Fixed index annuities (FIAs), the long-time darlings of the insurance agency world, may be on their way to becoming the darlings of their one-time nemesis, the broker/dealer community.
In 2014, 10 percent of total B/D annuity sales were FIAs, according to a new survey of B/Ds conducted by the Insured Retirement Institute (IRI) in first quarter 2015. In the same year, total FIA sales vaulted 24 percent ahead of the previous year to reach $48 billion, taking a 21 percent share of all annuity sales for the year, the Washington trade group said.
Moreover, 39 percent of B/Ds described their FIA sales as “growing significantly,” and another 39 percent said their FIA sales have been “growing modestly.” Other industry studies have spotted increased FIA sales in B/D distribution too.
Since B/Ds traditionally have not been big players in FIA sales, some annuity watchers have suggested that the recent FIA growth in this channel is a blip that will diminish when interest rates rise and other characteristics of the current environment change. However, IRI found that 31 percent of the B/Ds expect FIA sales to grow “significantly” in the future, and 46 percent more expect them to grow “modestly.” In fact, nearly half (46 percent) predicted FIAs will be a bigger percentage of their total annuity sales in the future, and none expects the FIA percentage to be lower.
The findings are based on views of 15 B/D members of IRI “across all third-party channels,” including regional, independent and full-service (wirehouse) B/Ds, as well as banks and “others.”
The data reveal key elements of this market, including commission trends for B/D-sold FIAs. First, the sales picture:
- While B/D-sold FIAs continue to be eclipsed by B/D sales of variable annuities, B-D sales of FIAs now surpass B/D sales of traditional fixed annuities, which accounted for a 7 percent share in 2014, the study found.
- A huge majority, 90 percent, of the B/Ds said they make five or more FIAs available to their advisors, and 80 percent said they offer FIA products from five or more insurers.
- About one-third of the B/Ds work directly with issuing FIA companies. Another third obtain products from an independent marketing organization (IMO) and 39 percent combine (deal direct and use IMOs).
- Three quarters (78 percent) of those using IMOs found these distributors were extremely/very helpful in providing distribution services, and 77 percent said wholesalers were extremely/very helpful.
The sales reflect a definite change from 10 years ago. That’s when B/Ds clamped down on sales of FIAs or, put more accurately, they clamped down on representatives who were selling the policies outside of the B/D’s supervision, a practice termed “selling away” (primarily through IMOs).
In 2005, the National Association of Securities Dealers (now FINRA) stirred the pot by issuing its Notice to Members 05-50. This advised B/Ds to treat FIAs as though the insurance products were securities. The Notice, plus several related developments aimed at changing the status of FIA, put a chill on B/D sales of FIAs. By first quarter 2007, B/Ds (wirehouses only) had a market share of only 0.6 percent, according figures from Wink Inc. The following year, the share was 1 percent, higher but only by a thread.
The chill began to thaw after the Dodd-Frank Act of 2010 became law, along with its Harkin Amendment, which preserves the insurance status of FIAs that meet specified requirements. Soon, FIA carriers stepped up their B/D outreach, and IMOs, brokerages and FIA wholesalers were offering their services to B/Ds. By first quarter 2014, Wink was reporting that B/D sales (wirehouses only) represented 4.5 percent of FIA sales. In first quarter 2015, this share had increased to 5.5 percent.
The FIA sale in the B/D
Today, the new figures from IRI not only corroborate the shift that has been occurring, but shed light on the characteristics of FIA sales in the B/D channel of today. Here are a few note-worthies:
Commissions: Almost two-thirds (64 percent) of the B/Ds reported maximum up-front gross commissions of 5 percent or less, and none reported gross commission in excess of 7 percent. In addition, about 80 percent reported a maximum surrender charge schedule of nine or 10 years. By comparison, in years past, critics had complained that FIA carriers paid “excessive compensation,” resulting in “lengthy and onerous surrender charges” - sometimes for more than 20 years. “This certainly does not seem to be the case with today’s FIA,” the researchers commented.
Crediting strategies. Every distributor that makes FIAs available to advisors offers “the most straightforward strategy,” which is annual point-to-point, the study found. “Other, generally newer, strategies such as daily averaging or inverse point-to-point are less likely to be available.” Also, index-linked interest spreads or asset based fees and “uncapped” strategies are the “most likely to be restricted in some way,” although the majority of firms do offer them. So, although some onlookers have posited that FIAs sporting the newer (and often more complex) crediting strategies are the ones that are drawing the most attention in the B/Ds, it may be that the simpler designs hold sway in this channel too.
Product displacement. The B/Ds describe FIA sales as displacing sales of other financial products, the top three of which are variable annuities with lifetime income benefits, traditional fixed annuities and certificates of deposit.
Suitability. Only 21 percent have suitability review procedures specific to FIAs, the researchers said, “but the remaining firms handle suitability review as part of broader annuity sales guidelines or through their general suitability review process.”
Training: Two-fifths (64 percent) said they cover FIAs in their broader annuity training, and nearly one-third (29 percent) said they conduct dedicated training especially for FIAs.
Consumer response: Nearly all the B/Ds said they view “safety of principal” as the most important FIA feature for consumers. Nearly one half (47 percent) said they believe consumers are very or extremely receptive to purchasing FIAs.
High level view
Under the challenged market and regulatory conditions of years past, FIA products made little headway in the B/D sales environment. But now, under more favorable market and regulatory conditions, FIAs are taking their place on the B/D shelf — and they’re selling.
At this point, the independent agent channel remains the dominant force in FIA sales. It is unlikely that theses sellers view B/Ds as a serious competitive threat, because B/Ds serve different customer demographics, have different product priorities and represent a comparatively small FIA market share. If B/Ds ratchet up their FIA game, however, the perception of threat could change.
InsuranceNewsNet Editor-at-Large Linda Koco, MBA, specializes in life insurance, annuities and income planning. Linda can be reached at [email protected].
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