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Insurance and the Generation Gap

Those searching for evidence of the brokerage industry's progress towards true wealth management need look no further than registered reps' evolving attitudes towards life insurance. Reps historically have been reluctant to sell life insurance because of the steep learning curve associated with the products, and there is evidence that many still are hesitant to put forth the effort necessary to grasp

Those searching for evidence of the brokerage industry's progress towards true wealth management need look no further than registered reps' evolving attitudes towards life insurance.

Reps historically have been reluctant to sell life insurance because of the steep learning curve associated with the products, and there is evidence that many still are hesitant to put forth the effort necessary to grasp the products' nuances. But according to a poll of Registered Rep. readers conducted by the magazine and sponsored by The Hartford Life Insurance Co., the holdouts tend to be older reps who came of age professionally in an era when being a broker meant hawking stocks. By contrast, younger reps are much more receptive to life insurance.

“A broker of today is not the broker of 20 years ago,” says André Cappon, president of New York-based CBM Group. “The broker's pitch used to be, ‘I'm going to find ways for you to make money.’ The pitch right now is, ‘I'll be putting together a package of products that will address your whole life.’”

Experts, including Cappon, interpret this as a sign of the industry's increasingly warm embrace of the wealth management model — a development that has important implications for clients and reps alike.

The Generation Gap

According to the survey, reps that have been in the industry for fewer than five years are more likely to consider life insurance “very important” than those who have been in the industry more than 20 years. Twenty-six percent of the younger respondents said life insurance is “very important,” versus 14 percent of the older reps. (The survey, which was completed in June and had a response rate of 6.7 percent, is based on responses from 751 Registered Rep. subscribers.)

This is hardly surprising. Experienced reps account for a disproportionate chunk of the industry's assets — as much as 80 percent, according to Dalbar, a Boston-based consulting firm. It only makes sense that successful asset gatherers would stick with what made them successful in the first place, and for a large percentage of older reps, that means selling traditional investment products.

“The people we're talking about are so comfortable with accumulating assets and measuring a client's net worth over time and watching it grow,” says Bob Primmer, senior vice president in life distribution and sales for The Phoenix Companies, whose life insurance unit is based in Hartford, Conn. “They have a huge hurdle in their head to get over regarding how life insurance benefits clients.”

Conventional wisdom validates the habits of experienced reps, Primmer says. For instance, consumer finance magazines and newspapers are full of maxims like “buy term and invest the difference,” but Primmer says this is frequently not the best approach to life insurance. “If someone needs only death benefits, then, yeah, term life is the way to go,” he says. “But I could show you a million examples of when that's not the best way. There are a lot of situations where permanent insurance is a much better selection.”

Phoenix and The Hartford — which both view reps as a primary sales channel for their life insurance products — say that the retail brokerage industry is awakening to the fact that insurance should be an integral part of any comprehensive financial plan.

One sign of this is the increased share of life insurance sales that originate outside the insurance industry. In 1997, 47 percent of life insurance market share came from “career agents,” meaning salespeople who work for insurance firms. By 2003, that number had shrunk to 38 percent. Meanwhile, the categories of market share that include financial advisors and financial planners increased from 6 percent to 10 percent and from 47 percent to 52 percent, respectively. (The market share numbers hail from LIMRA International, a Windsor, Conn.-based insurance trade group focused on marketing and distribution.)

Ready to Rise

Still, insurance is hardly an entrenched product in the brokerage industry. At Merrill Lynch, whose Total Merrill program is perhaps the highest profile of the industry's wealth management efforts, insurance accounts for only about 5 percent of total retail brokerage revenues. At Wachovia, the number is even lower — only about 1 percent, according to a company spokeswoman. Insurance revenue numbers at independent firms are higher, sometimes much higher depending on the firm's strategic focus.

But few would argue that life insurance has plenty of room for growth in the brokerage industry, and the Rep./The Hartford survey suggests that it is poised for exactly that. To wit: 69 percent of registered rep respondents say they currently sell life insurance (including variable life, whole life, universal life and term). This is up from 66 percent in last year's poll, and experts say it's a sign that insurance revenues at brokerages should increase in the coming years.

“There's a real shift in life insurance, in terms of source of production,” says Michael Kalen, executive vice president in The Hartford's individual life division, which also is based in Hartford, Conn. “The growth in life insurance sales is coming from financial advisors.”

What's in the Way?

One of the keys to increasing insurance sales lies in getting over reps' historical biases against it. Reps who do not sell insurance cite a wide range of reasons for their reluctance. Thirty-two percent say they need more training and sales support, and 20 percent say the sales process is too complicated. Reps who sell insurance acknowledge these hurdles, but quickly add that surmounting them is worth the effort.

“A lot of the reason brokers are reluctant to get involved with insurance is that good insurance practices do not offer immediate gratification,” says Andrew Fass, senior vice president and assistant complex manager in Wachovia Securities' Sacramento, Calif., region. However, “the rep who sells insurance elevates himself from a stock-and-bond-salesman status to primary-advisor status, and in the process learns so much more about the client than someone who sold them just stocks and bonds.”

Surprisingly, reps do not seem daunted by the prospect of having personal health discussions with their clients (only 5 percent noted this as an obstacle to selling insurance).

Also surprising was the fact that compensation issues are not a hindrance. When asked to cite factors that would help convince them to sell life insurance, only 14 percent of respondents agitated for “greater financial incentives.” Perhaps this is because insurance products can be quite lucrative for reps. If a rep at a wirehouse sells a policy with a $10,000 annual premium, the wirehouse typically gets all of the premium in the first year; then the firm pays its rep in the first year according to grid — say 40 percent, or $4,000. In subsequent years, most of the premium money goes to the insurance company, while a small percentage — maybe 3 percent — goes to the wirehouse, which typically keeps the money.

So, at least in terms of its compensation, an insurance sale feels like an investment transaction. When it comes to product details, however, insurance is anything but familiar to most reps. It makes sense, therefore, that reps are looking for help in selling insurance, and increasingly, they are leaning on life insurance providers for the support they need.

Among reps who sell insurance products, 50 percent say they get sales support from life providers, up from 47 percent last year. Among those reps who expect to sell significantly more life insurance in the coming 24 months, reliance on their life insurers is even heavier — 63 percent expect to get sales support from the insurance provider, up from 42 percent last year.

Kalen, whose firm gets about 70 percent of its life insurance sales from financial advisors, says there is cause and effect at work here. “Those insurance companies that provide assistance to the broker are the ones that are likely to get their business,” he says. Cappon, the industry consultant, adds that reps' increasing openness to partnering with specialists — CPAs for their clients' tax needs, lawyers for their estate plans, for instance — is likely to help boost insurance sales.

Why Do It?

Another factor experts say could increase the brokerage industry's use of insurance is the fierce competition for clients — particularly wealthy ones. A savvy use of insurance can help an advisor differentiate himself from his rivals. Further, selling insurance to an existing client base can help a rep make more from his current book, while deepening and solidifying client relationships.

But the weight of the industry's inveterate indifference toward life insurance products is not easily changed. “If you're a stock broker managing $5 million of assets for a customer and you're scared to death of trying to sell him life insurance, because you don't know the first thing about it, what are the chances that you're going to bring it up?” says Primmer.

The evolution of insurance support — both in-house at brokerage firms and from third parties like insurance wholesalers — is alleviating these fears, experts say. Still, the most powerful agent for change is likely to be attrition among the experienced reps that do not feel they need to sell insurance to be successful. As these reps retire and are replaced by those who have been weaned on the wealth management concept, we are likely to see sales upticks in a wide array of financial products, including life insurance.

“What this survey tells me and what the sales trends tell me is that financial advisors really are now becoming wealth managers and are doing the things — the hard things, like learning product, engaging experts, having more in-depth conversations with their clients — so that they are positioned to act as real wealth managers,” says Kalen. “That is the trend we've seen in the last three years, and we expect it to continue.”

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