Almost twenty years ago Clayton Christensen’s book, The Innovator’s Dilemma, said the reason many established companies fail is because they don’t or can’t respond to disruption. Most of the disruption cited was caused by technology (e.g. cell phones replacing the need for Kodak cameras and film), but sometimes politicians and regulators were the cause.
Before 1 May, 1975, commissions on stock trades were fixed and rather profitable—a stockbroker could make a nice living trading stocks for his customers. However, on that date the SEC stated that stock trades could be negotiated and discount brokerages such as Charles Schwab & Co., Inc. became major players. To maintain their income, stockbrokers were forced to vastly increase the number of trades conducted, specialize in areas that allowed them to maintain higher margins (such as initial public offerings), expand their offerings or change occupations. Regulatory disruption forever changed distribution in the securities industry. Regulatory disruption has already changed distribution in the fixed annuity channel and these changes will dramatically increase over the next few years. Although the use of annuities will flourish as never before, the disruption to marketing organizations (MOs) and agents will be profound.
A Snowball Moving Downhill
One recent disruptor was the current administration supporting the purchase of annuities. Partially because of this, fixed immediate annuity options are gradually appearing in more defined contribution plans and qualified longevity annuity contracts (QLACs), allowing at least a portion of qualified monies to not be subject to required mandatory distributions at age 70 ½. Supporting annuities should be a good thing for MOs and agents, but in this case the annuities are, and I believe will, largely be bought on an institutional basis without an agency or agent in the middle. Thus, there will be billions in new annuity purchases generated and zero agent commissions. Indeed, the agent now has a new competitor for the retiree annuity purchase—the retiree’s retirement plan—and the retirement plan can probably offer better pricing due to economies of scale.
The adoption of the proposed Department of Labor (DOL) fiduciary regulation would cause the avalanche to finally hit, but this disruptive regulator snowball has been heading towards agents and MOs for years. The attention started when annual sales of fixed index annuities (FIAs) soared from $14 billion in 2003 to $23 billion in 2004. The increased visibility and potential oversight revenues culminated in the passage of SEC Rule 151a. The rule was neutered, but the result was increased supervision and suitability requirements.
If the DOL proposal is implemented the supervision of agents, especially those selling fixed index annuities, becomes a focal point. Determining whether to contract an agent will be based as much on the potential liability and cost the agent creates as on the sales generated. Relationships with agent recruiters (MOs) will be based as much on how much of the liability can be transferred as on how many agents can be recruited. In this regard, broker/dealers and registered advisory firms are a better fit because they are already directly supervising most aspects of the representative/agent’s business and therefore lower carrier risk. There will be less of a need to have an MO recruiting agents and providing product training, unless the MO can also take over some the carrier’s supervisory responsibility.
The fixed annuity distribution model is shifting; the only real questions are how fast and how far. The annuity establishment can fight against these disruptions and should—the DOL proposal being a prime example—because disruptions may be stayed. Witness Rule 151a. There are a variety of ways to take the edge off the effects of disruption or adapt to the new world for both agents and marketing organizations. Many will prosper. The only bad plan is to not plan at all for possible disruption.
