What issues confront banks as they strive to establish themselves as sellers and managers of annuities?
That was the theme of a recent roundtable meeting held by the American Banker. Four prominent industry figures met at the newspaper's New York headquarters to discuss the hot issues confronting banks that sell annuities - including sales strategies, profitability, and legal hurdles.
*Kenneth M. Hughes, national sales director for financial institutions at Keyport Life Insurance Co., Boston;
*Kenneth Kehrer, principal of Kenneth Kehrer Associates, a Princeton, N.J., research and consulting firm;
*Ramesh Shah, senior vice president at the brokerage unit of National Westminster Bancorp, Jersey City;
*Bayard F. Tracy, senior vice president for institutional sales at American Skandia Life Assurance Co., Shelton, Conn.
Staff writers Cristina Merrill and Karen Talley moderated the discussion. Excerpts follow:
AMERICAN BANKER: Why, in a nutshell, should banks offer annuities?
SHAH: It's simple. Banks should be in the business of meeting the full range of our customers' needs for financial products and services. And annuities are a very important piece of that jigsaw puzzle.
HUGHES: It's the same reason banks should be in all aspects of investment sales - it expands your customer relationships. And solid customer relationships will ensure rising profits and future growth.
TRACY: Banks have to provide an array of financial products to meet their customers' total financial needs. Annuities are one piece of that, along with CDs, mutual funds, life insurance, term insurance, and other retail products.
AB: But some banks are hanging back.
KEHRER: That's right: It's interesting that most banks are not in the annuity business. Some are prohibited by state regulations that prevent bank employees from offering the products. They could use an investment product marketing firm, but they don't want outsiders in their bank. Others are concerned that annuity sales will cannibalize their main business, and consequently, they decide to remain on the sidelines.
AB: Back to banks that are selling annuities - how are they doing?
HUGHES: Generally banks are doing a great job delivering investment products to their customers, despite criticism by some regulators and the media. But there's always room for improvement in their sales process and their training.
KEHRER: There are two elements to what kind of a job they're doing. One is how good they are at serving customers in this competitive environment. From that perspective, customers appear to think their banks are doing a great job.
But there's been a lot of controversy over how well banks are doing in determining suitability and complying with the myriad of new regulations.
TRACY: The distribution of investment products in banks is a maturing business. And as it matures, the sophistication of the sales process and of the sales representatives increases dramatically.
AB: Where are banks dropping the ball?
HUGHES: A lot is said about banks' having a tremendous opportunity because they have a solid customer base and internal systems to serve them. But banks can also sabotage their chances for success.
Banks, for the most part, lack the sales environment crucial to the offering of investment products.
Bank management should also take a long-term approach to the business. This would make the bank consistent with what it is asking its customers: to invest in fixed and variable annuities for the long term.
But banks may not be sending that message. They rely on representatives and a brokerage infrastructure that's less than 30 years old on average and probably has less than four years of experience.
Where I see the banks' real abilities to assist is by tapping internal systems to help automate their sales programs. Sales representatives could use personal computers to serve as financial planning tools.
TRACY: Sales representatives must strike an appropriate balance between production - to bring in fee income - and creating lasting relationships with customers.
Relationship building requires a level of experience and sophistication on the part of the sales representative, who must know what kinds of products are available and what offerings are best for each customer. Sales representatives at banks will become better at this as time goes on.
KEHRER: Right now, sales representatives are largely concentrating on getting the first annuity or mutual fund sale out of a customer and then moving on to the next customer.
The approach is supported by banks that supply sales representatives with lots of referrals or with lists of customers whose CDs are maturing. As a result of this approach, repeat-sales ratios are extremely low. There needs to be a lot more improvement in the area of developing relationships.
Sales representatives should do things like call customers - not necessarily about another product - but to see how things are going.
SHAH: I agree that sales representatives should be doing more. But I don't think that banks are standing idly by.
We're doing things like asking our customers to fill out detailed financial profiles, which show compelling needs for annuities and other investment products.
We also gather information to get a sense of how much risk customers can tolerate. This allows us to make customers more educated and comfortable about the long-term decisions they're making.
We're also starting to do a lot of work to get second and third sales. We're tracking sales representatives' activity and also keeping tabs on the types of products our customers have purchased. This way, we can spot opportunities to add to customers' existing holdings or fill a gap. And in some cases, really, we'll be asking customers to revisit us on a biannual or annual basis for a financial checkup.
AB: Does the way that some banks compensate their sales representatives encourage one-shot sales of annuities and other investment products?
KEHRER: Some banks are, in fact, changing their compensation programs. They are starting to move away from a purely transaction-based compensation to compensation that rewards the sales person for relationship development. For example, Barnett Banks has switched its sales representatives to salaries, instead of commission.
AB: How are insurance companies - which supply annuities - helping banks sell more of the products.
TRACY: There are a number of ways. A number of insurance companies provide asset allocation software. The asset allocation programs cull a broad array of investments, including fixed and variable annuities, to come up with a mix that best meets customers' needs.
SHAH: Our insurance carriers are assisting our sales force by helping them thoroughly understand the products. Thus, our sales people can explain annuities to customers in a very friendly and comfortable way.
Our insurers are also helping us better market our products through our branches. They're helping us position the products, promote them in different, changing environments, and ensure that customers are well- served.
HUGHES: That's an important point, Ramesh. Annuity companies can help sales representatives learn how best to sell annuities and follow up after the purchase.
Presale, there is a great opportunity for insurance companies to help sales representatives deal with customers in various rate environments. Postsale, insurance company representatives can offer coaching on how to help customers understand renewal rates, including how they are set and how often they change.
KEHRER: Insurance companies have done a better job on the fixed annuity side when it comes to working with banks. In fact, a lot of fixed annuities were developed specifically for the bank channel.
On the variable annuity side, the overwhelming number of products were actually designed for customers at securities brokerages.
As a result, a lot of bank customers may feel that variable annuities are too complicated, have too many choices and too many bells and whistles.
AB: Who is buying annuities?
SHAH: Our analyses indicate that most of the annuity buyers are older bank customers, in the middle-income range, and generally making their first nonbank investment purchase.
They are fairly conservative in terms of their outlook, their investment needs, and the level of fluctuation that they're willing to tolerate in their first investment product.
HUGHES: The typical annuity buyer is 50 years old and up, and they're buying the annuity for the purpose of funding their retirement or passing wealth to their heirs.
AB: How much is the typical investment in an annuity?
SHAH: In a fixed annuity, it'll range anywhere from $15,000 to $20,000. Variable annuities are probably in the $14,000 to $20,000 range as well. But our people tell me that the size of the tickets are coming down in the last year or so.
AB: How do banks take their sales effort to the next level?
HUGHES: The best way that banks can capture the up-and-coming customer base is by doing a good job with their current customer base. These older people will refer their children to the bank.
KEHRER: Annuities play a role in banks' need to become the financial planner of the middle class. This will require technology, a greater array of products, and probably a better price-performance ratio on the type of products they sell.
Surprisingly, for a product with so much potential, insurance companies and banks have just sort of run their hand over the surface of researching potential customers. They have not really gotten down to figuring out why customers are buying and how they could sell much more.
TRACY: I'll give you a reason why I think they haven't done a lot of research. It's still a matter of picking the low-hanging fruit. That's what the banks continue to do. . . . Obviously, some banks are pretty good at (creating a sales environment), but most are less so.
KEHRER: It's a matter of improving their sales ability, as opposed to their marketing ability.
SHAH: Banks must not just look at and analyze who the annuity customer is. They should identify the type of customer who's buying any of the range of investment products we offer.
And then, once they buy the product, how quickly can we get them to buy a second or third product and spread their investments and their investment risk?
So it's not a single-product focus that's critical. It's really the generic area, the overall area of investment, annuities included.
AB: Is there a ratio of internal customer versus external customer buying annuities from banks?
SHAH: I'd say the majority of our annuity customers are existing bank customers. They have some other relationship with the bank - either a checking or deposit relationship.
However, we know that a substantial portion of the funds put toward investment products are, in fact, new funds for the bank. So this is not a one-to-one switch between a bank deposit and an investment product. That's very important.
KEHRER: Nationally, 60% to 70% of the investments that go into an annuity or mutual fund in the bank are really coming out of the bank's own deposits. But about half of that money, in fact, was money that was leaving the bank anyway.
HUGHES: We found in my prior organization (California Federal Bank) that the number tended to fluctuate quite dramatically with differences in the market environment and the economy.
AB: Are investment products, including annuities, significant contributors to Natwest's bottom line?
SHAH: They are a growing contributor to the bank's profitability. And because this is fee-based revenue, they have the potential to be very high return-on-equity products. So they offer an excellent financial performance to the bank.
AB: Should banks manage their own annuities?
TRACY: I think the answer to that question depends upon their capabilities to distribute the products they manage.
Some people could say that the jury's still out on banks' success with their own mutual funds. Banks that have the capability to sell equity funds successfully have fairly extensive branch networks. The same thing is true with annuities. The most important thing is distribution, distribution, distribution.
Having said that, we should point out that no financial intermediary, maybe with the exception of the Wall Street investment bank, has ever been successful over time without controlling and managing assets. It is an asset game in the final analysis.
KEHRER: I think we're going to see a significant shift in banks' interest in the next year or two. We'll see more focus on managing the money in the fixed annuity products. It costs less to manage the fixed annuity than it does the variable product.
There's a lot more scale with fixed annuities because banks sell $3 to $4 of fixed for every $1 of variable they sell.
And the money management that's involved is much more akin to the kind of money management that banks have done traditionally.
HUGHES: Banks can make a considerable amount of money in distribution. But they can really make a difference to their bottom lines by getting involved with asset management.
The money management side of the business allows banks to maximize and expand customer relationships.
Even if they're a smaller bank that can't get into proprietary products or asset management, they can certainly make sure they leverage the amount of customer relationships they have by stepping up distribution. Smaller banks can maximize profitability that way.
AB: Would it help to house these annuity operations in the retail bank so (that) they are more a part of mainstream offerings?
KEHRER: Logically, this business should be part of the retail bank. It involves distributing a retail investment.
But the retail bank in many bank companies doesn't contribute very much in terms of profits. A good investment program - annuities and mutual funds - will return to the bottom line about $10 per retail customer household. That looms pretty large compared to what a retail bank is getting from its retail banking per customer household, which is in the $15 to $20 range. And the investment area requires no capital be set aside.
AB: The Supreme Court's Valic decision, which declared that annuities investment products could be sold by banks, came out three months ago. What kind of impact have you seen on banks' annuity sales?
KEHRER: I don't think it's had much of an impact on bank sales at all. In fact, there's been considerable confusion about Valic, as if the decision opened the door for banks to get into annuities. What it really did was keep the door open.
The real significance of Valic is that it's focused more banks' attention on selling annuities. Many were just sitting on the fence, and all the publicity has got them thinking about annuities some more.
HUGHES: The most immediate short-term benefit of Valic is that it allows some banks in what were very oppressive insurance regulation states to bring their cases forward more aggressively.
SHAH: The importance of Valic is in the continued progress toward deregulation in terms of creating a level playing field. This way, all providers of financial services can build their businesses in a way that's most economical and appropriate for their infrastructure and distribution.
AB: Does the Valic decision, with its tone of deregulation, conflict with any other measures or proposals that are out there?
KEHRER: There's been such an outcry among banks about the National Association of Securities Dealers' proposed rule to regulate bank brokerages.
That's because this proposal is going in the opposite direction of a level playing field. It's requiring additional things on the part of banks that other brokerages aren't required to do.
SHAH: Exactly. The NASD proposal would ban certain practices that are good for customers. For example, it would block bank brokers from looking at the entire customer account as a way of deciding what's appropriate.
AB: What about the Retirement CD, which is basically an annuity with federal deposit insurance? If that gets thoroughly sanctioned or approved, will the annuity business as we know it become obsolete?
TRACY: Well, it certainly would have the effect of diminishing fixed annuity sales, I believe, given that people generally buy annuities for their rates. Now, you would have rates with FDIC insurance.
Whether the rates would be comparable to what a well-run insurance general account would yield remains to be seen because most banks across the country are really not going to be capable of managing the money in a Retirement CD.
KEHRER: I really wonder whether a lot of major banks will flock to this product. I see some interest, but I know of some major banks that have looked at it and said "no." I think that the approach a lot of major banks will take is more joint ventures with established insurance companies.
HUGHES: I see the Retirement CD as really at best a halfway step into tax-deferred retirement planning for your customers, and probably not the best step. I wonder also if banks will be able to provide the same kinds of customer returns that insurance companies can provide.
I think the ability of banks to invest those dollars is probably more restricted by their regulatory bodies than it is in the insurance industry. If they really want to be in that business for their customers' benefit, then it makes much more sense to partner with organizations that have big- time experience, rather than (to) start from scratch.
KEHRER: It may be that the Retirement CD will take banks in the wrong direction. And we'd go back to the days when you've got a rate-driven product that's put on the board for people to come in and buy, and they buy it in isolation from the rest of their financial needs.
The Retirement CD probably won't be sold by the investment sales staff of the bank. And so it'll be like going backward - it won't be very profitable for the bank.
That means it's certainly not strategic from the point of view of the bank's trying to meet the customers' full needs, nor is it so good for the customer.
AB: It sounds as though you're all sold on annuities. But what are the prime reasons banks should stay in the annuity business for the long term?
TRACY: There's two ways you stay in the business long term. You create products that meet your customers' needs. And to the extent that annuities, mutual funds, CDs meet your customers' needs, you have to stay in it long- term. Or else somebody else out there will supply a product to meet that need.
HUGHES: Banks generally state that they're in the business of taking care of their customers' money, providing a safe place for their customers' money. I think they have to be in this business long term because I don't think you can provide for your customers' money and not provide for your customers' money in retirement.