Annuity sales may be flattening from last year, or even dropping in some markets, but it is not from decline in advisor use of the products.
In fact, more than 80 percent of financial advisors say they have continued to sell variable annuities this year, the same percentage as in 2011, reports Cogent Research.
In addition, 38 percent say they are selling fixed annuities, a percentage that has been inching up since 2010, when it was 30 percent.
Both findings are pretty interesting, given the much publicized cuts and exits that some annuity companies have made during the past year, says Meredith Rice, senior project director for the Cambridge, Mass., research firm.
She is referring to the concern voiced by a lot of annuity watchers earlier this year, that the cuts and exits — particularly in the variable annuity market -- could have a dampening effect on advisor interest in selling annuities. So far, that does not appear to have happened.
The findings come from Cogent’s Advisor Brandscape Report, the 2012 version of which Cogent released to its clients on Tuesday. Rice gave InsuranceNewsNet a high level look at some of the annuity findings.
The Brandscape Report annually surveys financial advisors from five distribution channels (national wirehouses, regional broker-dealers, independents, banks and registered investment advisors) about their views on various financial topics, including annuities. The 2012 report reflects views of 1,741 advisors.
Allocation to annuities continues
Rice points out that not only have advisors continued to sell annuities in the same percentage in 2012 as in 2011, but their allocation to annuities as a percent of assets under management, has remained the same as well. That is, their allocation to variable annuities is 11 percent in both years, and their allocation to fixed annuities has hovered between 1 percent and 2 percent in both years.
“That’s flat, from year to year, but it’s interesting considering all the changes that have occurred in products and the market,” she says.
Altogether, advisors are giving variable annuities much more attention than fixed annuities. In fact, advisors selling variable annuities (81 percent) is just behind advisors selling mutual funds, which, at 95 percent, is the top product that the polled advisors say they sell.
The variable annuity sales are not evenly spread between the distribution channels, of course. For instance, only 29 percent of registered investment advisors (RIAs) report selling variable annuities in 2012, Rice points out. That's up slightly from the 26 percent who said this in 2011, but it's still not over 30 percent.
By contrast, 88 percent of national wirehouse advisors in 2012 say they are selling variable annuities. “And that’s up from 2011, when 81 percent of wirehouse advisors said they sold variable annuities,” Rice said.
The comparatively low usage among RIAs is understandable, since these advisors tend to be mostly fee-based. They are less interested in selling variable annuities because the majority of these products are designed for commissioned sales. (Incidentally, an even smaller percentage of RIAs -- 13 percent -- report selling fixed annuities in 2012.)
What is spurring the growing interest of national wirehouse advisors in variable annuities? “I think it has to do with client demand,” Rice says. In today’s volatile economy, “people want to protect their principal, and those who are near or at retirement want to have attractive retirement income benefits.”
Today’s variable annuities, although scaled back, still offer guarantees that do those things, she indicates.
A small percentage of advisors in the 2012 study did report that they have actually decreased their use of variable annuities.
The surprising thing is that “these advisors aren’t necessarily increasing their sales of fixed annuities,” Rice notes. “Instead, they are increasing use of separately managed accounts, exchange traded funds, and in some cases alternative funds and strategies (hedge funds, structured products and the like).”
Choosing separately managed accounts and exchange traded funds over variable annuities is not unheard of during times of market volatility. But using alternative products and strategies this way does raise an eyebrow.
Why might that be happening? For one thing, at least 75 percent of all advisors surveyed by Cogent in 2012 say they are using some type of alternative product or strategy. That percentage is similar to last year, Rice points out, adding that use of alternatives is particularly strong in the national wirehouse channel.
So, it could be that those advisors who are throttling back on use of variable annuities in favor of alternatives are simply going with the flow. After all, only a handful of variable annuities offer alternative options, so the advisors may feel forced to go elsewhere if their own variable annuity carriers do not offer alternative funds.
Then there is the matter of rationale. The Cogent survey did ask advisors why they are using alternative investments and strategies. A few of their answers have an annuity-like feel to them. Consider:
- Eighty-eight percent say they are using alternatives for “diversification or use of non-correlated assets,” and 47 percent of those advisors listed this answer as their top reason for selling alternatives. (The same has been said for recommending annuities, at least where diversification is concerned.)
- Eighty-three percent say they are using alternatives is for “downside protection of the portfolio or risk management,” and 27 percent of this group said this is their top reason. (Downside protection is a major reason why advisors recommend use of annuities with guarantee riders, indexing, etc.)
- Sixteen percent say they are using alternatives for “managing tax benefits for clients,” and 2 percent of these mentioned this as their top reason. (Likewise with annuities, where the benefit of tax deferral is a major consideration in the buy recommendation.)
The advisors mentioned a few other reasons for using alternatives, but the above three stand out as ones that are also reasons for recommending annuities. So it could be that the advisors who are scaling back on variable annuities and not using fixed annuities instead are simply looking for alternative investment options for their clients—and, in particular, alternatives that act like annuities.
If that is the case, as more carriers add alternative options to their variable annuities (a trend that is under way now), these particular advisors may once again ramp up their use of annuities.
Rice says the Cogent survey did detect advisor discomfort with annuities in two areas. One concerns how annuities fit into the advisor’s compensation structure (fee-based, commission-based or a mix of both). For example, fee-based advisors don’t want to work with commissioned products.
The other is what Rice terms “a somewhat lower overall impression of providers’ brand favorability.” In some cases, she says, “the advisors’ impressions of annuity carriers are relatively low, even among current users of variable annuity products.” And the overall trend in this area is “flat” when compared to 2011.
But areas of advisor discomfort can be opportunities for carriers, she adds. For instance, some carriers are working on the compensation issues right now. And where brand is concerned, carriers can address the concerns and strengthen their image to the advisor community.
In particular, she says, carriers can differentiate themselves by showing commitment to the business, demonstrating they have the financial stability to support their guarantees, and providing a range of features in their products. “Those things are very important to advisors,” Rice says.
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