They didn’t make it, and the annuity industry was caught off-guard.
Fixed indexed annuities (FIAs), which had originally been left out of a draft proposal of the Department of Labor’s new fiduciary rule, were added to variable annuities as the two classes of annuity products requiring an exemption.
For advisors to proceed with a sale of annuities under the exemption, they will have to meet a much higher disclosure and transparency bar than in the past, according to a preliminary reading of the final “conflict of interest” rule published Wednesday.
Variable annuities, which are regulated as a security, required an exemption for commission-based advisors under the draft rule published last year. VAs had been expected to remain under the exemption despite industry efforts to get them removed.
Lumping FIAs, which have been hot sellers over the past few years, with variable annuities came as a surprise, said Julie Burke, managing director for North American insurance at Fitch Ratings in Chicago.
“One of things we were expecting was a shift from variable annuity to FIAs, but now they are both in the same boat,” Burke told InsuranceNewsNet. ”So, what could have been viewed as a favorable development for FIAs has turned around and is obviously unfavorable.”
Under the final rule published Wednesday morning, FIAs were removed from the Prohibited Transaction Exemption 84-24 and joined variable annuities in the best interest contract exemption.
“Indexed annuities are a high commission product like variable annuities, and 60-65 percent of the industry sales are within qualified retirement plans,” analysts with Keefe, Bruyette & Woods wrote Wednesday in a research note to clients.
“We expect indexed annuity sales to be negatively impacted as a result,” the KBW analysts also wrote.
In an email to InsuranceNewsNet, Sheryl J. Moore, president of Moore Market Intelligence and publisher of Wink’s Sales & Market Report, said she was “disappointed to hear” that FIAs had been lumped in with variable annuities under the BIC exemption.
“Indexed annuities were a ‘back up plan’ for many variable annuity carriers,” she said. “It appears that those plans may be changing.”
FIAs delivered a record fourth quarter with sales of $15.5 billion, a 30 percent increase compared with the year-ago period, according to Wink’s Sales & Market Report.
The hot-selling FIA category also finished 2015 at a record $53 billion in sales, an increase of 13 percent over 2014.
The nation’s top three FIA carriers last year were Allianz Life, American Equity Companies and Security Benefit Life, according to Wink’s. Unless those companies are truly diversified, the DOL’s final rule could pinch their bottom lines.
“Many companies that sell FIAs are one-trick ponies so it’s more of a negative for them than for variable annuity writers since variable annuity writers tend to be more diversified,” Burke said.
In earlier trading Wednesday, the stock price of variable annuity writers rose while stocks of FIA carriers were taking a hit.
“We talked to a couple of FIA writers today and they were caught off-guard,” Burke also said. “They are trying to figure out the next step.”
A More Complicated Sale
For advisors, the question is whether FIAs and variable annuities will turn into a more complicated and burdensome sale to retirement investors.
Closing a sale involving FIAs or variable annuities inside an individual retirement account (IRA) will be harder in the future, said Thomas Terhaar. Terhaar is an investment consultant for individual investors and an investment advisor representative for Conrad Siegel Investment Advisors, a registered investment advisory (RIA) in Harrisburg, Pa.
Once agents lay out all the fees and commissions to an investor, “it will be harder for the selling agent to say this is in our best interest to do this as opposed to doing something else,” Terhaar added.
Fees were a major reason for the genesis of the rule. The Obama administration said that investors were losing as much as $19 billion a year to agents, advisors and brokers selling products from which the intermediaries themselves also benefited.
Consumer advocates and the Obama administration touted the DOL conflict of interest rule as a big win for consumers as it raises disclosure thresholds to consumers. Terhaar said the new rule “could be a win in that cleaner business is being done.”
The final rule clears “a little bit of the smoke for some potential buyers out there and are comfortable with what is being shown is in their best interest,” he told InsuranceNewsNet.
InsuranceNewsNet Senior Writer Cyril Tuohy has covered the financial services industry for more than 15 years. Cyril may be reached at [email protected].
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