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At one time or another, we have all probably heard that "annuities are sold not bought." The reason commonly offered is that consumers do not fully understand annuities and won't buy what they don't understand. The AARP, for example, recently directed a major annuity marketing campaign at its membership. But sales representatives set to handle responses had relatively few callers. Why? Patrick Reinkemeyer, a variable annuity specialist for Morningstar, Inc., a fund-data company, explained it this way in an article in The Wall Street Journal (1/18/99), "Typically, the AARP member is very active, very involved. Even given that great intellectual curiosity, they're still struggling to figure out how a variable annuity works and how it fits into their portfolio." Larry Sullivan and Robert T. Cassato, treating the topic in NAVA Outlook ("Dispelling Variable Annuity Myths," July/August 1998), cited the rise in attention being given to annuities, saying, "Unfortunately, much of this media attention has been based on misinformation and misperception…." The authors then went on to challenge the industry with a call to action. "The key to changing these misperceptions is to educate the public at large about the underlying benefits of our product. After all, most people agree that an educated client is the best client." Prudential Accepts the Challenge Against this backdrop, Prudential Investments developed a plan for demystifying annuities. We planned to get to the bottom of the supposition that people do not buy annuities because they do not fully understand them. Our plan was to delve into why some people buy annuities while others with similar backgrounds do not. Only then could we build a meaningful education platform based on our findings of what consumers know and don't know, and what they want to know and need to know. Finally, we could tailor the media through which we could best reach the various groups of consumers. Our Study Method and Participants To determine consumers' level of understanding of and attitudes toward investing in general and annuities in particular, we conducted focus group sessions and a quantitative survey. The subjects in the focus groups were not a random sampling of "typical" consumers, but a set of people who all had the characteristics of "desirable annuity buyers." Some of them owned annuities and some did not, but they all shared similar demographics, such as income and age, and showed a predisposition to financial planning and having professional sources of financial information. We catalogued the responses and used them in developing a questionnaire that we then administered to more than 3,000 consumers nationwide. This article summarizes the findings of both the focus group sessions and the quantitative survey, and discusses education implications. What "Annuity" Means to Consumers When asked to define the word "annuity," some focus group participants had very little understanding, while others understood the basic concept of paying an amount of money to receive monthly payments in the future. Annuity owners were more knowledgeable of the concept than non-owners. Yet when asked to talk specifics, the owners spoke mostly about the stream of income, as the non-owners did. One area of confusion surfaced in regard to returns. Two out of three participants said annuities offer fixed returns only, not knowing that variable returns are also available. As one would expect, annuity owners and non-owners looked at these products differently. A significantly smaller percentage of annuity owners than non-owners saw the product for older people, and a significantly larger percentage of owners appreciated the investment aspects of the product. Younger (age 45-54) and older (age 55-64) people differed in their evaluation of annuities. Fewer than half of the younger people saw annuities as a good financial vehicle, compared to about three-quarters of older consumers who saw the product as a good financial vehicle. Education Implications: Keeping things simple, we should work at helping consumers understand exactly what an annuity is and does. We want them to see annuities as a good financial tool, for the younger as well as the older person, and as more than a source of fixed returns. To have an impact, the advisor must begin with the consumer's level of understanding, addressing the prospect's concerns up front. The fact that annuity owners show a more positive regard for the product seems to validate the theory that educating non-owners could increase the probability of their becoming owners. Our research shows that the problem is not in the product, but in the way it is presented. Why Some Buy and Others Don't Generally, annuity owners in the focus groups had positive feelings about their decision to purchase. One influential factor may be that many owned variable products that have benefited from recent stock market performance. Non-owners were fairly explicit about why they have not bought an annuity:
For the most part, those who do not own annuities were confused about the product. Education implications: The industry must do a better job of explaining the products and tying those explanations to the needs of the prospects. High on the list of elements to be explained more effectively are:
In our effort to educate consumers, we would do well to take a two-pronged approach: One, be sure to give accurate information to dispel any myths. Two, present the information in a way that will resonate with consumers, and help the sales rep and marketing staff interact with the consumer on his or her own terms. Investment Traits of Annuity Owners and Non-Owners The 3,000 completed questionnaires uncovered compelling differences in attitudes toward investing among consumers who own annuities and those who do not. These differences can be important in any effort to reach a potential prospect. For instance:
There are some differences among the owners. Younger annuity owners in the quantitative study, for instance, cite "retirement planning" and the need to generate income for beneficiaries as the most important reasons for purchasing their annuities. Older owners, on the other hand, are more likely to focus on tax deferral and protection of their principal, in addition to the guaranteed lifetime income these products offer. Education Implications: To educate consumers about annuities, we need to focus first on people to whom we are speaking and sending materials. For instance, with younger prospects we may need to stress the retirement aspect; with older and upper income people, focus as well on the tax deferral factor. In individual one-on-one situations, we should not even make assumptions about consumers' concerns, but find out from the prospects their concerns and investment goals. Annuity Concepts with Higher Average Scores (How consumers rank annuity features in terms of understanding, believability and persuasiveness)
How to Persuade The ultimate goal in educating the consumer, of course, is to help the consumer make better investment decisions. Three yardsticks in any sale seem to be "understanding, believability and persuasiveness." To be persuaded to buy, consumers must first believe the offer. In order to believe it, they must understand it. In the focus groups, we asked participants to rate a number of the annuity's features on the basis of these three yardsticks. The results showed that two features-tax deferral and income for life-rate high on all three yardsticks. (See table.) Education Implications: To the extent that marketing materials and presentations can improve the consumer's level of understanding, they may also raise the level of persuasiveness. Thus, attention to better definitions, improved readability and attractive design of printed materials may have significant, measurable value. In addition, we must realize that many non-financial individuals do not understand some terms that are part of the everyday vernacular within the industry. We must avoid jargon and define our terms. The Communication Vehicles Consumers Prefer Ultimately, the program we design to educate consumers about annuities must involve communication vehicles and approaches that consumers will readily accept. We need methods and materials from which consumers can draw information in a way that enables them to retain what they learn. The primary sources of information the focus group participants tend to use are written materials and/or personal contact, such as with a financial planner. Personal contact may be face-to-face or over the phone. Women seem to differ from men in that they prefer listening rather than reading. They benefit from listening to radio and TC talk shows, financial planners or other personal contacts, and stock clubs. This preference is true even of women who use written materials as a primary source of information. When choosing between "just the facts" materials and a more thorough document, consumers differed in their preferences. In most cases, those participants who selected the "just the facts" approach see that as the initial piece to whet the appetite, with an option to get additional information or details if desired. More than a small percentage of respondents use the Internet for research, but not for purchases. Education Implications: In all realms of education, the more complicated and foreign the concept, the more deliberate the teachings must be. In addition, all good teaching begins not with the content, but with the learners. Who are they? What do they know? What do they need to know? To what approaches will they be most receptive? An Opportunity for the Industry In order to raise consumer awareness of the significant benefits of annuities, as an industry we need to find specific answers to these questions for each individual or group of prospects. These answers can help us target our messages by using language consumers can understand, and improve the effectiveness of our sales materials and training efforts. If we can accomplish this, we'll spend our marketing and training dollars more effectively, we'll move away from the "sold not bought" syndrome and we will bring a useful and flexible financial product to the broader audience it deserves. Contributed by Joel R. Kesner, senior vice president and director of annuities, and Christine Donovan, director of customer market research, Prudential Investments. |