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Advantage Compendium - An Index Annuity Resource |
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No index sponsors or endorses any index product. Information believed accurate but is not warranted.
Buyer Manipulation 1/06 A positive story can increase buyer
trust and help make a sale, This part of the study is not surprising. We are all aware that having a good day or a bad one affects our decisions in general. What the study showed was how easy it is to put people in a more trusting frame of mind and how easy it is to counteract the manipulation. By sharing a positive story or telling an uplifting tale the listener becomes more trusting. Good salespeople intuitively know this and often open with a joke or humorous story, and the study shows it works. A sale may result not based on the merits of the solution offered, but because the “trust judgment” has been altered. But we can neuter the manipulation if we are aware of it. If we hear a funny story, our judgment will not be affected if we consciously think “I’m being told this story to make me more receptive”. If we recognize or anticipate the manipulation its power melts away. What this means is one needs to recognize the emotional state of the other party. If they seem angry or sad the best choice is to delay forcing their decision until another time. If that cannot be done, then the alternative is to make them aware of the real reason they are angry or sad, because this will help to separate the emotion from the decision. But don’t try this with your spouse. The study found this emotional
manipulation only worked with people we don’t know very well, because when
people know the real you they’ve already formed a trust judgment. 2006 – Uneasy Year 1/06 Unless the SEC rules that all index-linked annuities are not and cannot be securities, NASD and their supervised B/Ds will be a growing factor in how index annuities are distributed. This will be beneficial for some insurers, but cause a major disruption in the marketing channels for most others involved. Interest rates, the stock market and the economy will experience a jagged year and see whether a 5th year of growth is possible. And suitability and producer conduct issues will come to the forefront with tighter controls on agents resulting. 2006 will be an unsettled time. The Eight Minute
Performance 2/06 Well, there were about seventy people in my daughter’s
group! They rehearsed for five weeks! (This is a really big deal!) They probably
had twenty hours per week in practice – that’s over one hundred hours of
preparation for this eight minute performance! *
Immediately engage the audience As I said, it was quite a daunting task. I couldn’t help but relate their act to our business. We are trying to do the same thing in our sales presentation. We try to engage our prospect, build trust, perform along the way, provide an idea that explodes in their minds, close, and hope they buy. Some of us have been doing this for so long that it has become old hat. But, I have a couple questions for you – Are we spending enough time in “rehearsal”? Are we putting on our best performance? I remember someone telling me that “All business is show business”. Take a few minutes to review your script. Make sure you know when to sing and when to listen. Prepare the build-up and then provide the most convincing rationale for doing business with you. Don’t delay. You won’t have all day. Remember, it’s just an Eight Minute Performance. Reprinted with permission from Ray Ohlson’s new book “Until
Next Time...Good Selling!” Mr. Ohlson may be reached at The Ohlson Group
in Indianapolis at 877-844-0900. Advantage Survey Hints That Half Of
Registered Producers Impacted By NASD
2/06 Our previous survey work showed that 55% of index annuity producers were Series 6 or 7 registered. The purpose of the survey was to see whether NASD Notice 05-50 was impacting the way that index annuities were being sold by securities registered insurance agents and how producers and their broker/dealers were reacting. Unfortunately, because only 64 subjects answered the survey I do not consider it to be statistically valid, but rather should be viewed as an indication or hint of what may be going on. I have tabulated the responses and listed the comments of the producers. 20% said that within the last six months they had ended their relationship with their B/D, gone inactive, surrendered their security license, or in some way suspended or terminated their active Series 6 or Series 7 registration 42% said their broker/dealer established or announced intent to establish an “approved list” of index annuity products 39% said their broker/dealer now requires all index annuity applications to go through the broker/dealer or an “approved affiliate” 28% said their broker/dealer is taking a piece of their index annuity commission 21% said they are looking for a new broker/dealer? Complete survey results are in the February Index Compendium issue. A Series 6 Does Not Qualify
You To Sell Index Annuities 2/06 I reviewed four different training manuals designed to teach one how to pass the Series 6 exam. Here’s what I found. On providing a broad overview on the economic factors affecting all investing, the typical course had two paragraphs on what the Gross Domestic Product is, 12 lines describing the business cycles that create bull and bear markets, and 115 words on inflation. All told, a one-page article on economics in any issue of Business Week probably provides more depth than all of the economic knowledge needed to pass the Series 6. What about providing a foundation for understanding the indices linked to the index annuity? In the main text there were only 11 words, “a S&P 500 index fund’s performance tracks the underlying index’s performance”. However, if you went to the Glossary in the back of the study materials you find a more in-depth explanation: Index – A comparison of current prices to some baseline, such as prices on a particular date. Indexes are frequently used in technical analysis. A Series 6 does not qualify you to present index annuities (but neither does a life license) By contrast, there was more teaching on the topic of suitability, the average training text devoted six pages to the topic. However, there was a bit of a bias on what was defined as “suitable”. I looked at three different practice final tests designed to prepare the student for what they will find on the actual Series 6 exam. The first practice test had 6 questions out of a hundred on the topic of suitability, the second had 9 questions, and the third again had 6 questions out of a hundred that related to suitability. However, in anywhere from a third to half of these questions that asked what was suitable, the only available answers were mutual funds. The only mention of fixed annuities in any of the study books was “annuities and bank CDs are considered illiquid”. What is suitable if a client’s objective is preservation of capital and safety? The books say to buy government securities and Ginnie Mae backed investments. The training manuals do discuss asking about a customer’s age, employment and risk tolerance – but they never suggest to ask whether the customer has adequate life, health or disability insurance. The bottom line is passing a Series 6 test in no way, shape, or form prepares you to sell index annuities. But neither does passing a state life insurance exam. I also reviewed two training manuals designed to help you pass your life insurance/annuity state examination. I believe I counted two questions on each courses’ sample tests that related to index annuities. A life insurance license does not qualify you to sell index annuities either. In point of fact, the passing of mandated testing in any area does not create immediate competence. A newly licensed doctor, lawyer or insurance agent may have met the minimal requirements to practice, but I would not want my gallbladder removed, to be defended in court, or have a buy-sell agreement funded by any of these neophytes. The difference in any profession between proficient and barely competent is additional training. Instead of requiring the passage of a specific state test on index annuities before folks can sell the products, state insurance departments should mandate that producers must demonstrate adequate knowledge of fixed index products before they may sell a carrier’s products. This “attainment of adequacy” could be accomplished by ensuring producers take additional coursework or classes in index annuities and the burden will be placed on the carrier to ensure that producers have successfully completed the training. A Series 6 does not qualify you to present index annuities, but neither does a life license. Training, not exams, creates proficiency. 4th Quarter Index Annuity Sales Slip, But Year
Sets Record 3/06
Indexed universal life was the real story in 2005. Indexed universal life (IUL) premium of $186 million increased 50% over the previous year and doubled from 2003. Although IUL is still a small island in the wide world of fixed universal life premium it is interesting to note that 4th quarter 2005 premium alone exceeded annual premium for any year in the previous decade. Annuity
Regulatory Changes In The Wind 4/06 Much
Smoke, Little Fire NASD
Turf War Glauber deliberately ignored the fact that there are
only two types of annuities – fixed and variable – and that index annuities
materials provide significant disclosure to consumers as well as greater
protection than NASD regulated investments. Continuing with the pattern of
doubletalk, in a speech only six days later to the Senate Committee on Aging
NASD Executive Vice President Elisse Walter told the committee NASD is urging
broker/dealers to treat fixed insurance products as security products. “The
three annuity types are really three versions of the same product” -NASD Chairman
Glauber NASD responded to a Minnesota Department
initiative and will hold an annuity roundtable on 5 May in Washington to discuss
suitability and regulatory concerns. However, the participants in the roundtable
appear to be strongly tilted towards variable annuity, investment firms and
security regulators, all of whom may feel they have lost revenues due to index
annuity sales and may not provide an unbiased perspective. I am afraid the
roundtable may reenact a version of the Revolutionary
Tribunal with only the guillotine
missing for those supporting index annuities. Iowa
Leads The Way Focus
On Exchanges The regulatory world for the annuity producer will change in the near future with greater required training, more disclosure, agent fingerprints on file, and more bad agents will be thrown out for good. The only real question is whether it will be an insurance department or NASD world. Better
Rates Ahead For Fixed Annuities 4/06 The flip side is when the cycle turns short-term rates
rise more quickly than long-term rates and you have a period when CDs get more
and more competitive against fixed annuity rates. But not to worry, the
long-term bond rates also trend up and fixed annuities regain their rate
advantage…or do they. The Federal Reserve began raising interest rates and CD
rates trended up. The average 1-year CD rate of 1.12% on April 2004 was 2.64% by
April 2005 and 3.35% by Halloween. However, the yield on the 10-year Treasury
was 4.53% in April 2004, 4.15% by April 2005 and only just back to 4.56% by last
Halloween –
good trick, bad treat.
Last autumn you could find 1-year CDs yielding as much as
some bonus rate fixed annuities, and multi-year CDs were trumping multi-year
guarantee annuities. It was a tough time for fixed annuity producers, but it
appears the yield worm has finally turned. Since the first of the year 10-year Treasury Yields has moved up half a percent, but the average one-year CD has increased a third of a percent and five-year rates have barely moved. Barring any number of unforeseen calamities that could upset this prognostication, it appears fixed annuity rates should become increasing competitive as the year progresses. Bully
About Life 05/06 The
Theodore Roosevelt I think of is not the one that charged up San Juan Hill and
was one of our greatest president. I’m thinking of the Teddy that was so
weak as a baby his father would race his carriage through the streets and hold
Teddy into wind so that the air would be forced into his lungs so he would
breathe through another night. The
young boy Teddy that would alternate between lifting weights and climbing hills,
and being bedridden with asthma, and then each time return to challenge himself
even more. The
young man Teddy that was told by his doctor that unless he spent his days as an
invalid that his heart would stop, and instead Teddy spent the next 40 years
going nonstop from ranching to the hard scrabble world of politics, always
working at full speed, with unlimited confidence, and with the knowledge that
each day might be his last, but never, ever giving up or slowing down. I
remember all the adversity Teddy faced, take a fresh look at my suddenly smaller
problem and give it another go. NASD
Fixed Annuity Regulatory Power Grab Based On One Case 05/06 It
appears that NASD concerns of possible sales practice abuses in the use of index
annuities are not supported by their own records, and NASD public comments that
they need to regulate all fixed annuity sales to protect consumers have no basis
in fact. It should be noted the NASD did manage to collect $12,500 in fines from
representatives that were selling fixed annuities and had not given their B/D
written notice of their activity. Index
Annuity Complaints Up Sharply 05/06 Although
VA complaints are higher the sales are much higher than for index annuities.
Variable annuity 2005 premium was $128 billion 1
for the top 25
carriers. Index annuity top 25 carrier premium was $27 billion. To put the data
in perspective it is necessary to examine the number of complaints for each
dollar of premium collected. In
2005 there were 176 closed customer complaints specifically reported on variable
annuities or one complaint for every $729 million of premium. This was better
than the 181 closed customer complaints reported in 2004 and the one complaint
for every $676 million. In
2005 there were 104 closed customer complaints specifically reported on index
annuities or 1 complaint for every $259 million of premium. To
look at this another way, in 2004 the number of complaints for both index and
variable annuities were roughly equal – 1 complaint for each $614-$676 million
of sales. However, in 2005 there was one complaint for each $259 million of
index annuity premium and one complaint for each $729 million of VA sales.
Looking at the same amount of sales the index annuity reported three complaints
for every one variable annuity complaint. Even
though they are still lower than for many other insurance products, by any
measurement index annuity consumer complaints have increased. Whether the spike
last year was an aberration or a trend remains to be seen. Index
Annuities Paying Competitive Rates 05/06
Average Fixed vs. Average
Index Premium Average Commission (In)
Competence Back in 1999 Justin Kruger and David Dunning of Cornell
University did studies on logical reasoning by testing individuals. They then
asked these individuals how they felt they did on the tests. Although people
scoring average or above average had a pretty good idea of where they ranked, by
and large the folks that scored around the 10th percentile felt they scored well above average. In
other words, even though the incompetent ones did worse than 90% of everyone
else they generally felt they had performed better than 70% of their peers. When the incompetent were asked to grade the tests of
the top scorers – thus providing an example of competent knowledge – they
failed to recognize their own mistakes. Not only did the incompetent remain
incompetent, but they were too incompetent to realize they were incompetent.
A
Wee Spike In Fear 06/06
Overconfidence
07/06 Many
investors think they’re right about their investment views. That people are
overconfident in their financial skills is not surprising; it is well documented
that we tend to think we’re always better than average regardless of the
personal attribute being measured. This leads to overconfidence and sometimes
problems for the financial counselor. An
overconfident investor is less likely to take advice from a counselor. One
solution to this is for the counselor to diplomatically puncture the
investor’s confidence by showing them where they are wrong without
embarrassing them. In
test groups I’ve had people take a short financial knowledge quiz that they
grade themselves. I find folks tend to be more receptive to what I’m saying
after they take the quiz. Are
some people more overconfident than others? According to recent studies the
answer is yes. A couple of professors surveyed 2000 pension plan participants on
their knowledge and confidence level. Three findings jump out of their research:
▪
Although the investment knowledge of men and women was similar, men were a third
more likely to be overconfident in their investment abilities. ▪
The investment knowledge of high school grads and college grads was similar,
college grads weren’t any smarter about financial matters than those that
stopped at high school (although they thought they were). ▪
The
investment knowledge of active investors was highest but their overconfidence
was the lowest, the active investors knew enough to know they didn’t know
everything. What this might mean is that it will be helpful for a financial counselor to find out the sex, formal education and investment experience of the consumer because that may determine whether the counselor can immediately begin to teach the consumer about the solution being offered, or whether they will need to show the consumer what the consumer doesn’t know so they can begin to taught to be right about something. Safety
– Bank & Annuity Reality 07/06 Legal
Reserves On
an individual policy basis what the carrier does is look at the greatest present
value of all possible benefit streams, but never less than the cash surrender
value of the annuity. On
a statutory reserve or legal reserve basis this could translate into insurer
reserves equaling anywhere from 100% to 106% or more of cash value. However,
the concept of calculated reserves for the bulk of liabilities is possibly
unique to the insurance industry. You cannot make an apples to apples comparison
between insurers and banks because banks view their liabilities on an account
value basis and not by reserve valuation. Capital
& Surplus I
looked at the assets and capital surplus for 2005 of the twenty largest sellers
of index annuities and computed their Capital
Surplus Ratio. I used
the NAIC definition of Capital & Surplus which is “the outstanding capital
stock, preferred stock, paid in capital and unassigned funds held for
policyholders (assets minus liabilities)” and divided this by the total
assets. The
median capital surplus ratio for the twenty largest sellers was 5.9%. Ratios for
the twenty carriers ranged from 3.5% to 16.2% (however if you drop off the two
outliers on the ends the range drops to 3.8% to 10.6%). The
capital required for a bank is determined by statute and regulator guidelines.
Tier 1 capital is the core measure of a bank's financial strength from a
regulator's point of view. It consists of the most reliable and liquid types of
financial capital primarily
shareholders' equity. Examples of Tier 1 capital are common stock, irredeemable
preferred stock and retained earnings. The
capital ratio is the percentage of a bank's capital to its assets and would be a
kindred measurement to the capital surplus ratio. To be well-capitalized under
federal bank regulatory agency definitions, a bank must have a Tier 1 capital
ratio of at least 6%. For 2005 the average capital ratio for all banks was
10.1%. In
2005 the largest annuity carriers had capital ratios of 5.9% vs. 10.1% for the
average bank If
you compare these index annuity carriers with the average bank the typical
annuity carrier has 5.9 cents behind each dollar of assets and the average bank
has 10.1 cents behind each dollar of assets. This ratio is on the high side
based on bank history. For example, in 2002 there were between 6 and 7 cents
backing each bank dollar. Safety From
1994 through 2005 there were 66 bank failures. Bank deposits within federal
deposit insurance limits were protected, but the same did not hold true for
account balances over the insurance limits in many of these banks and not every
uninsured account was made whole. During the same period there were only three failed carriers that did not provide all of the fixed annuity value for all of their annuity customers; owners of annuities issued by London Pacific Life, National American Life Insurance Company of Pennsylvania and Summit National Life Insurance did receive up to guaranty limits but account amounts above those limits may never be fully paid. There may be other carriers out there that have not returned a hundred cents on the annuity dollar, but I can’t find them (by the way, no index annuity owner has ever lost money because the insurer failed). A fixed annuity should be presented as simply another safe money place. 3
Tips To Correct Phone Messaging 1.
Give your phone number immediately after saying
your name and speak slooowly. 2.
Figure out why you’re calling before you call 3.
If the purpose of the call is to ask a question,
ask the question when you leave a message. I believe the reasons why so many people seem
to be intimidated by math were too many poor math teachers (ones that were good
at solving math problems but not necessarily good at teaching) and a lack of
essay questions on math tests (meaning students couldn’t bluff through the
math answers and actually needed to study hard). The problem with not
understanding math is others with a little more math savvy may then use math to
deceive you. What I’m going to try to do is talk about financial math, how it
can create a false impression, and the additional information you might need to
find out the facts. Mean
(Average) Say that you were looking at two financial
instruments. Instrument A had an average past return of 5% and Instrument B had
an average past return of 6.5%. If you believe the past will repeat, which one
would you pick? The obvious answer is B.
The average return of A was 5%. From an odds
or probability standpoint you have a equal chance of earning 4%, 5%, or 6%, so
regardless you’re going to be within one percent of hitting that average. The average return of B was 6.5% and your real
return won’t even be close to the average. You could zoom right past it and
get 10% or 25%, but B has a 67% probability you will earn 1%. Averages can often be misleading because a
couple of very high or very low numbers can distort the picture. Does this mean B is worse than A? No. B still
offers a 1/3 possibility of earning 2 to 6 times more than you’d earn in A
next year and over time should produce a higher overall return than A based on
the data we have. However, if your main concern was never earning less than 4% A
would be the better choice –
and you’d never know this if you were only told
the average. Standard Deviation 1
SD contains 68% of the possible returns The Standard Deviation (SD) of the population
for Instrument A is 0.89. What that means is roughly two-thirds of the returns
fall between Average 5% plus or minus 0.9 (or between 4.1% and 5.9%), and 95%
fall between Average 5% ± 0.9 + 0.9 (or between 3.2% and 6.8%) according to the Standard Deviation
Theory.
The Standard Deviation of the population for
Instrument B is 9.0. What that means is roughly two-thirds of the returns fall
between Average 6.5% plus or minus 9 (or between -2.5% and 15.5%), and 95% fall
between Average 5% ± 9 + 9 (or between -11.5% and 24.5%). By knowing only the standard deviation we can
conclude there is a very strong chance (95%) that A would earn somewhere between
3.2% and 6.8%; a pretty tight band of returns around that 5% Average. Based on
B’s Standard Deviation, we have a 95% chance of losing up to 11.5% or earning
up to 24.5%; a 36% return swing from worst to best with each end a long way
from B’s 6.5% Average. Note: The Standard Deviation Theory says B returns could easily be as low as a negative 24.5%. However, we know the worst we can earn based on real numbers is a positive 1%. This is an excellent example of how a mathematical correct theory may not reflect the real world and cause one to make a bad decision (a worst case of making 1% is a whole lot better than possibly losing 24%) . The returns of Instrument B are a lot more
volatile than those of Instrument A. With A you’re almost certainly going to
earn at least 3%; B is much more of a crapshoot. Does this suggest that a low
standard deviation is automatically better than a high one? No. A
higher Standard Deviation means more volatility, not better or worse Suppose a new Instrument C has an Average
Return of 4.5% and a standard deviation of only 0.05. This would mean
mathematically a 95% shot of earning between 4.4% and 4.6% with C. But we know
Instrument A has a two-third chance of returning either 5% or 6%, and the worst
we could do is earn 4%, which isn’t all that much lower than the best possible
Instrument C return. To
Sum Up The final comment is all of this analysis only holds true if the past repeats and your model works. Consider if we’d used degrees on the thermometer instead of percentages and the data represented temperatures during a Minnesota winter. All of this data would be fine if we're trying to predict next January's temperatures, but it is ka-ka if we were trying to use it to predict next summer’s temperatures in Duluth. 2nd
Quarter Index Annuity Sales Flat
9/06 The top ten carriers
for the second quarter:
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