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Turmoil in the Variable & Indexed Annuity Industry

The annuity market is changing. This is partly because of the recent DOL fiduciary rule and partly because of other forces in the economy. In an article for Think Advisor, Raymond James’ Scott Stoltz gives us “A Glimpse of the Future of Annuities.” Variable annuity sales have been declining slowly since 2011 and LIMRA expects them to go down significantly more over the next two years. In contrast, fixed indexed annuity sales are skyrocketing and all of the top 10 indexed annuity carriers saw increasing sales during the first quarter of this year. Some people have suggested that the declining variable annuity sales are mostly due to the impending DOL fiduciary rule that was finalized in April. Since the DOL ended up including indexed annuities in the BICE guidelines, could this mean a steep decline is coming for indexed annuity sales as well?

Stoltz doesn’t necessarily think so. He believes there are many other factors that have led to the decline of the variable annuity. First of all, the recessions of 2007 and 2009 hurt insurers, causing them to scale back the living and death benefit features they were offering that were too generous. In addition to that, low interest rates have been hurting insurance companies as well. These companies have done many things to lower their risk exposure from selling variable annuities. Some have offered clients buybacks on variable annuity products with living benefits, stopped offering living benefit options, or scaled back on the once plentiful investment options. All of these factors have made variable annuities a little bit less attractive to consumers and led to the variable annuity decline.

Some variable annuity companies switched to indexed annuity products in anticipation of the final DOL rule. Of those who already sold fixed indexed annuity products, many increased their focus on these products and shifted away from variable annuities. Advisors and financial institutions do not have to change their business models, but they do have to make sure that their contracts, disclosures and supervisory procedures all meet the DOL requirements. So basically, most companies will have a lot of changes to make. Advisors are still allowed to earn commissions on variable and indexed annuity sales, but they have to be able to prove that their commissions are fair and just and that they didn’t influence the product recommendation. The higher the commission charged, the harder that may be to prove in a court of law.

Here are four predictions for the future of the annuity industry. The commissions earned from sales of annuity products are probably going to go way down over the course of the next couple of years. As long as commissions are in line with industry standards, there is an argument to be made that they are fair. But what happens with financial institutions as a whole will now dictate fixed indexed and variable annuity commissions. It’s not likely that any of these institutions will be willing to push the envelope and charge higher commissions than everyone else. The second prediction is that the overall purpose of surrender charges is going to change. Since companies won’t be worried about recouping large commissions if a client surrenders an annuity too soon, surrender charges will probably allow companies to offer more desirable features to clients. Those willing to have a longer surrender period may get higher returns, higher caps, or lower fees depending on the annuity type they purchased.

The third prediction Stoltz makes is that commissions on packaged products like annuities will be paid by the broker-dealers in the future, rather than by the product manufacturers. This is how it works with individual securities now. It’s much more transparent to the client and of course, to regulators, when commissions are structured this way. If product manufacturers no longer have to worry about commissions, they can offer the same product in a fee-based or commission-based account. Commissions would just be added by the distributors if necessary. This would make it so that product manufacturers would only compete on the basis of products and services, rather than commissions. Finally, the independent marketing organizations of today will probably not be around in the future. IMO’s don’t qualify as a financial institution unless they have their own broker-dealer or RIA, so they can’t offer the legal contracts now required.

After all of these expected changes occur, there will of course be some sales consequences. Lower commissions will inevitably lead to a sales decline. But as surrender charges and fees go down as well, annuity products will be more desirable to clients in relation to alternative products. The big hit will come with the fact that 60% of indexed annuities are currently sold through independent insurance agents served by IMOs. As this channel goes away, sales will undergo a steep decline. Stoltz estimates a 50% decrease in variable and indexed annuity sales at the start. He does think that traditional fixed annuity sales could increase by 50% because independent agents will turn to these products instead. He believes that indexed annuity sales will slowly recover as the client pricing improves. With all of the changes coming in the annuity industry, the top annuity sellers will look completely different over the next couple of years.

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