Hot-selling fixed indexed annuities (FIAs) were dealt a blow when federal Labor Department regulators made it more difficult to distribute the products into retirement accounts.
So where do FIAs go from here?
In the near term, a “fire sale” effect could mean a rise in FIAs as insurance agents and brokers push to sell as many as possible before the final deadline of Jan. 1, 2018, when the DOL fiduciary rule goes fully into effect, some industry experts said.
But so long as interest rates remain low, FIAs will continue on their hot streak, said Sheryl J. Moore, publisher of Moore Market Intelligence and Wink’s Sales & Market Report, which tracks FIA sales.
“They will drop slightly when the new procedures go into effect in January 2018,” Moore said in an email.
“However, I think we are still going to continue to see record sales for indexed annuities, moving-forward,” she added. “The low-interest-rate environment is really fueling sales of these products. Plus, consumers want the safety and guarantees that indexed annuities offer.”
What happens when interest rates turn around and rise?
Sales may cool, but rising rates won’t necessarily translate into a corresponding decline in FIAs, Moore said.
“Banks will go back to selling CDs if rates improve,” Moore said. “Some agents will go back to selling fixed annuities because they are a simpler sale. However, you have to remember that an increase in rates also means an increase in indexed annuity caps.”
Outside of bank-channel sales, therefore, the market has every reason to anticipate higher FIA sales as rates rise. Advisors should pretend the fiduciary rule doesn’t exist in the short term, said annuity expert Jack Marrion.
“This has no effect this year and there’s nothing you can really so about it, so keep selling,” said Marrion, CEO of the consulting firm Advantage Compendium. “Try to ignore all the noise.”
Agents should welcome the news that FIAs are here to say as the category topped $53 billion in sales in 2015, a 13.1 percent jump over 2014, Wink reported. The percentage increase in FIA sales was nearly double the rate of their fixed-rate annuity cousins.
FIA Industry Reviewing Options
DOL regulators caught the industry off guard with a rule that lumped FIAs in with variable annuities as annuity products necessitating a higher level of disclosure.
Some legal experts were surprised that, from the perspective of the DOL, FIAs were considered variable investment product in the same class as variable annuities, which are regulated as a security. A U.S. appeals court ruled in 2010 that FIAs were state-regulated insurance products.
Friends of the FIA community said they intend to explore all their options, indicating a legal challenge may lie ahead.
“We are still digesting the final rule, as it spans more than 1,000 pages,” said Jim Poolman, executive director of the Indexed Annuity Leadership Council, in a statement on the organization’s website. “In the days and weeks ahead, the IALC and its member companies will continue its analysis and explore all options to address the rule’s deficiencies.”
“At first blush, it appears that this rule discriminates among similar insurance products without any rational basis,” he said.
Opponents of the rule say it will harm millions of Americans who need the lifetime guaranteed income generated by annuities because advisors will have a more difficult time selling these products.
Other organizations have vowed to step up their opposition as well. Some have even hinted at possible legal action against the DOL and lawmakers have also talked about introducing legislation blocking the rule.
Supporters of the rule, including President Barack Obama, labor unions and powerhouses like AARP, say retirement investors will benefit as the rule quashes incentives for advisors to steer investors into products with higher fees and commissions.
Two Deadline Dates
The new rules impose a higher legal standard than in the past on almost anyone offering a financial product or advice to an Employee Retirement Income Security Act (ERISA) plan participant or individual retirement account (IRA) holder.
For insurance advisors and brokers advising and managing retirement money, life changes April 10, 2017, as these intermediaries become fiduciaries on that date.
But advisors who want to take advantage of the Best Interest Contract Exemption, or BICE, from April 10, will only be required to comply with some of the more limited conditions of the exemption.
These conditions include acknowledging their fiduciary status, adhering to a best interest standard and offering basic disclosures of conflicts of interest.
Additional requirements of the exemption — clarifying how it can be used for the recommendation of proprietary products and fulfilling data retention requirements, for example — along with other provisions in the regulation go into full effect Jan. 1, 2018, according to the DOL.
Regulators opted for a staggered implementation period to the rule after the industry complained the original eight-month deadline was too short.
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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