancers and other life threatening diseases. My son recently fought and won a battle with leukemia. If we had his DNA, it would have told us about the translocation of a particular gene that caused the cancer and we could have prevented it from happening in the first place. Armed with this information digitally, an insurance company no longer needs you to bleed and pee. They may no longer need to access volumes of medical information from your doctor. And having this information in advance helps the insurer get to “yes” faster rather than “no” longer. Underwriting for life insurance is about to be changed forever…for the better.

Digitization of everything

Blockbuster has given way to Netflix, K-Mart/Sears have yielded to Amazon and Tower Records was beaten down by iTunes. Everything is moving to digital and the insurance industry is not an exception. While the insurance industry has been slow to adopt new technology  there are signs that this is beginning to change. By using data integration, cloud technology and new digital formats, technology today allows insurers to digitize the purchasing experience without having to change their legacy systems (which will continue to be a drag on progress). Imagine a digital lead nurturing program that, through analytics, targets customers based on specific demographic information along with life events that trigger the needs for life insurance. Perhaps through Facebook or other social media, a client clicks on a message that seems personalized to them and their particular situation taking them to a landing page educating them on the features and benefits.(Side note: when you explain the features and benefits of permanent life insurance without first saying it’s life insurance, the product sounds amazing. Of course, compliance folks don’t let you do that...nor should they). Once the prospect has been educated online through various mediums such as video, storyboards or a Khan academy styled explanation, they then fill out some personal information online which begins to populate an illustration and application. If they chose to do so, they can talk to an agent or advisor unless they prefer to continue on their own (most will likely choose an agent/advisor). With the data input about name, age, face amount and premium, multiple illustrations can be simultaneously run and rendered on a simplified policy comparison chart (like above) with visual graphs viewable on any device of their choice (with the compliance approved illustrations attached via pdf should they want to review them). Once a product is selected, an electronic application is filled out and electronically signed, medical underwriting is streamlined by using online DNA information and a policy is issued almost immediately. Technology today can tackle the two most difficult things in the business which is finding a qualified prospect under a favorable circumstance and making the purchasing process less time consuming and confusing. 

Non-traditional channels will be compelled to address life insurance needs

The big story lately in financial media has been the margin compression in the wealth management space. The DoL and the advent of robo’s are moving the dial on that even quicker. With the AUM fees expected to be cut from today’s standard of 1% to about 25 basis points, and commissions fading away, RIA’s and Independent Broker-Dealers will need to find revenues from somewhere else. There is a general belief that fees for comprehensive financial planning (as opposed to investment management) is one place to go whether it’s a flat fee, hourly charge or baked into a higher % of AUM. But one of the tenets of financial planning if memory of my CFP training is correct, is life insurance. How can an advisor meet their fiduciary requisite and not address their client’s life insurance needs? I don’t think they can. But why don’t advisors address it today? …you guessed it…it’s freaking complicated! And it makes the advisor look stupid if they don’t have it mastered. But what if the process to address it is digitized and made seamless? That’s where I see the advisor stepping up and making life insurance part of their value proposition. At the same time, life carriers are actively looking for alternative lines of distribution since the traditional agent with an average age of over 60 is a dying breed. Look to see new forms of permanent life insurance priced for the advisory marketplace so the conflict of interest over commissions are taken away. And technology will enable the RIA and Independent Broker-Dealer to address the needs in a far more consumer friendly way.

Robo-advisor as a proxy for robo-insurance

Not surprisingly, the majority of FinTech investments early on went towards B2C direct models trying to disrupt the space through what we know as the "Robo-Advisor". Now that we’ve seen a couple of them crash and burn, there seems to be a reorientation towards using technology to enable rather than replace the advisor. In InsurTech, we’re likely going to see the same. The majority of InsurTech investment is currently going towards B2C models attempting to go around the current distribution channels following the theme of “disruption”. 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 InsurTech. Technology in insurance will reset from attempting to bypass the traditional channels to enabling them. (that is…until all the agents age out of the business!)

There is no other industry as ripe for a technology overhaul than the life insurance industry. Paper driven legacy systems have been like a ball and chain on technology progress. However, the dynamics impacting the industry are creating opportunities to change that. The painful process of finding a prospect and the multi-month purchasing process is on the cusp of changing through new technology. It will be the carrier or distribution firm who finds a way to change the buyer experience through new technology that will win in the future. However, as life firms have been in cost containment mode the past several years, the talent to create a digital platform is slim. I see carriers and distributors more likely to partner with InsurTech firms to create the future platform while using their current resources to keep the lights on with legacy systems. Imagine if we could flip the old quote around and say, "life insurance is a product that is bought and not sold" ...Life-Insurance 2.0 is almost here. 

"The secret of change is to focus all your energy not on fighting the old, but on buillding the new" -Socrates

Demographics and the Emergence of Robo-surance

 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"

-Ovid