In early 2008, Fidelity Investments announced that it was expanding its services to enable clients to open variable annuities online. For customers, the offering cuts out the proverbial middleman, eliminating the need to buy an annuity through an insurance agent. Since then, other companies have discussed joining the online annuity movement, and still others have balked at the suggestion.
Similar to the discussions that took place when health insurance and term life sales became available on the Web, this newest development has fueled the debate around whether annuities are appropriate for online sales and what effects this will have on traditional agents.
Dr. Moshe Milevsky, executive director of the Individual Finance and Insurance Decisions Centre (IFID) Centre in Toronto, Ontario, Canada, said that the wide array of available annuities makes it difficult to arrive at a blanket conclusion as to whether online sales are a positive or negative development.
"For the most part, the annuities that would be sold online would be garden-variety annuities that would help Americans, or, for that matter, anyone who wants an income, to buy this online," he said. "They would get better pricing, they would cut out the intermediary, and it makes perfect sense to me."
For the industry, he added, this simply serves as another distribution channel that will only add to the list of agents, investment advisors, and financial planners rather than displacing them.
It's unclear, however, if the marketplace -- despite the already prevalent use of the Internet -- is ready to conduct such significant transactions over the Web. "I don't think -- at least today -- that someone is willing to buy a $25,000 or $50,000 product online, send a check, or do an EFT and then get a pre-packaged annuity policy in the mail," said Ron Lane, president of Fairlane Financial Corp. in Fort Lauderdale, FL. "It's like buying a car over the phone: You want to drive it around first."
Barry Goldwater, principal at The Financial Resource Group in Newton, MA, remains skeptical that consumers -- especially at the upper-income level -- will warm up to purchasing annuities online. "I do not think that you are going to be getting the high-end people that brokers like myself deal with going online and giving up their money for an annuity product that is misunderstood even when agents and brokers come to the house or the office and start talking about it," he said. "People will always misunderstand what annuities are unless they have the ability to ask questions."
Ideally, annuities are just one part of an individual's overall financial plan, which may also constitute tax, retirement, and estate planning, notes Doug Wolff, vice president of business development at Security Benefit in Topeka, KS. If clients were to exclusively purchase annuities online, he said, it would effectively take them out of the advisor's hands and extract them from the planning process. This would seriously impact the overall plan, rendering it much less effective than it would have been had the advisor been able to weave the annuity into the client's portfolio, he added.
Should annuities become a strong online presence, however, fixed annuities would be the way to go, experts say. While variable annuities tend to be the most complex, fixed are more straightforward, and therefore better suited for online sales, Wolff conceded.
"The main thing clients want with a fixed annuity is the highest credited rate possible," he said. Because they're a bit less complex and a simpler vehicle, he continued, there may be more of an upside percentage of fixed annuities that can be sold over the Internet.
One of the dangers associated with the online sale of annuities is that their complexity could lead to some significant issues -- especially if the buyer didn't understand the terms of the contract. Online sales must, therefore, be set up so that their terms are easily understood.
Wolff noted that this requires the industry to employ electronic tools that determine suitability.
"They are already out there, and none of them are perfect," he said. "Oftentimes, it requires sitting down with that licensed individual who has training and understands risk tolerance, the risk of vehicles, and how they fit into somebody's financial plan."
The biggest risk at an industry level is the potential for someone to purchase something they shouldn't have, locking them into surrender charges and penalties they didn't understand.
According to Wolff, the online sale of annuities does provide some opportunities for traditional agents -- especially those who are adept at applying technology to the sales process. "It could be a way for them to prospect for new clients," he said.
"They may be able to attract prospects from halfway across the country or halfway around the world. That's one way I see a registered rep or agent evolving their business model through the sale of online products. They have a much bigger potential marketplace for prospecting."
One area where the Internet has already made a positive impact is the distribution of information on annuities in the marketplace. "Even if it isn't the final medium for the end sale to the client, I do think it has offered a lot more tool sets to help reps and clients make an informed decision as to which carrier's annuity they might use, or what type of annuity they might use," Wolff said.
Milevsky believes that when the marketplace boasts more information about a product, all players involved stand to benefit. The online sale of more straightforward annuities could, in fact, position agents, advisors, and financial planners to advertise the value that they bring in setting up a more complex plan.
As online services are incorporated into an increasing number of financial transactions, many believe that the online sale of at least some types of annuities is an inevitable development that has the potential to go mainstream. Whether this is a threat to agents depends on how they have modeled their businesses -- and if their clients feel comfortable with a more self-serve approach.
"I see the public not as well served by not being able to speak to a human who is doing more than just explaining the product, but also integrating the product into other aspects of their financial life," Goldwater said. "I don't think you can do that with an annuity online."
He does concede, however, that Charles Schwab made a successful business of selling stocks online. "Did that put stockbrokers out of business? It put the low-end stockbrokers out of business, but the people who are relationship builders are not going to be affected by this kind of online activity."
Carolyn Heinze (carolynheinze.blogspot.com) is a freelance writer and frequent contributor to the Agent's Sales Journal. She can be reached at carolynheinze@free.fr.
