Advisor Today > > August 2001

Cover Story: Enhancing Sales with Annuity Software

By Robert O'Connor

Technology is allowing advisors to effectively illustrate a wide range of products, show how money works and model future rates of return.

As the annuity market expands over the next few years, software will become an increasingly important sales tool for both carriers and advisors. Lamar Stewart, an account executive at Annuity Brokerage Services, in Charlotte, N.C., describes software as critical to his firm's annuity business. It makes it easy for the advisor to calculate future income. "You can't really close a sale without having software," he stresses.

Stewart's ability to run illustrations helps him in dealing with other financial services specialists. For instance, he has received calls from CPAs and a CFP looking for help in providing this service to their clients. He was able to take their numbers and run them through his system. While a number of software programs will calculate present value and future values of sums of money, "it is a little different when you're talking about annuities, and specifically single-premium annuities," he notes.

He is pleased with the annuity software systems available, describing them as "excellent" and easily adapted to changes in the tax laws.

The company is using a customized system that is compatible with the company's computer. The program was developed by a local firm for about $8,000. "All I have to do is sit down and plug in numbers and it returns the values to me relatively quickly," he emphasizes.

The customized software does not link up with individual carriers, however. The integration of financial advisors' programs with those of the carriers is probably a couple of years away.

Annuity-illustration packages

Clients expect advisors to have up-to-date technology and many look to their advisors for comparisons based on information about different companies gleaned from friends or co-workers. Howard D. Stern, FSA, senior vice president of marketing and product development for SunGard Insurance Systems in Miami, believes that annuity-illustration packages will play a major role in guiding the financial decisions of Baby Boomers as they approach retirement. Many people have accumulated significant capital in various investment vehicles. "And it's coming time to decide what to do with this money," he says.

The issue, he adds, is particularly relevant for insurance companies, which are concerned that large sums of money will be shifted from flexible annuity contracts.

In response, he says, the insurers are pushing the idea of annuitization -- basically taking your capital and buying an annuity with the insurance company that will essentially guarantee that you "don't outlive your assets." That seems to be the hot concept today.

Many illustration systems show the accumulation of funds inside annuities. Less common, Stern points out, are packages that depict the effects on the annuitization process of a decision by the contract holder to purchase a life annuity or a similar option.

Annuity illustration from SunGard

According to Stern, SunGard has developed a comprehensive annuity-illustration system that can accommodate a variety of strategies and a wide range of annuity products -- fixed, variable, qualified, nonqualified and equity-indexed. "Our goal," he says, "is to show dynamically how the money is going to be paid out, over what period and under a variety of options, including tax ramifications."

The SunGard system contains comparisons of the benefits of annuitizing versus making systematic withdrawals. It also covers investment decisions such as investing in annuities versus putting money in a mutual fund outside the annuity wrapper. The overriding aim is to give the client the best possible assessment of the various choices available. Rather than merely offering clients a snapshot of what they are likely to have at retirement, Stern says, the SunGard system has been designed to show the income level the investor can expect over his life span.

Sales presentation from The Annuity People

The Annuity People, Inc., of Tigard, Ore., provides software to advisors in the 403(b) and 401(k) markets. The aim of the systems, says Mike Forrer, president of The Annuity People, is to illustrate concepts of how money works and how it will accumulate. It is vital that the advisor be able to demonstrate these principles to a client. Although Forrer is a financial advisor and still active in the area, 98 percent of his time "is in the software business -- consulting, answering questions and conducting training seminars about our software." He got the idea for his new career course from the technology advances of the mid-1980s.

The Annuity People's software allows the financial advisor to recreate various contribution scenarios in the client's presence. It also performs tax analysis, even adjusting itself in advance of tax refunds. "It is sales-presentation software," Forrer says. "It is meant to be used on a laptop computer, with the individual."

The system has a module that can project the benefits of state teacher retirement systems, giving the client clear guidance as to how much he should be saving for retirement. A transfer-analysis module can help steer the client to a better investment vehicle by factoring in the penalty fee against improved performance. For instance, a client who is asked to pay a 4 percent penalty on the transfer of an investment worth $100,000 might balk at the idea until it is explained that he can earn the money back in a relatively short time. There is an added incentive to make the change if retirement is not an immediate prospect.

The Annuity People sells its software throughout the U.S. via a CD-ROM. The firm provides regular updates of regulations in each of the 50 states. It gives prospective customers a free look at its product by allowing them to download demonstration software from the Internet and use it for 30 days.

The company is now developing pension-maximization modules. It is also creating risk- tolerance questionnaires for various insurers and putting them on the computer to guide clients in their asset-allocation choices and help advisors avoid potential legal pitfalls. Forrer points out that it is illegal for someone who is not a registered investment advisor to recommend a specific fund to a client. Such an advisor, Forrer says, "is not supposed to tell a client what to use. You can say, 'These are their benefits.' But he's got to make the selection." If anything, Forrer says, the regulations governing these kinds of activities are likely to become stricter rather than more lenient. For instance, he discerns growing NASD pressure against allowing an advisor to receive a second payment after moving a client from a poorly performing mutual fund to another.

He believes the changes in the tax laws, particularly the provision allowing for pension portability, are likely to give a major boost to the annuities market. After January 1, 2002, anyone who is in a 457 plan and terminates employment will be able to roll that money into an IRA. Huge sums of money are awaiting transfers into IRAs. "People will need software to illustrate it. Our challenge is letting people know about it," he says.

There is intense interest in the tax law changes, according to Forrer. He believes that an explanatory article on the effects of the legislation was largely responsible for 4,000 hits on his firm's website in less than a week.

Financexpert's planning system

Larry Fowler, president of financexpert, in Bellevue, Wash., which is developing an Internet-based, financial-planning platform, is optimistic about the role of software in the annuities market. His company's product is being designed to deal with what the firm has identified as a gap in the market: the tendency of advisors to play it safe and base their projections on relatively low market returns. Advisors tend to do this to compensate for the volatility of the stock market. "Software today does not do an adequate job of modeling that variable rate of return," he says.

financexpert is affiliated with Personal Finance Group, an independent investment-advisory firm, also based in Bellevue, which has been using these systems in-house for a number of years. The firm plans to begin marketing the packages to advisors by the end of the year. The system will use an Application Service Provider (ASP) model, under which all the calculations will be on the servers in a secure Internet environment. The financial advisor will operate through a browser. Fowler believes that it is possible to create reliable Web-based systems that will charge advisors only for what they use.

To advisors who insist on housing systems on their own computers, Fowler points to the rapid rate of change likely to result from amendments to tax laws, updates in regulations and judicial decisions. In such a shifting climate, he argues, it would not be economically feasible to build and maintain desktop-bound systems. He says that the financexpert system will be protected by a strict privacy policy and by a highly secure architecture that bars access to the data to everyone but the financial advisor.

The financexpert product is being designed to give the advisor two options on modeling future returns. One will be to delve into a database of historical returns for different asset classes and then seek to draw lessons as to future performance. The other would apply random periods from the past to the future.

One problem with such methods, Fowler says, is that the use of a large number of asset classes can effectively limit the relevant historical time frame. But by limiting the extent of the search to areas like international equities or a range of domestic equities and bonds, the researcher can find solid data going back to the early 1950s. "That gives you almost half a century worth of performance data to work from," he says.

A lesson to be learned from this kind of focused study is that the relationships among asset classes during the same phases of the business cycle do not change a lot. Another is that situations tend to be repeated. It is possible that the economic turmoil of the 1970s could occur again. "We could again have high interest rates, high inflation and underperformance in the stock market. We could also have other periods when inflation is low and stock returns are low. We should use the data from those historical periods and apply it to the future," he observes.

Software for independent advisors and carriers

There is inevitable conflict between the priorities of independent advisors and carriers. Independent advisors are likely to favor generic systems that allow them to roam easily across the entire market as they seek the best deals for their clients. Carriers, naturally, prefer to operate systems that will deliver business to them and not to their competitors. This gap between the two groups will not be easily bridged.

Challenges of annuity software

Despite the many advantages of annuity software, Dan Vargus, president and owner of Vargus & Associates Insurance in Tacoma, Wash., sees the software as an "ancillary" tool in annuity sales. Not only does the software not provide the entire answer, he regards most as incomplete. "I think a lot of it is skewed within their projections," he notes. Vargus, who has Series 6 and 63 securities licenses, also criticizes annuities-oriented software for failing to offer useful comparisons with other investments. He believes that there is too much selling simply on the basis of interest-rate performance. A better approach, he argues, would be to look at the inherent strengths of the product. He also feels that the software's illustration function offers less than a full explanation of annuities. "You see the performance a lot of times, but you do not really get a clear understanding of what the annuity is."

Instead, he would place more emphasis on presenting historical performance and using testimonials to increase the client's understanding of the product.

As an independent advisor, he is also critical of the carriers' systems. A system that an independent advisor would have in his office would not link to a carrier's system. He believes that carriers are more interested in maximizing their premiums than in creating generic systems that would give clear guidance in areas like interest rates, service fees and surrender penalties. The goal should be to create a system that allows the agent to compare brands "without actually selling a company." Such a task would not be difficult for the user. "Annuities are not complex. Pretty much 99 percent are similar with respect to their features," he emphasizes.

There appears to be room for greater efforts by the financial-services industry to educate people about planning for their future. In April 2001, two researchers for TIAA-CREF, the private pension system, found that about half of middle-class U.S. households in which the breadwinners were currently employed were not doing enough to save for their old age. The researchers, Mark Warshawsky, director of strategic research, and John Ameriks, research economist, presented their findings in a paper that was delivered to the Pension Research Council at the Wharton School of Business in Philadelphia.

Technology's role in marketing

Technology can also help in marketing annuity software. Robb Edwards, director of advertising and promotion at Creative Marketing International Corporation (CMIC), a national annuity-marketing organization in Overland Park, Kan., stresses technology's importance to the overall marketing efforts that support the annuities sector. CMIC recruits agents from around the U.S. to work with the 15-plus companies in its portfolio.

Several of these carriers have produced elaborate CD-ROM presentations that combine tools for educating both agents and clients. For instance, the client-oriented material is likely to include mini-seminars on how fixed or indexed annuities work. One of CMIC's most recent projects was a program that contains several annuity presentations available to agents from the CMIC website. The program is designed to help agents make presentations to their clients.

Edwards predicts dramatic developments in terms of specific presentations. One area involves illustrating the required minimum-distribution rules that were issued this year on fixed annuities. Another is clarifying the split-annuity concept, which allows clients to conserve their principal while receiving a monthly income. "These are things that can be sometimes difficult for an agent to explain," Edwards points out. "But a picture is worth a thousand words. And when you walk through a 10- to 15-slide presentation with outstanding production values, it just helps the agent make the case that much stronger.

"It is important for people to understand what they are buying," Edwards stressed. "If they don't understand, they might walk away or find a reason not to make the purchase. Agents who are not even computer literate have embraced the technology and have increased their sales."

Edwards sees opportunities for organizations like CMIC to promote education within the industry. A quarter of a century ago, the major East Coast mutuals put their agents through rigorous training programs in life insurance and auxiliary markets. But industry structures have undergone a great deal of change, especially with the high number of demutualizations in recent years. "As we've evolved into more of a brokerage community and more of an independent distribution system. I think you are finding that that responsibility is going to fall to firms such as ours," he notes.

High hopes for the future

Predictions of dramatic growth of the annuities market appear to be well founded. The natural process of aging is forcing millions of Americans to think more seriously about financial matters. Changes in legislation are likely to increase the need for reliable advice. And the financial-services industry is gearing up to meet the demand. Products will continue to develop in both range and complexity, and information technology will have to keep pace. Success in this market will require the highest-quality software.

Robert O'Connor is a London-based freelance writer and a frequent contributor to Advisor Today.

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