Challenging status quo bias in annuity sales
Status quo bias affects how decisions are made, and this predictable tendency is having a negative influence on both the annuity consumer and the annuity industry.
We all know that people prefer that things change as little as possible, even though they know that changing could be a positive in their lives. Most of us feel very comfortable with our current state of affairs. That personal baseline is kind of used as a comfort zone to which any change is usually mistaken or perceived as a negative.
When it comes to financial products, annuities are the poster child for status quo bias. The constant media attacks along with unwavering apathy and lack of leadership from the annuity industry has improperly framed these transfer of risk strategies as the bad tattoo no one wants to have.
In my opinion, it’s important to look at these current annuity status quo biases from both the consumer and industry standpoints, and how they can and should be changed.
Consumer status quo bias
Annuities are the curse word of the financial industry, and a primary reason for their negative connotation from a consumer’s standpoint is due to an overall product bias that usually isn’t based in fact.
The vast majority of people I run into think that all annuities function like a Single Premium Immediate Annuity (aka: income annuity), and that if you die early the evil insurance company keeps the money. What they are describing is a “Life Only” policy structure, and only one of 10-plus ways to set up that type of annuity. With that fact being stated, there are over 13 different types of annuities with all of them unique in structure and the specific solutions that they solve for.
There are variable annuities, indexed annuities, fixed-rate annuities, charitable annuities, long-term care annuities, longevity annuities, immediate annuities, contingent deferred annuities, secondary market annuities, etc. Get the picture?
In addition, there are attached benefit “riders” that can be added to some policies as well, so it’s an understatement to say that the annuity universe is vast. Saying that “all annuities are bad” is like saying “all restaurants are bad.” Yes, there are some horrible annuity policies out there just like there are some restaurants whose food is inedible. However, there are very good annuity policies available that have fantastic contractual guarantees.
This annuity consumer status quo can be changed when annuities are understood and used for what they were designed to do, which is transfer risk. Annuities aren’t growth products in my opinion, and should be placed in a portfolio as a non-correlated asset and positioned right beside your pension and Social Security payments.
Annuities aren’t “one size fits all” even though too many are sold that way. These strategies should be customized for each specific situation, and can solve for some (not all) financial goals. Annuity consumer status quo should change to the realization that annuities are contractual guaranteed realities that can compliment your portfolio of placed properly and fully understood.
Industry status quo bias
The biggest problem that the annuity industry has concerns the ongoing issues of how annuities are improperly sold and promoted. Annuity sales techniques too often fall under the category of hype and sizzle selling, which largely goes unregulated in the wild, wild west of annuity oversight that is supposed to happen at the state level.
Carriers seem to turn a blind eye to how their products are presented and advertised (especially on the web) in order not to interrupt the large ongoing money flow of baby boomer premium. Change is hard in the annuity industry, and the prime example of this is the antiquated three step distribution system still in place and somehow unchanged for decades. If you miss the inefficient travel agency distribution model that no longer exists, then the annuity sales process can bring you back to the disco era of leisure suit business models. Most annuity products flow from the annuity carrier to distributor to agent and then finally to the consumer. This industry bias to the distribution status quo cannot be defended in any way.
The other glaring problem the annuity industry has, in my opinion, is their misplaced fascination with stock market growth as a product strategy. It’s like an offensive lineman wanting to be a ballet dancer from a reality standpoint. Even though the vast majority of annuities bought today are deferred variable or indexed annuities that attached themselves to market returns, the selling of the growth dream with unreasonable return expectations is a primary reason that most people have a negative perception of annuities.
Annuities at the end of the day can never compete with real market returns. Indexed annuities were actually designed to compete with CD returns, and variable annuities combine high annual fees with limited fund choices which severely limits any growth potential. Even the best no-load variable annuities have limited investment options, so I am dumbfounded how the industry growth argument continues. There’s only one reason, and that reason is that people want to buy the dream. They want to have their cake and eat it too, and there will always be annuity “bakers” (i.e. agents) out there to serve it to them.
Annuities can contractually solve for four specific things; principal protection, income for life, legacy, and long-term care. The easy to remember acronym is P.I.L.L. Notice there is no “G” for stock market growth!
Status quo no more
The unstoppable demographic tidal wave of baby boomers retiring and their need for contractual guarantees and benefits will eventually change the current annuity status quo bias that’s been in place for decades.
Most people will always need more income, and they will want that income guaranteed for as long as they live. Annuities, structured properly, are the only product category that can achieve that goal. Hopefully, that will be the new status quo “bias” that both consumers and the annuity industry can embrace together.
Originally published by MarketWatch.com 11.26.2013 – http://www.marketwatch.com/story/challenging-status-quo-bias-in-annuity-sales-2013-11-26