Will fixed index annuities stay ahead of fiduciary concerns?
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 shrank 13% to $13.6 billion in the first quarter, ahead of a projected 5% to 10% drop this year, according to the LIMRA Secure Retirement Institute.
Despite experts pointing out costs to clients hidden in the fine print of annuity contracts, FIA sales hit a record $60.9 billion in 2016. Insured Retirement Institute CEO Cathy Weatherford predicted in June that “demand for annuities will continue to rise,” and one distributor says he’s 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 this month’s LPL Focus conference.
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The decision enshrined “the key part of the rule, which is applying fiduciary status to IRAs, the largest segment of the entire retirement market,” Lowe said. He presented a chart showing the largest average retirement assets clustered among Americans aged 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. So they’re right in the same demographic that you all want to work.”
UPSIDES AND DOWNSIDES
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 noted 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%, notes Eric Aanes, president of Larkspur, California-based RIA Titus Wealth Management.
The latter would be “a terrible option because the insurance company controls the portfolio,” Aanes said. 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,” according to Aanes.
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,” Aanes 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. And hopefully, we don’t see advisors selling products that they don’t understand.”