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Can fixed index annuities bounce back in the fiduciary era?

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Debate over the fiduciary rule cast annuities in a harsh light, resulting in a recent sales slump, but fixed-index annuity issuers and distributors remain optimistic.

Few firms have slammed the Department of Labor rule more vocally than annuity firms and their advocates. The Trump administration pushed back full implementation of the rule by 18 months, but experts have predicted gloom for all annuities amid downward pressure on fees and commissions.

Fiduciary advocates often rip annuities, and client arbitration cases involving the product jumped 31% last year to 242, according to FINRA.

Sales of FIAs declined 4% year over year to $15.6 billion in the second quarter, ahead of a projected 5% to 10% drop this year, according to the LIMRA Secure Retirement Institute.

The declining sales this year, however, follow a strong showing for the products last year.

Experts say that the slump is likely temporary.

Despite the concerns about costs to clients hidden in the fine print of annuity contracts, FIA sales hit a record $60.9 billion in 2016.

Insured Retirement Institute Chief Executive Cathy Weatherford predicted recently that “annuity sales will continue to increase,” and one distributor says that he is very bullish on FIAs.

Labor Secretary Alexander Acosta’s decision to allow some aspects of the rule to go into effect made for “one of the most transformational times in our business” in Sammons Retirement Solutions President Bill Lowe’s 30-year career, he told advisors in a session at the LPL Focus conference in August.

The decision enshrined “the key part of the rule, which is applying fiduciary status to [individual retirement accounts], the largest segment of the entire retirement market,” Lowe said.

He presented a chart showing the largest average retirement assets clustered among Americans 50 to 69 years old.

“Look at the sweet spot of that market. Isn’t that exactly where you want to work?” Lowe said.

“That’s who index annuities particularly appeal to,” he said. “So they’re right in the same demographic that you all want to work.”

FIAs’ guaranteed protection of retirees’ principal represents their simplest attribute and one of their main selling points.

Clients may also buy into a lifetime withdrawal benefit for 85 basis points and a death benefit for 35 basis points with the FIAs offered by Sammons, Lowe wrote in an email.

Key caveats of those annuities, though, include a 6.25% point-to-point cap on upside for one product and a spread fee between 95 and 155 basis points for another product designed to earn 5%, says Eric Aanes, president and founder of Larkspur, California-based registered investment advisor Titus Wealth Management.

The latter would be “a terrible option, because the insurance company controls the portfolio,” he says.

A third type pays the client 2.7% the first year but carries a 10-year surrender charge period, during which the insurers can reset the rate every year.

The products have “lots of rules” and “long lock-ups,” Aanes says.

While acknowledging that the fiduciary rule has made such annuities a hot topic, Aanes warned that advisors and clients should examine the products closely.

“It’s a matter of being sure that you understand the product and understand all the potential landmines,” he says. “It’s almost like prescription drugs.”

For his part, Lowe counseled advisors to first identify the issuing company of any annuity. The president of the West Des Moines, Iowa-based distributor, which sells products from fellow Sammons Financial Network firm Midland National Life Insurance, also stressed the importance of educating clients.

“In a DoL world, complexity is the enemy of the advisor,” Lowe said.

“Clients don't buy what they don’t understand; they shouldn’t buy what they don’t understand,” he said. “And hopefully, we don’t see advisors selling products that they don’t understand.”

This story is part of a 30-30 series on navigating the growing world of choices for clients. It was originally published on Aug. 21 and then updated on Oct. 10.

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