The Department of the Treasury and the Internal Revenue Service released new guidance that is “designed to expand the use of income annuities in 401(k) plans.”
By Cyril Tuohy
Regional broker/dealers, banks and savings and loans institutions were the big winners in the sale of fixed annuities last year at the expense of the independent producer channel, according to Beacon Research.
“The story is that as the boomers retire and move toward retirement, there’s been a drastic shift in risk tolerance for investors,” said Jeremy Alexander, Beacon Research president and chief executive officer.
The largest market share gains were recorded by the large, regional broker/dealers. Their market share rose to 7.3 percent last year, up from 4.8 percent in 2012, according to Beacon Research’s data.
Large and regional broker/dealers were followed by the banks and savings and loans institutions, which reported a 23.4 percent market share last year, up from 20 percent in 2012, Beacon reported.
Alexander said that the changes in market share among the distribution channels last year reflect the success that advisors have by imparting advice to investors and retirees about how to secure future income.
Large and regional broker/dealers retain the personal approach financial advisors use to sit down with customers face to face.
“Over time, advice is what is so valuable,” Alexander said. “This channel and the bank channel really focus on giving overall advice instead of selling product. When you look at client needs, retirement income is going to be at the top of the list.”
Broker/dealers also have spent the last several years teaching sales representatives about retirement income and briefing them on the workings of the fixed-income market, Alexander said.
Biggest losers in terms of market share were the independent producers, who reported 47.4 percent market share in 2013, down from 52 percent in 2012. (Many independent producers, however, are affiliated with large and regional broker/dealers.) Independent producers lost share as they gravitate toward wealthier, more profitable clients. Advisors can’t serve everybody, so they have to decide who they want to keep as clients.
The captive agent channel dipped slightly to 12.7 percent market share in 2013, down 0.1 percentage point from 2012, as did wirehouses which reported 1.1 percent market share last year, also down 0.1 percentage point from 2012.
Direct third-party channels — cable television and the Internet — reported 4 percent market share last year, also down 0.1 percent from 2012.
Independent broker/dealers, which also represent insurance agents, were unchanged with 4.1 percent last year over 2012.
Alexander told InsuranceNewsNet that despite a strong stock market — which economic theory holds dictates should suck money away from fixed-income investments — fixed annuity products had one of their best years in a long time.
“The strong stock market should draw money out of fixed investments, but we’re not seeing that,” because of the retirement boom and the demand it has created for income guarantees, Alexander said.
Total sales of fixed annuities in 2013 reached $78.1 billion, up 16.6 percent from 2012. Fourth quarter sales reached $23.5 billion, up 4.7percent from the third quarter, and up 45.2 percent from the year-ago period, Beacon also said.
For the first time since 2008, all annuity types — fixed-rate annuities, indexed and income annuities — achieved year-over-year positive sales growth last year, Beacon’s research found.
Sales of immediate annuities were up, too.
Interest rate dynamics played a role, as they usually do. In 2013 the dynamics were inversely correlated, as they sometimes are.
Last year saw a high “negative correlation” of annuity sales to interest rate spreads, Alexander added. This is usually not the case, however. Normally, the higher the spread — the average rate credited to an annuity versus, say, the rate on a five-year Treasury note — the higher the annuity sales, he said.
With depositors keeping their money in certificates of deposit (CDs), banks are “uniquely set up” to offer services and financial advice to middle market customers, and to clients who already own fixed-income investments.
Annuities, fixed investments with a better yield than CDs, are a natural fit for bank customers. Banks hold an advantage compared to other channels when serving middle-market consumers, Alexander said.
“We’re seeing more and more banks getting into this,” Alexander said. “Over time, we’ve seen these (annuity) products get compliance friendly.” Annuities are simple and offer shorter surrender periods than they used to, he said.
Annuity product experts like Douglas Dubitsky, vice president of product management for Guardian Retirement Solutions, said that whereas years ago annuities were rigid, they are now more flexible.
With more annuity products in the market, the more they are likely to fit the needs of bank customers.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. Cyril may be reached at email@example.com.
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