William R. White is Practice Leader,
Investment Products Consulting for the Spectrem Group.

Insurance companies have not done a great job selling mutual funds directly to individual investors. But, for those organizations willing to make a commitment to the market, there are significant opportunities to build a mutual fund business by leveraging existing distribution strengths and customer relationships.

Currently, only 5% of mutual fund investors purchase funds predominantly through insurance companies. By comparison, 26% buy direct from a mutual fund, 18% invest mainly through a full service broker and 13% choose a financial planning firm. Banks are just slightly ahead of insurance companies at 7%.

The demographic profile of mutual fund investors who use the insurance channel is also not encouraging. The market value of their stock and bond funds (outside retirement plans) is $58,700, compared with $79,000 for all mutual fund investors. Their household income is just slightly less than the average mutual fund investor ($59,600 vs. $60,700), but their net worth is about 20% less ($243,500 vs. $303,800). And, they tend to have less formal education. Only 38% have a four-year college degree or more vs. 50% of all mutual fund investors.

So, where's the upside?

The life insurance industry has built a reputation around the concept of helping people "insure" their standard of living now and in the future by building and protecting their assets. The industry also delivers its products and services primarily through personal contact with its customers. These are two strengths that play into current investor needs and can be leveraged to build a successful retail mutual fund business, assuming a company has a portfolio of proprietary or outside funds with satisfactory performance records.

Upon an examination of Spectrem's extensive research into several important financial services markets, two opportunities emerge for insurance companies to grow their retail sales of mutual funds. First, tapping their existing insurance relationships among affluent households, and second, leveraging their contacts with participants in the retirement plans they manage.

Tapping the Affluent Market

The affluent market in the US (households with $100,000+ income or $500,000+ net worth, not including principal residence) has grown at a phenomenal rate over the past few years, fueled by exceptional returns in the equity market and an increase in dual income families. Today, more than 16.5 million households fit this profile, up from 10.6 million in 1990.

This booming market presents a sizable opportunity for insurance companies to market mutual funds and other financial products. The average affluent household has investable assets of more than $650,000 and a net worth of $1.3 million. Also adding to their attractiveness as insurance clients is the high incidence of business ownership among the affluent (36%), which creates a variety of additional investment and insurance needs.

Interestingly, while just over half of these households own mutual funds outside their retirement plans, more than 70% have a relationship with an insurance company through the ownership of life insurance or annuities. The insurance industry, working through its agents, can - and should -- capitalize on these product relationships to increase its sales of investment products. While space limitations of this column prevent the development of an extensive strategic plan, consider these two ideas:

First, take a needs-based approach. Among all affluent households, "assuring a comfortable retirement" is the number one financial objective on a list of 11, followed by "maintaining current living standards." Insurance companies can address the primary goal through a variety of investment products and can assure the second through insurance products. Affluent households also are prime candidates for estate planning services, which are ideally suited for the insurance agent and which lead to investment product sales. The insurance agent typically deals with business owners early in their careers and should work on making wealth creation outside the value of the business a priority. Remember that the insurance relationship is driven off certain needs of the affluent customer and specific expertise that the agent brings to the table. Those two factors must be at the core of developing the investment relationship.

Second, build or buy expertise. Add investment specialists with product and advisory expertise at the agency level to drive sales and/or provide sales support to agents. They can be hired from securities brokerage or mutual fund organizations or trained from within if the resources are available. Similar home office capabilities are also necessary to support the sales process. The marketplace is highly competitive and the affluent mutual fund investor has become more sophisticated, so it is essential to have knowledgeable, experienced people to be successful.

Capturing Retirement Plan Distributions

The second major opportunity for insurance companies to build their retail investment product business lies in the retirement plan market. Each year, millions of retirement plan participants take lump sum distributions from their plans, most of which are re-invested. This asset pool represents a huge investment opportunity for the industry. Last year, for example, participants took distributions totaling $288 billion, and reinvested $244 billion in IRAs, annuities and other savings vehicles.

Action Taken With Lump Sum Distribution

Key
Code	Type	$Billions
A	Rollover to IRA	$189.4
B	Purchased annuity	$24.4
C	Transfer to new plan	$7.7
D	Taxable withdrawal & invest	$30.0
E	Taxable withdrawal & spend	$36.1

Insurance companies are positioned to capture a fair share of these distributions. In the 401(k) market alone, they manage plans representing 22% of the more than $1.2 trillion in 401(k) assets. However, like many retirement plan managers, they haven't done a great job capturing the distributions. When participants leave a plan managed by an insurance company, only 6% of those taking $50,000 or more select that company as the manager for their distribution.

What can be done to improve the capture rate of these distributions? Here are five suggestions that will work for almost any investment organization serving both retail and institutional clients.

First, avoid silos and blend your institutional and retail businesses. The investment products offered to retirement plan participants in self-directed plans need to be aligned with your retail offerings. Participant education needs to be the same as that offered in the retail environment and be based on sound financial planning concepts.

Second, treat plan participants as customers. Plan design features, investment product offerings and the participant communication and education activities all should be designed with the participant in mind. They also must work together to familiarize them with you as the source of investment solutions.

Third, focus on advisory services for the participant. Position your institution as a trusted advisor for addressing the individual's retirement planning needs and work on developing and cementing a relationship with the participant.

Fourth, use different types of advisory services to cost-effectively reach participants, depending on their financial situation and life stage. For example, lower cost, self-directed services may be more appropriate for job-changing participants with lower balances, while a more premium-priced solution may be justified for retirees with significant distribution balances.

Finally, manage contact with participants throughout their lifecycle in the plan. From creating a default rollover option as part of the plan design, to leveraging advisory services during active participation, to dedicating sales resources for managing distributions, constantly touch the participant.

Spectrem Group (www.spectrem.com) is an international provider of strategic consulting, market research and M&A advisory services to financial institutions. Spectrem is part of NFO Worldwide (NYSE: NFO), a leading provider of research-based marketing information and counsel to the worldwide business community.

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