Online Lessons from the Brokerage Industry: Techniques Life Insurers Can Use to Support Retirees’ Distribution Needs

There is currently a fierce battle underway between full-service brokerages, self-directed brokerages and life insurance companies to win the business (and assets) of recent and soon-to-be retirees. While life insurance companies that branched off into mutual funds and other financial products in the 90s are well-positioned to leverage their reputation for protection and distribution products, few have yet run with the ball in terms of marketing their capabilities in online marketing or television and radio advertising. Meanwhile, firms like Fidelity are appealing to these customers directly with new rounds of distribution-centric commercials.

Keeping with the theme of distribution, it is interesting to take a closer look at how life insurance companies stack up against the brokerage industry in terms of online functionality supporting the distribution of retirement funds and income. In looking to roll over their significant retirement savings, one of the most important factors in a client's decision -- beyond faith in an institution's ability to connect them with the right investment vehicles -- is that institution's ability to provide them convenient and unfettered access to their funds. Some clients will want to transfer money on a recurring basis to an external bank account while others will prefer to occupy one account that allows them to invest and bank at the same time. The size and frequency of transfers will change, as customers get comfortable with how much money they'll need in their new life stage. No one wants to have to sign cumbersome paperwork every time they need to access their funds. The two most important factors related to distribution liquidity will be convenience and timeliness.

The brokerage industry is addressing these needs head on, particularly in its support of ACH (automated clearing house) transfer functionality. ACH, although not a new technology, has picked up significant traction in terms of usage across industries in the past few years. Armed with research that demonstrates customers hold more money with an institution when they know they can move it out with ease, banks across the country are launching functionality that enables customers to process bidirectional transfers between bank accounts across institutions. Similarly, services like PayPal have achieved success on the shoulders of this technology, which acts as a two- to three-day wire transfer without the high fees.

Discount brokerages such as Charles Schwab are no stranger; 60 percent of Watchfire GomezPro discount broker Scorecard firms currently offer online functionality that allows transfers between brokerage and external bank accounts. While some only allow money to be ACH'd in, they are scrambling to expand the service. Among full-service brokerages in our Scorecard rankings, 33 percent currently allow customers to make transfers to external bank accounts via their Web sites. Furthermore, there is much to come in this area. Firms like Wachovia plan to launch new transfer functionality in the near future.

Convenience is a primary driver in the use of this functionality. While offline setup of recurring transfer functionality has been available for some time, the process of adjusting frequencies and amounts or adding a one-time supplemental transfer via the phone or branch can be burdensome. Migrating this service to an online, self-service setting and allowing for online monitoring makes the process of turning retirement savings into spending funds a breeze.

Similarly, full-service and self-directed discount brokerages have dived headfirst into the business of providing online bill pay functionality. Over 65 percent offer this online service in each of the Watchfire GomezPro full-service and discount brokerage rankings. This service operates much like an online checkbook, allowing customers to write electronic checks directly off their online account. The names and addresses of the people they pay are stored online and they can simply choose their payee, enter a dollar value and click "submit." The payment is sent electronically to large merchants who have already set up electronic relationships with the bank and is sent as a paper bank check through the mail to all other merchants.

Brokerages prefer online bill pay because it allows them to provide the banking services their customers desire, thereby eliminating their need to transfer funds out to a separate institution. Retirees enjoy the convenience because it provides them with just the type of distribution flexibility they need in their new life. If they are vacationing or going to be away from home, they can simply go online and pay a bill without having to remember an address or find a post office box. Similarly, when going away, they can just set their payments to occur on a recurring basis, and set an end date to that recurrence for their return date. For example, if they need extra money one month they can simply log in and pay themselves; a check will arrive in three to five days. They now have one account that allows them to manage their investments, pay their normal expenses and distribute funds to themselves with impressive flexibility.

Looking at the life insurance space, few firms have yet to prepare their online environments in order to support adequate online distribution capabilities. While firms like State Farm and USAA offer online bill payment via their banking arms, this functionality has yet to be widely adopted by the largest of life insurance companies. While use of online bill pay has yet to reach critical mass among brokerages, a noticeable uptake in adoption is occurring, and it is happening among full-service brokerages. Cash management is the one major area of online technology investment occurring consistently across the industry today. Firms that don't offer it yet are building it, while those that do are improving the flexibility and usability of it. While many retirees are on the tail end of the Internet adoption cycle, this issue is not going away any time soon and will only become more salient. For life insurance companies to compete with the brokerage community for retirees' significant post-retirement assets, they cannot simply focus on their product, protection and price merits while glazing over the distribution issue.

Tim Carpenter is an insurance industry analyst with Watchfire GomezPro in Waltham, Mass. He can be reached at [email protected].