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Insurers Elbow into Mutual Funds

Insurance companies are building their mutual fund sales, hoping to take advantage of the increasing interest in these investment vehicles and the pending explosion in retirement savings, industry experts say. Insurance firms are drawing on the strength of their established variable annuity distribution systems to compete with full-service investment houses.

In the last five years, insurance companies' growth in mutual fund sales has increased an average of 84 percent each year, according to DeRemer & Associates, a mutual fund consulting firm in Wrentham, Mass. To date, insurance agents have sold a significant amount of mutual funds. By 1998, career insurance agents had sold $63 billion worth of mutual fund assets under management, according to DeRemer.

But, looked at from another perspective, $63 billion was scarcely more than one percent of the mutual fund industry's $5 trillion in assets last year, according to DeRemer. And while insurance companies' mutual fund sales have grown 84 percent a year over the last five years, mutual fund asset growth has far outpaced insurance companies' contributions, surging 148 percent a year over the same time period, DeRemer said.

Nevertheless, insurance companies are gaining ground.

New England Securities in Boston, a subsidiary of Metropolitan Life Insurance Co., has had healthy sales of mutual funds in the past six years, said Tom McConnell, president of New England Securities. His firm's mutual fund business has grown from 16 percent of total revenue in 1992, to 25 percent of total revenue, representing $1.6 billion in 1998.

"It is a significant number," McConnell said. "It is a material part of our 2,800 agents' compensation, representing $18 million in sales commissions."

In addition to the dollars generated, selling mutual fund, variable annuity and other investment vehicles has become a new business imperative driven by customers' needs, said McConnell.

"The form of the relationship with the investor is changing," McConnell said. "We are moving from a transaction type business to an asset advisory business with lower fees. The business model is changing rather rapidly. And while it is not changing in the form we had expected or preferred, with lower fees, it is changing, and we are refocused."

New England Securities' advisory business grew 80 percent in 1998, and further growth in this kind of one-on-one, personalized approach is anticipated, McConnell said.

Investing and investment advice will become even more important to his customers, as 77 million baby boomers, like himself, near retirement, he said.

"We are standing on the verge of an explosion, and mutual funds and other investment product forms lend themselves well to the needs of these 77 million," he said. "I know what's important to me. I am saving for retirement, and I want to work with someone on an advisory basis because there are just south of 12,000 funds out there. I don't mind paying a fee for this kind of advice," he said.

To meet these needs, New England Securities puts its agents through a rigorous training program based on six integrated modules covering mutual funds, variable annuities, disability insurance, life insurance, investment options and risk.

"You want the agent to go in with a whole host of arrows in their quiver so they can focus on what the customer needs," McConnell said. The goal is to sell using a "needs-based approach," he said.

New England also supports its salespeople with investment specialists.

Lincoln National Corp. of Fort Wayne, Ind., has entered the mutual fund business for many of the same reasons as Met Life. Lincoln is a more recent entry, having acquired Delaware Investments, a Philadelphia-based institutional money management firm in 1995.

"Lincoln, like many other insurance companies, has recognized the [financial services] industry is changing to the point where financial advisors have to provide customers with a range of products throughout their life cycles, and throughout the products' life cycles," said Karina Istvan, vice president of strategic planning for Delaware.

Today, Lincoln's mutual fund and variable annuity businesses constitute 44 percent of the firm's revenues. Of Lincoln National Investment's $58.8 billion of revenues in 1998, mutual funds and annuities contributed $26 billion.

For other insurance companies, moving into mutual funds has come about as a natural extension of their distribution channels.

"There are many insurers that have strong relationships and existing distribution channels for their variable annuities, like Hartford Life Insurance and Skandia," said Dennis Gallant, a consultant with Cerulli Associates in Boston. "They have a great opportunity to market mutual funds through those channels because there is a lot of leverage that can bring."

In addition, career insurance agents who have investment products to sell along with their insurance products find that their insurance sales increase 20 percent, said Russ Prince, a consultant with Prince & Associates, a mutual fund consulting firm in Shelton, Conn.

In a proprietary study of 500 agents generating $100,000 or more a year in first-year life commissions, Prince learned that 57 percent of insurance agents are "extremely interested" in being in the investment advisory business, Prince said.

American Skandia Life Insurance of Ansonia, Conn., entered the mutual fund business for precisely these reasons.