Economic Probability Models    1/99        Return to Library Index
Investment decisions are influenced by the results of historic models. An individual investor may use Morningstar to select a fund with a five star rating - the rating is based on a recent historical comparison of performance with similar funds and indexes. Other investors may use the beta and alpha statistical values to determine the relative volatility of an investment against a broader market. In financial markets, firms will attempt to protect themselves by using investments with different correlations to minimize risk.

Correlation is a term that implies a relationship between two variables. If two investments move exactly the same they would have a correlation value to 1.0. If the investments always performed directly opposite of the other they would have a value of 0. The closer the value to 1.0 the closer the perceived relationship between the two investments. To balance risk one would select investments with low correlation values. The hope would be that when one investment zigs the other will zag.

Hedging attempts to minimize risk by using similar vehicles that react differently to market conditions. A simple example would be to combine ownership of a stock with the purchase of a put option. If the stock goes up in value the investor makes money, less the cost of the put. If the stock drops in value, the put would be used to protect against loss. Hedging places a floor on potential losses.

Other strategies include lending against collateral and using risk management analytical tools like Value At Risk (VAR) models. The VAR is designed to identify the maximum possible losses within a given time frame with a predetermined degree of confidence.

However, all of these analytical and risk management tools assume that the variables in their models will remain constant and that historical models can be used to predict the future. But, there are times when reality refuses to obey the rules established by the model makers and the future refuses to behave like the past.

For the past five years European mutual funds have had a correlation value of .39 when compared to U.S. growth mutual funds. The implication is that European funds won't mirror the performance of domestic ones. However, as the average U.S. stock fund lost 15.02% in the third quarter of 1998, the average European mutual fund was down 17.69%. Not only did the two investments move in the same direction but the magnitude of their moves were similar. The value of using correlation models to hedge against risk did not work in a time of extreme market stress.

Hedging strategies assume that markets are always liquid, or else one wouldn't be able to price their positions. However, firms that used Russian government bonds to hedge against Russian currency plays were caught short when Russia defaulted on their bonds resulting in no liquidity.

VAR assumes that market events can be plotted as a bell curve, unfortunately extreme market events do not have a normal distribution curve. The Summer VAR models that were telling investors that there was almost no risk of large losses didn't take into account a Russian bond default and a U.S. stock market that would drop almost 20% in five weeks.

The point is that no model based on past events can accurately predict all future events. Man is a political and emotional animal and often does not react logically in times of stress. Because of this even the best model will be wrong some of the time. But, the alternative is to ignore the past, test various hypothetical scenarios and prepare for the worst case. However, there still has to be a realistic basis for your assumption.

What you need to do is rely on broad historical data but realize it's limitations. Investors are always looking for analytical tools that will help them determine future outcomes. One needs to be cautious and determine if the tool uses realistic assumptions about the market and human nature. Investment models will always be imperfect as long as man is involved.

The Ubiquitous Paradigms Of Dialogue Are Pejorative    1/99        Return to Library Index
Every year business adopts a gaggle of buzz words. Some writers and speakers, fearing that their ideas have little merit, attempt to add impact by using the new word or phrase of the day.

The word "paradigm" appears in every other article I read. Paradigm means model or example and it is a paradigm of what is wrong in business writing. The word is perfectly acceptable. It is derived from the Greek paradeigma meaning to compare. But, somehow people feel that if they write about the "new paradigm" of something it will have more meaning than "new model" or "example".

Communication means the clear exchange of ideas. I've always been a proponent of word conservation - conveying an idea in the fewest and simplest words I can find. To do this I don't want a meaningful dialogue, I just want to talk with you. I promise not to start any sentence with "literally" when I mean figuratively, and I won't demonstrate ubiquitous paradigms of pretentious phrases.

The first rule in communication is sending at the level of the receiver. You wouldn't tell a six year old eating dinner with their fingers that "it would facilitate the transmittal of the seeds from the legume by utilizing the pronged culinary utensil" when you're trying to tell them it would be easier eating the peas with a fork. However, we get into the habit of using "jargon-speak" with our clients.

If a customer is concerned about loss we often begin a lecture on the beta of the product, volatility and the benefit of diversification through asset allocation. If your client is an investment analyst this is perfectly acceptable.  But, for the average client you need to talk at a level they understand. If you're trying to explain the benefits of diversification telling a client that they "shouldn't put all their eggs in one basket" is probably more helpful than showing a four color computer generated asset allocation model.

The second rule in communicating is using the simplest words to convey the message. I could tell a client that a mutual fund purchases equity instruments in a geographically diverse portfolio of small cap corporations, or I could say that this mutual fund buys stock in a lot of small companies across the country.  Simple communication doesn't mean you have to stay with three letter words or speak at the level of a second grade primer; you need to use words that convey exact meaning.

When one doctor talks about a percutaneous transluminal angioplasty, other doctors know she's talking about snaking a balloon up an artery to expand walls at an obstruction. The key to effective communication is using the most appropriate language for the situation. For the best examples of what not to do pick up any government publication.

The third rule is making sure your message is understood. When you're talking with someone (notice I didn't use verbal interchange of expressions) ask frequent questions to see if your listener understands what you're saying. If you're writing your message, have someone read it who is below the level of the intended audience.

So, send your message at the level of the receiver, say it simply and completely, and ensure that it's understood. Communication means a clear exchange of ideas.

I have found four avenues that are effective in building an ongoing stream of prospects and capturing long term clients. They take more effort than simply running an ad, but they work. The reason for their success is based on a simple premise: PEOPLE HATE TO BE SOLD BUT THEY LOVE TO LEARN.

People are more likely to believe a newspaper article than a newspaper ad. Consumers place higher credibility on the words of a professor than a salesperson. And, more people will buy a stock based on watching Wall Street Week than if their broker gives them the tip. Why? The first sources are perceived as teachers, not sellers. People enjoy learning new things and using their new found knowledge to better themselves. The key to successful unconventional prospecting is creating situations where you will be perceived as a teacher.

The Four Avenues
The four methods are teaching, speaking, writing and hosting. Each avenue gives you the opportunity to come across as a "problem-solver" not "product-pusher"; a teacher not a huckster. Before we get into the specifics of using each approach let's discuss your professional persona.

The Reluctant Salesperson
Whether you're speaking or writing, the interim goal is to address a person's problem or to inform a person about news that affects them. You never talk about products - except as a general solution to a problem. You never ask for an appointment - but you would be willing to see the prospect when you can find the time. You never hand out a list of your services or customer sales materials - but you do make it clear about where you can be reached and the areas you specialize in.

If the problem you're addressing is building wealth for retirement you might offer the soluiton of using an index annuity, but you won't handout the XYZ Index Annuity sales brochure. If you're asked for an appointment don't give out your business card, just write your phone number on a piece of paper and ask if they could call you tomorrow when you can check your schedule.

I realize this flies in the face of every sales article that tells you to distribute business cards like snowflakes and press for an appointment. However, you're not selling, you're teaching. You're training prospects to become clients. The prospects are learning ways to use you and your services.

Avenue 1 - Teaching
The best place to teach is in school. Many community colleges and school systems offer adult classes in a variety of areas. Offer your services to teach an investment class. Most of the students will be small investors, but occasionally you'll have a student with $100,000 sitting in a 2% savings account or a pension plan lump sum distribution. The objective of teaching the course is building a referral network of former students.

Another method is to sponsor and teach a two or three night investment course using a school or library as the location. Many schools, colleges and libraries rent out meeting rooms. These sites are less threatening to a prospect and convey a learning, rather than a selling atmosphere.

Never ever hold these classes at a hotel. Every prospect knows that hotel seminars - regardless of what they are called - are designed to sell them something.

Target mail affluent areas near the site. Try to schedule a regular series of classes so that you can enhance future attendance through word of mouth.

Another way to teach is to offer continuing education courses for accountants and attorneys. Every state requires these professionals to complete a certain number of CE hours to remain in good standing. In many states it isn't difficult to get a session approved for CE credit and the topic can often be investment related. As the speaker you are building a relationship with referral sources.

Does this work? Yes. At first you'll get an occasional call from accountants or lawyers asking for a stock price or insurance company address; eventually you get client referrals.

Avenue 2 - Speaking
Business clubs like the Lions, Exchange Club and Rotary are always looking for speakers. Contact your Chamber of Commerce for a list of local club presidents and offer your services. Establish an emergency speaker service where you'll step in if there's a cancellation.

Avenue 3 - Writing
Every ad I've used cost a few hundred dollars and resulted in one or two prospect calls.  Every article I write costs me nothing and generates three to four prospect calls. The article may convey the same information as the ad, but it's received as a teaching tool and not a sales implement.

Writing an article and getting it printed are two different things. You may be able to get your articles published in your local major newspaper if you have a relationship with the editor or spend a lot of advertising dollars with the paper. However, it's unlikely that the New York Times will publish your unsolicited manuscript.

While you are building a relationship with the major newspaper submit your work to your suburban or community newspapers. In addition, there are dozens of newsletters produced by civic clubs, trade organizations and community groups that may welcome a timely article on a financial topic of interest to their readers.

If you can't get published, get quoted. If a reporter can rely on you for immediate and accurate comments on a topic, they'll use you again and again. Remember deadlines. If a reporter can't get hold of you they'll find a different source.

Avenue 4 - Hosting
One hundred plus cable TV channels means a lot of air time to fill. One can strike very reasonable deals on sponsoring and starring in a regularly scheduled cable TV investment show. Production costs can be kept very modest. If you believe that agents should be heard and not seen, a weekly radio show time slot on a local station can be purchased at low cost.

Even though people are cynical about the media appearing on television and radio enhances your image as an expert. Many people like to boast that their financial advisor is a celebrity.

But I Can't Speak...Talk...Act
Then you'd better learn. It's not necessary to become an expert in all of these areas, but you need to be competent in at least one of them.

There are many sources that provide packaged seminars, newsletters or articles. If you'd like to try your hand at being an author take a few writing courses and practice writing.

If you need to improve your public speaking abilities you could take workshops or courses on speaking or join the local Toastmasters club. To improve your hosting abilities take a drama course or hire a communications consultant. Don't worry that you'll never be as good as Dale Carnegie, Ernst Hemingway or Lionel Barrymore. Practice creates competency. You don't need to be an ace, just okay.

Compliance
Naturally, all of your public use materials need to be cleared through your compliance department and meet the standards applicable to communications with the public.

Be Unconventional
Advertising and cold calling are proven ways to build a business, but you keep running into sales defense screens. By utilizing unconventional prospecting your initial and ongoing impression is that of a teacher, so the barrier remains down. 

It takes a little longer to build a book of business this way, but the flow of future prospects steadily increases and you avoid the feast or famine cycles of traditional prospecting. Be Unconventional.

Index Annuities & CDs    2/99        Return to Library Index
If you look at the last fifteen years the S&P 500 produced an average return of 14.43% a year. This compares with an average annual return of 6.46% for certificates of deposit. The index produced a higher return than CDs in 12 of those years and had a simple average return that was more than double that of these bank instruments.

The last fifteen years have been a wonderful time for the stock market, while certificate of deposit yields are much lower than they were in the early '80s. We don't know what the future will bring, but let's look at today. One year CD rates are around 4.25%. Consider that an index annuity at an effective 60% participation rate only needs the S&P 500 to increase a little over 7% to beat the return of the CD. If the index posts a double digit gain the index annuity could see the equivalent of two years worth of CD interest in a single year.

Index Annuity Performance - 1998    2/99        Return to Library Index
The S&P 500 began 1998 with a value of 970.43, rose 22.3% to a value of 1186.75 by July 17, then plunged over the next six weeks to close at 957.28 on August 31 erasing all gains for the year. Over the next couple months the index did a great impersonation of a bear rally, before deciding that the bull was not dead and ending the year at 1229.23 recording a 26.7% gain for the calendar year.

 While the index posted its fourth consecutive year of 20% plus gains other categories had different results. 1998 performance for specific categories or indices was:

Index annuities calculate the movements of the S&P 500 index in different ways. Some index annuities calculate gain based on the absolute end point of the year, others average the days, weeks, months, quarters or final quarter of the period. The following is the calendar year 1998 performance of the S&P 500 using the various calculation methods.

S&P 500 performance based on the different calculation methods is only one factor in determining the actual interest credited on an annuity; the other variable is the participation rate applied. Any calculation method may produce the highest index annuity return for a period depending upon the actual movement of the index and the participation rate used. In this article we compare the returns of term end point-to-point annuity methods.

A term end point index annuity credits interest based on index movements from an initial value to an end point, or group of end points, for the term. The end point may be the absolute ending value or an average of different values during the final year of the period. Participation rates are usually guaranteed for the entire term. The average participation rate for a term end point annuity at the beginning of 1998 was 75%. We have applied this rate to absolute S&P 500 performance for the period. Index performance does not include reinvested dividends nor does it reflect premium taxes or surrender charges, if applicable.

Most Funds Do Not Beat The Index
Most mutual funds do not beat the performance of the S&P 500. In fact, 86% of diversified stock funds have lagged the S&P 500 during the past ten years.

Index Annuities Are Not Mutual Funds
Mutual fund returns include reinvested dividends and subject the principal to market risk. Equity index annuities are fixed annuities with the crediting of excess interest based on movements of an equity index. Index gains for term end point annuities are not realized until the end of the term. A mutual fund gain is only realized when the mutual fund is sold.

But Rates Are Lower Today
A combination of lower bond yields and higher option prices forced index annuity participation rates down at the end of 1998. Since then, rates have rebounded slightly and we could see further increases in participation rates in the coming months, but any increases should be modest.  However, even if you apply a participation rate of 50% to the same period the index annuity produces a gain of 13.3% - substantially more than the average bond fund and more than double the return of certificates of deposit.

Long Term Savings Vehicles
Index annuities were designed to provide for higher potential returns than other traditional savings vehicles like CDs and other fixed annuities, and they've succeeded very well. They were never intended to be a replacement for mutual funds. If a consumer wants the highest possible return, regardless of market risk, they should buy a mutual fund. If a consumer wants higher return potential from a long term savings vehicle, without market risk to principal, they should consider an index annuity.

Source for mutual fund data is Lipper Analytical Services. All information is for illustrative purposes and is not a solicitation to buy or sell any security. Past performance is not guarantee of future results. Information is from sources believed accurate, but is not warranted. S&P Index-linked products are not sponsored, endorsed, sold or promoted by Standard & Poor's.

1998 Equity Index Sales Over $4.2 Billion    3/99        Return to Library Index
Our report on index annuities for calendar year 1998 shows sales of over $4.2 billion, more than a billion dollars higher than the previous year. Equity index life sales rose from $45 million in 1997 to $67 million for 1998 showing an almost 50% increase in first year premiums.

Fourth quarter index annuity sales were $1.1 billion for 1998 compared with $800 million for the same period in 1997. Sales were down from third quarter production of $1.25 billion. Carriers attributed the decline to lower participation rates in the fourth quarter.

Index annuities continue to gather an increasing share of the fixed annuity market. Based on initial totals from LIMRA, traditional fixed annuity sales were $29.5 billion in 1998; index annuity sales were 14% of this figure. Traditional fixed sales declined from $38.2 billion in 1997, a 23% drop when compared with 1998. For the same period index annuity sales rose 40%.

Taxing Web Sites    3/99        Return to Library Index
As April draws closer I’ve searched the Internet for Web sites that may be helpful in completing your Form 1040. The following sites should answer almost all of your questions and save you a trip to your local IRS office.

www.irs.ustreas.gov - The IRS online. Even though it tries to be a little too cute with fluffy stories and graphics the site has everything from IRS news to statistical reports compiled from tax returns. Regulations, tax court cases and tax forms are available for down load and the site provides links to other sites for electronic tax filing.

www.1040.com - Good general site for the average taxpayer with news about tax changes, general tax information written in English and downloadable tax forms.

www.tax.org - Designed more for tax preparers than the average taxpayer. Reports news on federal and state tax law changes and proposed regulation.

Customer Confusion & Expectations    3/99        Return to Library Index
The concept behind index annuities is a simple one - excess interest above the minimum guarantee will be credited to the annuity based on movements of the equity index. However, insurers use 26 different structures to calculate how this excess interest is credited to the policy and there are a dozen formulas for merely determining what the minimum guaranteed return will be. The multitude of methodologies can create customer confusion and unrealistic expectations of returns. The customer needs to be educated about how their index annuity will perform.

They're Not Mutual Funds
At current participation rates no index annuity will come close to matching average mutual fund returns over the long haul. If you look at the last 50 years average mutual fund returns are over 10% a year. If you apply current participation rates to this period you generate average hypothetical returns of 5% to 7%.

This doesn't mean that index annuities won't produce double digit returns. If the stock market continues to act as it has in the last few years many index annuities will continue to generate 10% or higher annual gains, but they won't keep pace with the average stock fund. However, if we have a period of market turmoil as in the '70s, index annuities could realize substantially higher returns than mutual funds.  When market factors allow participation rates to rise index annuities could match or exceed mutual fund returns, but not at today's rates.

Index annuities should be positioned as complements or alternatives to other savings vehicles that also protect principal from market risk. No customer should complain if their index annuity returns 7% or 8% when CD yields are around 5% if you've created realistic expectations of returns.

Guaranteed Returns
The vast majority of index annuities guarantee a minimum interest rate of 3%. However, most annuities calculate this as a total minimum return. In addiiton, only one in six carriers base the minimum guarantee on the full premium. If the minimum rate is based on 90% of the premium the effective annual rate on a seven year product is 1.46% a year.  If a customer has only been told the minimum return is 3% and the annuity credits less than 3% they'll have questions.

If the minimum rate is calculated on less than the full premium you could explain the lower guarantee enables the company to channel more of the premium dollars to providing the potential for more excess interest. Tell the customer the purpose of the minimum guarantee is to ensure the accumulated value at the end of the surrender period will at least be equal to the original premium even if the market plunges.

Averaging
I heard from a person in January who was unhappy because their index annuity credited 12% interest. The reason for their sadness was that their contract had a 100% participation rate and they knew the S&P 500 had gone up over 20%. They wondered why they didn't earn 20%.

Averaging produces a lower ending value when index values are rising. For calendar year 1998 the S&P 500 was up 26.7%. If you apply a 100% participation rate to a monthly average index value the gain for the same period is 12.1% - an effective participation rate of 45%.

Averaging produces a higher ending value when index values are falling. If you look at the one year period ending 8/31/98 the S&P 500 was up 6.4%. If you apply a 100% participation rate to a monthly average index value the gain for the same period is 14.3% - an effective participation rate of 222%.

Averaging always drives numbers to the middle. In a steadily rising period averaging produces half of the gain of an unaveraged line. In a steadily falling period averaging produces half of the loss of an unaveraged line The problem is customers won't complain if they receive more than they expected, but they're unhappy if they receive less than anticipated.

The majority of index products use averaging. Averaging can result in higher returns when the index is choppy and provide comparable returns to unaveraged structures when the index is rising. However, if you merely told the customer that they had a 100% rate they might question why they receive less than the total index gain in a rising market.

If you are presenting an annuity using averaging you need to explain that the annuity's return will probably not reflect the index return that appears in the newspaper. You need to illustrate the concept and not simply quote a rate.

The Cost Of Free Withdrawals
The vast majority of index annuities offer some form of surrender penalty free annual withdrawals. However, taking money out of an index annuity early - whether the annuity uses a term end point or annual reset design - can kill the return.

The reason is even though the stock market has trended up over periods of time the road has not been smooth. The average annual gain of the S&P 500 index over the last fifty years is 10.15%. With the exception of the extended bull market of the '80s the stock market usually has a down year after two or three rising years. If you look at multiple year periods the majority of the total gain for most periods are created by a few exceptional years. The index will increase 10%, then go up 7%, then maybe drop 15% and then go up 30%. If you make your withdrawal just before the year with the 30% increase you've severely limited the total return.

Taking money out of an index annuity early is like market timing with a roulette wheel. Explain to the customer that even if the annuity provides liquidity it should be treated as a long term savings vehicle and any withdrawals could hurt overall returns.

Index annuities are long term savings vehicles designed for risk averse consumers. Even with lower participation rates and an absence of the 20% plus index gains we've seen in recent years, index annuities still have the potential to deliver significantly higher returns than other savings instruments. Index annuities have a strong story to tell without overstatement.

New Products    4/99        Return to Library Index
American National - Palladium index annuity has an annual reset design applying a participation and then deducting a yield spread from monthly averaged values; the surrender period is nine years.

Americo/Great Southern - the carrier adds a FlexIndex version with a fifteen year surrender period; deducts a yield spread from biennial gains.

Jefferson-Pilot - Choice 500 is available in a single premium version with a ten year surrender period and a flexible premium twelve year surrender period product. Both annuities are annual resets that deduct a yield spread from monthly averaged values.

Keyport - MultiPoint Index averages monthly index values over the one, five or seven year term of the annuity and uses the highest anniversary value as the end point.

EIA’s And The S&P 500    5/99        Return to Library Index
The S&P 500 is the main index used by every index annuity to determine the crediting of excess interest beyond the minimum guarantee. It is also the benchmark utilized by 97% of the money managers and pension plan sponsors to compare how other stock investments are doing. It's a benchmark that is difficult to beat.

In recent years the index has outperformed over half of the domestic equity mutual funds. One of the reasons for this performance is that the S&P 500 is not a static index. Every year stocks in some companies are dropped from the index, and others added, to reflect the changing face of American business. In 1998 alone 48 changes were made in the index with more technology stocks like America Online and Gateway being added, and more basic industry stocks like Pennzoil-Quaker State deleted.

Index annuities were introduced in the Spring of 1995. From 1995 to 1999 the S&P 500 increased 156.91%  - without including reinvested dividends. If you look at periods from April 1, 1995 to March 31, 1999 the index has posted these total gains:

In the first couple of years that index annuities were around many products were able to offer participation rates that reflected most or all of the S&P 500's performance. However, index annuities weren't designed to compete against stocks. Index annuities are long term savings vehicles that offer the potential for higher returns than one might obtain from other instruments that protect principal from market risk.

We examined the average returns of certificates of deposit from 1993 to 1998 and determined the participation needed in the S&P 500 returns for the same years to match the CD returns.  The results are as follows:

Including 1994 when the index slightly declined, if you could have participated in 20% of the S&P 500 gains over the six year period you would have outperformed the returns on certificates of deposit.

Let’s look at actual performance. Suppose you had purchased a typical point-to-point index annuity in the Spring of 1997 and 1998 at the participation rates then in effect. Here’s how a $10,000 investment would compare with CD’s on April 1, 1999.

The performance of the index annuity over the last two years is five times greater than the CD; the performance of the index annuity over the last year is greater than the CD’s return for the last two years.

Point-to-point index structures usually don’t lock in index performance until the end of the guarantee period, so these figures represent performance and not actual gains. However, the performance of the index annuity is substantially higher than the CD. Looking at the two year period, if the S&P 500 suddenly dropped 33% tomorrow the index annuity would still outperform the return on the certificates of deposit.

The Future
The last few years have been incredible for the stock market and no one knows how much longer this growth will continue. Don Reynolds, economist and founder of 21st Century Forecasting says that there is a strong correlation between demographics and the rising market. He discovered that as baby boomers began turning age 46 1/2 in the early ‘90s the stock market took off. The reason is that as baby boomers aged they began investing seriously for their retirement fueling the explosive market growth. How much longer will the market continue to rise? Based on boomer demographics we still have seven years before the market peaks.

Potential Returns
In 1998 the S&P 500 was up 26.7%. The average general equity mutual fund posted a gain of 14.62%.Again, index annuities are not designed as a substitute for mutual funds, but if you had only participated in 55% of the S&P 500 gain you would have outper- formed the average general equity fund and almost tripled the performance of the typical CD. Index annuities continue to be a conservative instrument with high potential.

“S&P 500” is a trademark of The McGraw-Hill Companies, Inc., which does not sponsor, promote or endorse any index annuity.

Agent Expectations    5/99        Return to Library Index
Index annuities are more complicated than traditional fixed annuities. While both products use the same basic annuity terms, provide minimum guarantees, offer tax-deferral and protect principal from market risk, the crediting of both minimum and excess interest can vary greatly from one index annuity to another.

We have counted 26 different methods in the way in which index movements are credited as excess interest to the policy and there are even a number of ways used to determine the guaranteed return. While any index structure can deliver the highest return in a given period depending upon the methodology, participation rate and movements of the index, the agent needs to understand how their index annuity really works to convey realistic return expectations to their clients.

Agent Materials
The first sources of information are the agent guide and training materials used by the insurance company for their index product. These materials need to build an accurate picture of how the annuity will perform under different market conditions.

While early materials from a few carriers didn’t provide a complete picture, agent and customer pieces are getting better and better in building realistic expectations of the potential returns of their products. Agent training is being stepped up; more and more carriers require disclosures signed by both the agent and customer at time of sale.

Agent Recruiting Advertisements
Although materials are getting better at informing the agent on the realities of the product, some of the ads and direct mail pieces used to recruit these agents can be misleading. Even if subsequent training provides comprehensive information on the actual workings of the product, a lingering first impression of a misleading ad can stay with the agent and may result in an inaccurate presentation to the consumer.

There are three specific areas needing more complete disclosure if they are mentioned in an ad.

Minimum Guarantee
I’ve seen several agent directed ads that mention the minimum guaranteed interest rate. However, unless the annuity bases the rate on 100% of the premium the effective minimum rate is less. There’s nothing wrong with an annuity paying the rate on less than the full dollar of premium - less money spent on protecting the minimum guarantee leaves more money to enhance the potential return. But, if we do hit a prolonged downward period in the market the annuity buyer is going to ask why they’re receiving 1.46% or 1.92% a year instead of 3%.

If you mention the minimum guaranteed rate state the percent of premium upon which it’s based.

Selling Participation Rate
Several recruiting ads mention the participation rate without stating how the annuity participates. Even at the same rate there may be a tremendous different in the actual return for a period depending upon the crediting structure used. Point-to-point structures result in different returns than annual reset structures; averaging index values creates different returns than structures that don’t average values.

Historic Cherry Picking
Index annuities have a short track record. Because of this many companies (and research firms) produce hypothetical returns based on past index movements. Even a long term historic look at index movements in developing hypothetical return calculations can’t be used to state how an index annuity might have performed, although it may be worthwhile for relative comparisons of different index structures. If a long term hypothetical analysis can present an inaccurate picture, selecting a single past period where the product would have performed well is very misleading.

Index annuity companies are doing a better job of training their agents and creating realistic return expectations for their products. Agent directed ads need to convey the same expectations.

Agent As A Search Engine    5/99        Return to Library Index
The Internet is changing the way that people invest. In the third quarter of 1997 Charles Schwab reported that 23% of customer trades were conducted online. One year later 58% of the trades were made online with over $4 billion of securities electronically changing hands each week. Fidelity tripled their number of online brokerage accounts in 1998 going from one million to three million. Fidelity reports that over 70% of their Personal Investing trades are now made online. Similar stories are reported from virtually every investment services provider using the Internet. In addition, information and analysis that a few years ago was only available to Wall Street research departments may now be instantly accessed on the Web by individual investors.

Shoppers Not Clients
Many articles have questioned whether agents and brokers will even be needed in the future. They say that a virtual world eliminates the need for the personal agent or broker. In some respects this is true. In the past there were people that did their own research and used discount brokers for stocks and called a toll free number to shop for term insurance. Today, these same individuals shop for the lowest costs on the Internet. However, these people were never clients; they’re price shoppers. While there are millions of people out there that make financial decisions solely on the basis of cost and not service, they’re still a minority of potential clients.

Information Overload
People want help with their investment planning and the Internet is a resource, but the main problem with the Internet is too much information. I used some of the major search engines on the Internet to find sites for investment advice. I typed in the words “retirement planning”. The search engine said there were 9,824,588 web pages on retirement planning and asked if I could narrow my search. So, I typed in the words “mutual fund”. The computer said there were 9,649,882 web pages and could I narrow my search further. So, I keyed in the words “balanced mutual funds” and the computer said there were 6,960,250 web pages and asked if I wanted to buy an airline ticket.

The Internet isn’t any clearer with insurance products. I typed in “fixed annuities” and the search engine also directed me to sites that discussed mutual funds, health insurance and variable annuities. The Internet has a wealth of information on almost every possible financial topic, but that doesn’t mean that access to the Internet guarantees you will be a successful investor. The dictionary contains thousands of words, but simply owning one doesn’t mean you’ll be able to write like William Shakespeare.

In addition to the habit of answering the question “What time is it?” with a full blown discourse on the evolution of clocks and their role in quantum mechanics, the Internet provides conflicting advice. On one search page I found web sites that suggested I buy small cap funds...large cap funds...sell all funds and buy bonds...and sell everything, buy gold, and bury it in the back yard because banks were going to fail.

In the August issue of the Advantage Compendium I said that investors are suffering from information overload. In spite of greater access to investment data than ever before, people are not only making the same investment mistakes they have in the past (like doing nothing or buying yesterday’s hot product) but creating new mistakes. I’ve noticed an increase in letters to financial columnists from investors complaining that the Internet brokerage firm wouldn’t make up losses on a trade, even though the investors admit screwing up the trade themselves. Many investors treat online investing as a giant video game without fully realizing that they are responsible for their actions.

For the vast majority of the public brokers and agents provide valuable services. Insurance and investment planning is their job. They search through the maze of products to find vehicles that meet the investor’s long term financial needs. They are trained to look at the insurance or investment needs of the whole client. Agents and brokers act as a filter by cutting out the unneeded data and providing a consistent source of information to the consumer.

Price shoppers and do-it-yourself investors will continue to surf the Internet looking for valuable investment advice. Don’t worry about them; they were never really prospects to begin with. Clients of agents and brokers already have their search engine, and a growing number of consumers will need your services in the future.

First EIA Linked To The Dow    6/99        Return to Library Index
American Equity has introduced the first equity index annuity crediting excess interest based on movements of the Dow Jones Industrial Average. The crediting structure of The Dow Equity-Indexed Annuity uses the annual monthly average of the Dow. 

EIA Renewals & Reality    6/99        Return to Library Index
Most annual reset index annuities permit the insurance company to declare a new participation rate and/or yield spread every contract year. In the last two years a majority of the annuity contracts with the flexibility to change the rate on renewal have lowered their participation rates.

I’ve been hearing from agents that tell me they are concerned about falling renewal rates. They’re afraid that the carriers may elect less competitive renewal rates because the insurance company knows that the remaining surrender charges will deter owners from moving the money.

In truth, there are no contractual limitations that would keep an insurer from dropping index annuity renewal rates to the minimum rate (if the contract has a minimum rate) or down to the guaranteed return. However, today’s lower renewal rates are probably due to the realities of the financial markets.

Renewal Realities
Index annuity rates are affected by bond yields and option prices. All index annuities have a guaranteed return that says at the end of the surrender period the annuity’s value will at least be equal to the original premium. To protect this minimum guarantee the insurer invests in bonds or similar investments. When interest rates are higher less money needs to be invested in bonds leaving more dollars to buy the options that provide the excess interest. When interest rates fall more dollars need to be invested in bonds to preserve the minimum guarantee leaving less money to buy options. Falling rates means that more pennies out of each dollar of premium need to be allocated to bonds. With fewer pennies to purchase options participation rates would have to fall unless option price also posted a decline.

Instead of falling, option prices have risen. Option prices are affected by market volatility. From the beginning of last year through most of the Autumn market volatility accelerated and option prices rose accordingly. So, not only were renewal rates affected by declining yields which left less money to purchase options, the price of the options rose. The result is lower participation rates.

Averaging Realities
Annuities that average index movements have also been affected by the current environment and by a volatile market. If you look at the twelve month period ending March 31, 1999 the S&P 500 gained 16.76%. If you use the average monthly values for the preceding years as an end point the S&P 500 rose 3.83%. Effectively, monthly averaging produced a participation rate of 23% when compared to absolute index movements.

If you look at the twelve month period ending August 31, 1998 the S&P 500 gained 6.43%. Monthly averaging of index values produced a gain of 14.26% for the same period; an effective participation rate of 222% when compared to absolute index movements.

These periods represent the extremes of averaging and not the norm. The calculation for the year ending last August finished with the lowest index value of the year and showed a ‘best case” use of averaging. Annual periods ending in the Spring of this year included the 20% correction that occurred last Summer and lasted into the Fall. This “worst case” produced averaged values that are significantly lower than one would expect based on historical data. On top of this “worst case” scenario participation rates fell due to the factors I mentioned.

Annual returns in the Spring for averaging products do not reflect the realities of index averaging. The market produced a double whammy for products using averaging with the effects of last year’s correction and generally lower renewal rates. However, if you compare the relative effective participation rates of both averaged and absolute index structures using historical data, averaging is still competitive.

Future Realities
The consensus of the capital market firms I talk with is that the recent upward movement of interest rates is a blip that won’t last. However, they do feel that volatility will continue to ease which means participation rates will modestly rise. While no can forecast the future course of option prices, interest rates and renewal rates, carriers that have the flexibility to adjust rates can respond to more favorable market conditions and even raise rates down the road.

Index annuities are designed to be a long term savings vehicle. You wouldn’t remove an All Star baseball player from the batting order because they didn’t hit in the first inning of a nine inning game. Give the index annuity time to do what it’s designed to do.

Training The Trainer    6/99        Return to Library Index
Sales managers are often called upon to train their people to become more effective in sales. Developing into an effective trainer takes hard work and practice. The goal of training is to improve a person’s self- awareness, skills or motivation by changing thoughts, behavior or environment in ways that are consistent with the goals of the organization. The first step is determining the objectives you hope to achieve.

Developing The Program
Base your training objectives on the needs of the students. What is their experience and background? What do you want them to be able to do when the training is over? You need to talk to the students to determine their specific needs. If the students don’t relate to the training it won’t motivate them to reach the objective.

The training needs to be conducted at the level of the student. If they’re bored because what you’re teaching is too elementary, or if it’s too advanced, they’ll tune you out. You may need to conduct different training sessions for students with different levels of experience.

Developing A Training Style
You must come across to your students as honest, credible, friendly yet powerful, open and caring. You are the facilitator, not the drill instructor. You should dress at the level of the students and talk at the level of the students. Don’t use polysyllables and don’t swear or use slang.

You need to listen and interact with the students. If you view yourself as the expert that has come forth to enlighten the peasants you won’t get your message across. The closer you see yourself with the students the more effective will be your training. Respond to each student as if you were in a one-on-one discussion.

Effective Learning
When you begin tell the students what your expectations are; start with a topical example of how the subject matter relates to real life and their own situation. When you speak, repeat important points. To be effective you need to get the students involved by motivating them to ask questions and talk about their experiences. You get them involved by asking questions.

Don’t make your questions too specific...no one will answer. You will get a better response if you ask the students how they feel about something; feelings are never wrong. It’s better to have a student believe that the topic is harder than it really is rather than easier. If you keep telling the class how simple something is, and they can’t grasp it, they’re going to feel stupid. On the other hand, if you convey that the subject is difficult and they come to understand it, they’ll have higher self-esteem.

Ask broad questions and provide theory, not personal experiences. The students should tell the war stories with you building on their comments. Don’t judge their comments. Thank them for participating. If their comment goes against what you’re trying to achieve, or the student is too negative, try to put a positive spin on the comment. If it appears the student’s goal is to discredit the subject, quietly talk to the student during a break and find out what the real problem is.

When It’s Over
Construct tests to get feedback from the students on the topic and your teaching style. Follow-up to see if the material learned is being used and apply what you’ve learned to your next training session.