NAFA CEO talks about 2023 state of the fixed annuity industry

Chuck DiVencenzo, NAFA president and CEO, discusses potential regulation, retirement trends and fixed annuity sales in 2023, with Paul Feldman, InsuranceNewsNet publisher.

Interview Transcript:

Paul Feldman:

Hello everyone. Paul Feldman InsuranceNewsNet. I am here with Chuck DiVecenzo and we're here in Washington D.C for the NAFA Annuity Forum and I want to talk to you about all of the things we've got, all of these leadership coming in from all over the country. What are some of the hot topics that every advisor should know right now?

Chuck DiVencenzo:

Well, I think the issue that's kind of come to the foray right now is the fact that just last week, I think it was Vanguard published the 401(k) accounts are down 20% over two years ago and the significance of that is that we have issues that a lot of the folks in their 50s and 60s starting to get ready for retirement. How do you work that process from taking your 401(k) and then understanding all the dynamics of de accumulation because it's very different than accumulation as you know, and the importance of, we had shifts in longevity last couple years, it went down a little bit in the States and I think now it'll probably rebound, obviously post COVID.

So, understanding the longevity issues, when to take money out, how to do that in the lifetime income issues. So, they're all kind of coming to the foray and we're in D.C because there's a number of things that just happened. We've had two different laws passed over the last couple years that are helping Secure 1, Secure 2.0, and so we're going to go on the Hill to try to get more advocacy about that, but yeah, there's tons of things kind of coming together and the other big thing that has come full circle in a lot of ways is that most people went through a period of high interest rates and seeing that and what that does and how that plays for the retirement income and inflation. So, lots of different things to look at and understand.

Feldman:

Are there some topics legally right now that should be of concern for advisors?

DiVencenzo:

Right now I have a lot on my plate as I look out for my membership. There's a number of cases right now that are out there. There were two with the DOL one got settled, the ASA case down in Florida and we have this FAC case, which is looking at the DOL fiduciary rule and hopefully we'll hear something about that in short order, but those two are looking at the current DOL rule and the DOL is now looking at publishing a new rule. So those that's on the DOL side.

We also have a couple cases with indices and in terms of understanding the dynamic of illustrations and the likes, we're keeping and eye on those. And then we have one other big issue that we've kind of seen, and that's a new one that's the SCC trying to have a situation where an individual was working both on the side of insurance and then also had a registered investment advisory and saying kind of a little bit of what we believe is overstepping their bounds in terms of regulation. So we're trying to keep track of that too. So a lot of things to look at.

We just did a recent survey of our IMOs and one of the things, they seem to be a lot more worried about the issues than advisors. I think advisors go about their business work, the process don't see as many existential threats, but the IMOs keep an eye on this and really work through that process. So we have a lot of folks here today that we're working with and trying to understand these issues.

Feldman:

So NAFA does a lot of work for the industry. Tell us a little bit about that because I don't know that everyone is aware of how much stuff you do for this industry?

DiVencenzo:

As you'll see my lapel pin here, we've been around 25 years and one of the things that's been interesting for me is my background has been all over the place in terms of both on the understand dynamic of the broker dealer side, from the wire houses to the independents and the banks to understanding independent distribution on this side, worked with carriers, worked with investment managers.

So a lot of different things are that kind of go into the issues I look at and one of the things that's important is that independent advisors throughout the country are becoming more sophisticated, understanding all the dynamics and the key is that they're able to get to folks and help folks all over the place. You don't have to be in a big city or what have you, that you're able to have expertise and understanding and sit down with someone that as you look at your nest egg and going into retirement or trying to plan for the different areas across your life that independent distribution provides.

So it really is important and we look at everything from the advocacy is very important for us, obviously to keep the industry going, but secondarily, education in a sense helps all that. A key passion for me is understanding best practices and helping folks to do that. So we have some education series that we work on, something that'll be coming out this year is more information on soup to nuts on indices so that agents can make sure they're up to speed on that and understanding all those things as well as just understanding where products fit in and don't and being able to again, be more holistic in their approach.

Feldman:

If you're an advisor and you're watching this, you really should become a member of NAFA. I mean, it is part of what you need to have in the industry.

DiVencenzo:

No, I appreciate that and I think one of the things that we look to when want membership is that we have monthly webinars. We are able to get... We have clients specific. A lot of the things that we do, we have some advisor specific materials, but we also do client so that you in fact have the ability to have a product agnostic look at something and really have good information the building blocks for clients to understand.

Feldman:

The advocacy is so important and really support NAFA, we need the advocacy because we got some crazy regulators.

DiVencenzo:

It is interesting. I think one of the things that you find in any organization is what do you try to do as an organization? You try to get bigger and so the same thing happens in some of the government... Sometimes it starts out as an understandable look at different things, but then it morphs into something more and so I think the issue that I have in particular is that when you are regulating an industry, you don't want to be able to have people not be able to serve and so with the baby boomers and now Gen X starting to get in that retirement phase or understanding that dynamic, you got to have people that understand this and want to go out and do business and not just somebody that has $5 million or more.

It's the individuals that really need help, middle class Americans, individuals that don't have as much and be able to say, "I'm going to do a great job helping them out and I can't be stopped by just over regulating on from various agencies."

Feldman:

Yes, definitely. So we're in a really good market. Annuity sales are reaching some of the highest that they ever have. What do you see as the market and how is it going to grow?

DiVencenzo:

Well, interestingly, I keep track of a lot of this. Limber does a great job of projecting and understanding the dynamic on a quarter to quarter basis and I grew up on more the variable side, variable annuities and the like and I was at Hartford for quite some time and the variable side traditionally was a lot higher in terms of post the '80s variable kind of took off.

Well, that really has flipped in the last couple years in terms of not only from a standpoint of FIAs, which have grown significantly, but MYGA's obviously our interest rate sensitive and they were up 110% last year. So the dynamic though is that our IMOs, for instance, I think the number for 2022 is about 79.4 billion in sales. The 30 IMOs that we've represented in a recent survey that I did, did 50 billion of that.

So when you think about that, it's significant that they did almost two thirds of the business and what else has happened too is that the FIA in particular has been accepted and the dynamic of the product is gotten better over the years in terms of more flexibility, more options and so different distributions start to look at this and say, oh, why, how are those sales so important, and so having that fit into a holistic plan is significant.

Feldman:

With all the consolidation that's happening in our industry that's happening through distribution, what do you see in the future for the IMO market?

DiVencenzo:

Well, that's a really interesting question because there were literally hundreds of IMOs maybe a decade ago and the key that I see is that it's a significant consolidation and it will continue and the ability for them to be flexible in their offering. Over 50% of IMOs have a broker dealer, have an RIA, and are able to really meet the clients where they need to be.

Like I mentioned in the past question, they're everywhere in terms of the... It is kind of funny, there's a huge concentration of IMOs in the Midwest, Kansas, Iowa, Nebraska, Minneapolis. So when you see this, you have a situation where they are not... On the coast, you have more the warehouses and those type of groups and I think the way this has happened is that they're able to offer all these different things all over the country.

And what I see is a more sophisticated financial advisor agent, over the course of time. They're able to learn more, develop their practice and so I think not just offering FIAs but other products and I think that will work very, very well. The other big thing I'm seeing is the investment in technology and in this specific area where the agents around the country are able to utilize their IMOs for specific technologies and help them service the client better and I think the groups that do more of that and are able to have different apps and flexibility and where to meet clients.

COVID taught us that you don't have to sit across from each other. You're able to meet the client where they need to be and so I think it's really very helpful for clients in the future and it will lead to the growth of product and services from the IMOs.

Feldman:

Do you have a gut feeling on how many sales are being made through Zoom or Teams or some video technology?

DiVencenzo:

Well, anecdotally and I go out and visit the IMOs or talk to them about different issues, I would say 25% now are doing that and you'll have different advisors. Some of the advisors that are a little bit older might not be attuned to some of the technologies or want to sit. They've done this face to face for years, but others, I think that as you look at the other clients now, individuals are in a situation where some want to see sit right across from others, but others want to say, this is my timeframe and when can you meet with me and so Zoom or what have you, works for them.

Feldman:

Well, it's out of pure convenience.

DiVecenzo:

Exactly.

Feldman:

It's made it so much easier, it's changed advisors’ lives that some of them are just doing it all virtually now.

DiVencenzo:

Exactly. Well, you can meet your doctor that way now and when you think about that in this case, but I think what ends up happening is kind of a blend of the two probably, in my opinion, if I was a client looking at that, yeah, I want to get as much information and be able to, like a quarterly update or what have you. Yeah, I could do that on Zoom, but sometimes I want to sit right across, particularly if you have a life-changing issue or what have you, that may be when you want to sit down with someone.

Feldman:

Human interaction is very important. It still is today. So you're talking about technology and illustrations are part of that technology. What do you think the industry can do better with illustrations, because most illustrate... One person said to me that there's never been a life insurance illustration that ever came true.

DiVencenzo:

I want to know about that. I would dispute that, but the issue that I see with illustrations is that particularly in the development of indices now, so as you have products, you're looking for that killer product or how it differentiates your product and so when you develop these indices in particular, they're back tested. So to understand that dynamic, when you go through that, the theory behind it is that as a economist, as a actuary I look at these things and say, how do they work, how does this work for me and then I'm looking for a future situation.

Well, history sometimes repeats itself, but sometimes it doesn't and then to have that specific period, is important to understand that.

Feldman:

It rhymes. It doesn't repeat itself.

DiVencenzo:

Exactly. So what we want to do is want to make sure that people understand this, this is how this was set up and I think the illustration's fine, but it's the explanation around it to say this was this particular period and how this works during this type of market, the cycles and go, but if you looked at cycles over time, I think that there are different indices that really fit that and so the flexibility there's really important.

I'm going to be talking to folks here this weekend about index products. Some of the best selling products are the index, FIA's, IUL, but also subject of a lot of lawsuits and attention from NAIC. At my last conference, speaker said he thinks there's going to be an AG 49C, probably federal regulators, maybe SCC. So the question is, it seems to me trying to thread the needle here as annuities shake off their bad reputation and open up to the advisor space. So how do these indexed annuities really thread that needle? What needs to happen?

DiVencenzo:

Well, I think again, to that point, it's education. It's understanding the dynamic of those particular products and what ends up happening, I think sometimes is that the more sophisticated and indices gets, the more you have to talk through those issues and on the positive side, there's a lot of different alternatives when you're going into this. If in essence, if you were just in a 401(k) with the various simplistic kind of indices, S&P 500 Russell, and the like, those are still, if you drill down on them, right? If you look at what's in a mutual fund, how does it work? Those are also very complicated. So to understand that dynamic when you're working through a process because they've had a longer tracker than FIAs, but specifically the FIAs, when you look at this, particularly with this group of folks that's 50s and 60s, 70s, they've been through a few things.

You had the bubble, the internet bubble, you had 2001, 2008, COVID and so when you look at that there, especially, particularly as you get into where principle's very important, the dynamic of having indices there where you can capture some of the market, but also have some of the fixed income properties. In fact, the more sophisticated RIAs now are understanding these products as bond alternatives and the like and understanding that they actually perform better in certain markets and obviously from a standpoint of just laddering or doing different things.

We haven't had interest rates like this where you could have a situation where you got over one or 2% for a long period of time. So again, understanding those principles and how they correlate and interact, and I think that's where the understanding comes in and making sure that we communicate it properly to the general public and clients and specifically.

Feldman:

With the DOL contemplating making some changes here, we've been through this before, we've been through the lawsuits, what have we learned from that and what can we expect?

DiVencenzo:

Now, this is kind of interesting because you would've thought that post the Fifth Circuit's decision in terms of understanding the issue a few years back that we would've seen something a bit different this time around. Now that did not happen and the DOL with their last promulgation of regulations kind of went down a path and they've lost one lawsuit, as I mentioned, the ASA case. Some of the frequently asked questions in terms of the dynamic of understanding what a fiduciary is.

So I think if it were me and I'm running an organization that's regulating, I would wait for the FACC case to understand that dynamic, to your point about how do I work through a process where I want to add a level, but we'll see what they do. Now the issue becomes one that how far can you go and they keep getting beaten in court.

In fact, in the ASA case, they decided not to appeal it because they didn't want another appellate division loss. They even said that in their court papers to the judge in the FAC case. Now where do we go from here? I think it'll be interesting to see, because I think much like 401(k) area where you had for years a certain group of folks that just decided that this is what we should have as a regulation, right, wrong or indifferent, this is where we're going and I think sometimes there's not thought around that.

And ultimately what I feel is that you end up losing the ability to service clients as you add more regulation. So particularly on the lower end, they're trying to protect middle America and folks that maybe can't afford or couldn't afford representation, and now all of a sudden you're making it harder for those people to do business. So I think one of the things that I would say is that there is great regulation in terms of right now from the DOL from states, we have I think 39 states now that have adopted MDL 275, and I would say next year, well, probably into the high 40s. So in essence, that's where-

Feldman:

Tell me a little bit more about that.

DiVencenzo:

Yeah, a few years there was a model regulation developed by the NAIC and now 39 states have adopted it and some version very close to M, what's called the Model rule 275 and so when you think about that and go through that process, the states always had the regulation of insurance. Now that's where the DOL, the SEC try to sometimes get in and so I think that's interestingly how we're trying to work that process.

The other question is, would we sue or join suits? We are very much aware of our distributions. We have certain things in the IMO distributions that are very, very important to us and maybe more specific than some other trades or what have you. So we work very closely with the other trade organizations and joint trades groups to make sure that we're aligned, we're specific, we want to be one force and work through that process.

We would join other trades and if there was certain things that we felt very strongly about, and if we felt strongly about something on our own, we obviously would litigate that.

Feldman:

With all of these industry associations starting to merge and become one, how does NAFA position itself? How does NAFA stand out?

DiVencenzo:

Well, I think just to that point, we have a very specific distribution, IMO distribution, very, very important and they have different needs than maybe some of the other distributions and so the way that I look at it is my job is to make sure that I'm communicating that out, working with the various, we have small, medium, large, very separate members, and then we have the carrier side.

So I think over the course of time, I'm very cognizant of those issues to work with other folks. I try to engage and collaborate. I work very closely with a number of the trades in terms of engaging with their CEOs and trying to see where we can work together and there's opportunities and likewise, we'll see how the industry goes along. As anything else, we have to work with those various trades to see what's best for our members and I constantly... I'm a fiduciary and I look at how that plays out for my members and as we move forward, again, 3, 5, 7 years out, we'll see how that plays out.

Feldman:

You have such an interesting membership. You have carriers, IMOs vendors, and financial institutions. How did that evolve and how's that going to grow?

DiVencenzo:

Yeah, I think we started out with the membership of IMOs and then obviously carrier members wanting to support them and I think one of the things, as the product has evolved, and I mean back 25 years ago when it started, it was maybe a couple hundred million in sales. Well, now in the fixed arena, it's over a hundred billion in sales. So our particular products, 70 billion just in FIAs. I think 79.4 I mentioned, but when you think about that, the IMO world is significant in that.

So all the individuals that come together around that, whether it's compliance people, technology people, industry providers, are all very much involved and what that does for us as a membership, it increases the ability to have intellectual capital, the ability to have dialogue, the ability to have education pieces around each of these areas and so I think it's really helped both what we do as a membership and then from an advocacy standpoint, being able to touch different places and work through that process. So very, very helpful.

Feldman:

Chuck, this was an awesome interview. Thank you so much for your time.

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