The insurance industry faces the well-documented problem of an aging sales force, but new research shows just how steep of a challenge it faces in recruiting and retaining new generations of agents and advisors.
LIMRA and McKinsey & Co. recently completed the latest chapter of an ongoing joint effort started in 2002 to monitor how various insurance distribution channels are responding to socioeconomic trends. The study finds that, although the outlook is positive for those organizations willing to embrace change, time is running out to address some critical industry issues.
Two separate, but related, underlying trends threaten the long-term growth of the industry: sales capacity and an aging field force. While some channels have made progress in these areas, overall not enough new talent is entering – and staying in – the industry to replace those retiring or leaving.
Today’s affiliated insurance sales force is now less than 150,000, down 40 percent from the 1980s. Recruiting new talent in the industry remains relatively flat and turnover continues to be high, especially in the first few years of an advisor’s career. If this trend continues, it will have a significant impact on the industry’s ability to sustain profitable growth.
This ongoing struggle to attract and retain new talent has created an additional challenge: that of driving up the average age of today’s advisor. This is especially the case in the independent insurance environment. The bulk of the independent field force has more productive years behind them than ahead of them. Compounding the issue is that fewer career advisors (the historical breeding ground for independent distribution) are following the traditional career path, instead choosing the investment space in which to grow their practices. This presents a critical challenge for organizations that rely on independent insurance advisor distribution: Where will the independent advisors of the future – and their business – come from?
The aging of the field force also brings to the forefront, more so than ever, the issue of business continuity. It becomes critical to assist advisors in the twilight of their career with succession planning to provide for an orderly transition to the next generation. It is a concern, then, that sufficient transition plans are not in place for many of these individuals. Fewer than half of the advisors planning to retire within the next three years have a succession plan in place; many have not even thought about it.
Organizations must develop strategies that maintain and build firm value and prevent “productivity retrogression” among senior advisors who may be content with their practice “as is.” To maintain and grow the field force, and ultimately the business, it is critical to give senior advisors a stake in the transition (perhaps in a legacy leadership role) and to help identify successors to ultimately take the reins of practice leader.
Although consolidation, technology and business efficiencies certainly have contributed to the decline in the number of advisors, there is no doubt that advisor count and retention play critical roles in the amount of life insurance business written. When comparing the number of career agents with life policy sales figures, there is a close relationship, especially after 1985. There is a similar relationship with retention. As LIMRA’s 2012 “Drivers of Sales” research demonstrates, “feet on the street” is a confirmed driver of individual life insurance sales.
Therefore, organizations not only must identify new sales talent, but create an environment where new sales professionals can be educated in selling insurance, successfully launch a career and flourish in those critical first few years. Once established, it is likely that a new recruit will embrace the career and become a successful long-term practitioner.
Furthermore, as organizations look to grow their market share or protect their current market share, particularly in the insurance space, it is especially important that they follow through on providing a positive experience. They need to retain promising performers in order to maintain company sales growth and profitability. As organizations compete for sales talent today, they compete not only within their own channel, but also with other financial services channels (including independent distribution networks) and other professional sales positions.
As such, firms must remain vigilant in managing their sales forces. It is a buyer’s market, as the shrinking number of advisors has been in a position where the advisors can call the shots when placing their business. This poses a challenge for companies competing for sales talent. Advisors demand higher payouts, and these payouts have put a squeeze on distribution economics. Higher payouts have motivated affiliated advisors to consider becoming independent. In the wake of the financial crisis, they were content to remain with their firms. While their satisfaction today remains high, there is evidence that satisfaction is eroding – particularly among affiliated advisors – and advisors are considering leaving their firms as the economy gains strength.
Firms must provide a value proposition beyond compensation that aligns with the needs of today’s most desired recruits. When switching firms, these individuals seek professional growth over higher payouts. They are looking for an environment that will best facilitate the growth of their practice, in a culture that best compliments their personal selling styles. This is especially the case among younger advisors in the early stages of their careers.
Advisors joining the industry today value different aspects of a career than did those in the past. No longer is it just about “being your own boss” or building personal wealth. Today, their success formula includes the opportunity for professional growth, to contribute to the growth of the firm, to have a voice in the firm’s strategic direction and to be part of a team versus operating as a solo practitioner. It’s not that compensation isn’t important – this is far from true. But in today’s environment, strong compensation is an expectation. It is in other areas where organizations can differentiate themselves in order to attract and retain the best and brightest of today’s sales force.
While the underlying issues of sales capacity and an aging field force create a background against which today’s industry operates, other developments merit attention as well. Ultimately, these developments present opportunities for organizations that, if leveraged appropriately, can set them apart from the competition. These three realities dictate the current state of distribution and the framework in which today’s financial services organizations now operate:
 The dominance of independent distribution.
 The emergence of the contemporary advisor.
 The development of the integrated sales and service model.
1. Independent Distribution
Independent distribution is the leading sales channel for many core industry products. Today it accounts for more than half of the life insurance written and for two thirds of the annuity business written. In the independent realm, advisors are actively screening carrier partners, while independent distribution networks (insurance marketing organizations and brokerage general agencies, for example) have become central to distribution strategy. These organizations now play a critical role in the competition for sales talent and market share. More independent advisors today prefer to place their business through an intermediary as opposed to placing it directly with a carrier.
With much of the business now written through independent channels and, with industry consolidation creating large mega-distributors and distribution networks, these organizations now have significant leverage among manufacturers. In an effort to differentiate themselves, these independent organizations have gone beyond the traditional mix of services to provide other value-added support such as advanced marketing attorneys and marketing services.
Further, these independent distribution networks will seek new sources of revenue, which likely will lead them to expand into new markets, offer new services or tap into new sales channels. Carriers must decide what value proposition, beyond product, that they will provide to these organizations in order to have a seat at the table. These trends raise the question of how far carriers need to go in providing services to these increasingly vertically integrated marketing organizations. As supported in LIMRA’s 2012 “Turning Point” research, the key to the future success of independent organizations and carriers will be having a clear strategy for differentiation and executing it well.
For those organizations not working through independent distribution networks, but distributing directly to advisors instead, there is increased competition as advisors constantly revisit and reevaluate their carrier relationships and look to “shorten their shelves.” Today, independent advisors place business with just half of the companies to which they are contracted.
Furthermore, almost half have stopped writing business with at least one carrier in the past two years, typically due to noncompetitive product offerings. Other contributing factors include the carrier’s financial instability, a desire to reduce the number of companies to which they are contracted, and service and support issues. As such, advisors constantly evaluate organizations, providing opportunities for manufacturers to develop product, service and delivery models as points of differentiation to attract the business of today’s independent advisors.
2. Today’s Contemporary Advisor
Over time, competitive pressures, market demands and new regulations have created a new profile for today’s advisors. Many have broadened their practices, incorporating investment and advisory solutions. Likewise, investment-oriented advisors now include insurance and advisory services as part of their business. Financial services organizations have responded in kind, as many now offer – to varying degrees – a wide range of insurance, investment and advisory solutions through affiliated and third-party channels.
As such, the competition for clients, especially pre-retirees, will be especially fierce as more advisors across various insurance and investment channels now provide an entire suite of products and services to meet client needs. These advisors and their carriers no longer just compete with other insurance-oriented advisors and carriers, but also with investment-oriented advisors and their firms. These include independent advisory representatives (IARs), bank advisors, and advisors affiliated with full-service and independent broker/dealers.
This emergence of contemporary advisors – who have expanded their practices to include new offerings beyond the traditional product set – has contributed significantly to today’s distribution environment and is becoming more engrained. For today’s career and independent insurance advisors, 30 percent of their gross revenue comes from investment and advisory business, up from 23 percent in 2004. What is very telling is that almost half of insurance-oriented representatives consider their primary area of expertise to be something other than insurance.
Yet, while the contemporary advisor is becoming increasingly prevalent, this does not mean that the traditional advisor is going away. A significant number of advisors in both the insurance and investment space remain successful by focusing on traditional core business. As a result, organizations now must support multiple types of advisors, each with unique needs. No longer is one support model sufficient; companies must identify where they will build competitive advantage that will align the most desired advisors with their strategic priorities.
3. The Integrated Sales and Service Model
The increased need to deliver products and services in an efficient and cost-effective way – coupled with the evolving expectations of today’s consumers – has created today’s integrated sales and service model.
Similar to the consumer products space, financial services organizations are adopting the concept of multichannel marketing (also referred to as “omni-channel retailing”), where consumers are presented with a consistent experience across web, mobile and retail stores. In this approach, technology takes center stage as the organization gains a single view of the customer across its channels, as opposed to several siloed views. It recognizes that today’s customers will leverage multiple outlets as they research and buy products and services.
Well entrenched in the consumer products space, today’s customers have come to expect multichannel marketing and distribution regardless of the product or service they are buying, including financial services. As such, firms and their advisors must be able to deliver this consistent experience across affiliated and third-party channels, as well as across contact center, web and mobile platforms.
Today’s advisors recognize this need. Demands in the technology arena are more specialized; yesterday’s differentiators are today’s table stakes. To meet the needs of today’s clients, advisors are demanding more advanced technology for client acquisition and maintenance. Their interest in smart phones, tablets and social media is high; a significant number would like to incorporate such technology to access information, obtain quotes, gather data, present information and use for training or continuing education. Advisors also say they plan to increase their use of social networking and video conferencing to contact their clients. In fact, research shows that the number of advisors who expect to initiate daily or weekly contact with their clients via these methods is expected to rise significantly over the next three years.
Service and Support
Today’s distribution environment places competitive pressure on organizations to try to “be all things to all people” – forcing them to step back and review the service and support they provide to both traditional and contemporary advisors. However, it would seem that organizations are focused more on quantity than quality. Advisors receive more support services today than they did in 2004, but many of these services are not highly valued. Today’s advisors have raised the bar, requesting more specialized services in point-of-sale support, technology management, development and coaching, remote sales support, marketing services, and new-business processing.
Organizations must align their strategies and provide the services and support that best position them for profitable growth today and in the future, while recognizing the value that certain services provide to an advisor’s practice. The competition for sales talent and the business of today’s advisors is particularly fierce. Financial services organizations operating in both affiliated and third-party (i.e., independent distribution) channels must provide a value proposition beyond compensation that aligns with the needs of their top performers – but that also appeals to advisors with other firms as they look to place their business. This exhibits itself in the following ways:
The need for specialized service and support.
The changing role of field leadership.
The growth of second-line management and product/functional specialists.
The increased demand for wholesalers (especially point-of-sale wholesaling) and the growing importance of sales desks.
Opportunities in Focus
Forces of change among manufacturers, distributors, advisors and consumers have reshaped the distribution landscape. This has driven companies to reevaluate their distribution strategies and create new approaches that leverage the business dynamics in play. In today’s environment, organizations and their advisors can deploy four best practices to gain clarity and position themselves for success: client specialization, retirement planning, knowledge of client life events and team-based business models.
1. Client Specialization
Currently, 43 percent of advisors incorporate client specialization and segmentation into their practice model. And, according to research, those who do so can expect to increase their production by an average of 15 percent. When segmenting their clients, advisors tend to use level of affluence, occupation, age and life events as the primary dimensions.
As advisors themselves become more specialized, the resulting demand for specialized support (particularly both in-person and remote sales support) increases. In addition, support from product specialists, sales desks and wholesalers has become increasingly critical to advisor success. Collaboration and team-based business models are approaches that allow advisors to integrate their resources and serve their clients in a consistent manner.
2. Retirement Planning
Our research further shows that advisors who engage in retirement planning activity can increase production by 5 percent. It is common knowledge that the growing retirement market presents tremendous opportunity to meet the accumulation, protection, payout and wealth transfer needs of today’s consumers. The retirement market includes not only current retirees, but also pre-retirees who are accumulating retirement assets and preparing to enter the payout phase, leveraging those assets to fund their retirement years. Adding to the retirement dynamic are concepts such as “phased” retirement and part-time retirees, those individuals who take on second careers in retirement.
While there is significant opportunity in the retirement space, there also are challenges. Of the estimated 50 million pre-retirees today, many lack understanding of retirement risks, most find it difficult to communicate goals and concerns, and two in three clients who have advisors still fail to create a plan. In addition, many advisors don’t know how to frame the retirement income discussion. Further, according to LIMRA’s “Advisor Perspectives on Retirement Planning” study, half of retired clients will switch to a new advisor in retirement.
It is clear that advisors who employ retirement planning as part of their business models have higher net incomes than those who do not. In addition, advisors find that formal written plans can bring benefits such as fostering client relationships and directing discussions toward product solutions. Once a plan is established, it follows that the advisor would provide the means to put the plan into action. Advisors believe that these plans can help them build assets under management through rollovers and referrals. Recent LIMRA research shows that about seven in 10 of them use software packages to generate plans, saving time while enhancing the professionalism of the finished product.
3. Knowledge of Client Life Events
According to research, advisors can increase production by almost 4 percent through building awareness of their clients’ life events. Developing knowledge of events such as retirement, marriage/divorce, a receipt of a large sum of money, serious health issues, the birth of a child and unemployment can help advisors better align product and services solutions to meet their clients’ needs. However, this approach means engaging clients at a new level that requires more time – putting pressure on advisors’ ability to manage a large number of clients effectively.
LIMRA research of life insurance shoppers (reported in the “Buyer-Nonbuyer” study) supports this approach. More than two thirds of life insurance shoppers ultimately purchased a policy when experiencing certain life events or triggers, including:
Changed marital status.
Purchased a home.
Started/expanded a business.
Became a parent.
Received substantial assets.
As such, advisors who are proactive in identifying current and new prospects experiencing life events can position themselves nicely for current and future sales opportunities.
4. Team-Based Business Models
Our results also show that regularly partnering with other advisors can increase production by 15 percent. The growth of team-based business models not only represents a change in philosophy, but also a change in culture that has implications for recruiting, talent management, client service and practice support. Until now, the financial services industry has been built around a solo distribution model, where advisors build their own practice and their organization provides a compensation and support model that drives success.
Team-based models can alleviate pressures on advisor practices and help them succeed, and advisors in team-based practices cite several reasons for employing them:
They wanted to grow the practice and increase productivity.
It evolved from informal partnering/joint work.
They sought ways to better serve clients.
It was necessitated by the growing complexity of the business.
Team-based models fit nicely into today’s business environment and address challenges around sales capacity and business transition. Advisors entering the business today seek a team approach in their sales model. And, according to our study, advisors placed in team-based business models are more likely to succeed than those in traditional solo practices.
Specific advantages to team-based business models include: allowing for an orderly business transition to the next generation of advisors, providing a work culture of success where new advisors are not overwhelmed and can rely on their team members for support, addressing complex client needs through the various specializations of team members, and allowing the practice to engage and manage a large number of clients effectively.
A New Distribution Landscape
Challenges in distribution economics, advisor business models and consumer preferences have created an environment where the economics of distribution are under pressure. This is driven by the increasing cost of supporting and serving a limited number of advisors, as well as managing the demands of multichannel sales and distribution. As such, there is a new distribution landscape, one that financial services organizations have the opportunity to leverage for their benefit. While the clock is ticking on addressing issues around sales capacity and an aging field force, nimble organizations have their eye on the clock and are taking steps to address these challenges and position themselves for profitable growth in the future.
Patrick T. Leary, MBA, LLIF, is assistant vice president, distribution research, for LIMRA. In this capacity, he oversees LIMRA’s distribution research department. This area studies a wide range of distribution channels, including affiliated and independent insurance agents, financial institutions, worksite, broker/dealers and direct response. Patrick can be reached at [email protected].