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Distribution Channels for Fixed Indexed Annuity Sales Changing After DOL Rule

The majority of fixed indexed annuity products are sold through independent insurance agents. But after the final DOL fiduciary rule was announce on April 6, it’s much less desirable for insurance companies to sell these annuities through independent agents. The insurance companies will be held liable for the BICE requirements because the independent marketing organizations that represent agents aren’t considered financial institutions that can take on the liability. Banks and independent broker-dealers are, however, and it’s likely that more insurance companies will increase their sales through these channels at the cost of independent agents. Investment News’ Greg Iacurci discussed this potential shift in the article “Broker-dealers could see higher share of fixed indexed annuity sales thanks to DOL fiduciary rule.”

Many indexed annuity companies are worried about the compliance required with the new BICE guidelines as well as the increased liabilities to insurers. American Equity was the 2nd highest seller of fixed indexed annuities last year. Their chief executive said that they see too many problems with the Best Interest Contract Exemption rule in regards to their independent agent distribution channel. He doesn’t think that the BICE guidelines are even workable for these agents to sell fixed indexed annuities. But he believes that the broker-dealer channel faces a smaller issue in regards to the BICE guidelines. Great American Insurance was the 3rd highest indexed annuity seller last year. Their parent company, American Financial Group, and Voya Financial both said that they are concerned about these requirements in regards to how they will effect independent agents. American Financial’s co-chief executive believes that while banks, brokers-dealers, and registered investment advisors will have to make smaller changes and adjust, independent marketing organizations will have a steep climb to adjust to this rule.

Independent marketing organizations sold 60% of fixed indexed annuities during the 4th quarter of last year. Wink, Inc. said that most of these were sold from qualified retirement accounts. Indexed annuity products can still be sold on a commission basis under the BICE guidelines, but there has to be a contract between a financial institution and the person buying the annuity saying that the product is in the purchaser’s best interest. Banks, broker-dealers, and insurance companies are considered financial institutions, but independent marketing organizations are not. This means that insurance companies will have to be legally responsible for the products recommended by independent agents. They really can’t even monitor that closely, like a broker-dealer would be able to do with their independent agents. This brings a lot of liability to insurance companies that most of them are just not willing to deal with.

One of the most likely outcomes from this change in liability is that insurance companies will increase their focus on indexed annuity sales through banks and broker-dealers. During the 4th quarter of last year, banks accounted for 17% of indexed annuity sales. As a channel, their sales were 30% higher in 2015 than they were in 2014. The fact that there was already such a significant increase before the DOL rule likely hints that this channel will continue their sales presence. The independent broker-dealer channel accounted for 13.5% of fixed indexed annuity sales during the 4th quarter of 2015. Their growth was 6% year over year. Both of these channels have had more of a focus on variable annuities in the past, but have definitely started increasing their acceptance of indexed annuity products in recent years.

There are a few options for the IMO channel though. Some of the bigger independent marketing organizations might join up with a broker-dealer or RIA to establish themselves as a financial institution. They also have the opportunity to apply for an individual exemption with the DOL. Regardless of what path they choose, the landscape of selling fixed indexed annuities is going to change. The DOL’s BICE requirements will likely lead to an increase of fixed indexed annuity sales through banks and broker-dealers and a decrease in the independent agent channel.

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