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Indexed Annuity Sales Continue Upward Trend, VA Sales Spiral Downward

photo_59666_20160112It’s been a great year for fixed indexed annuities as sales appear to be headed to a record high in 2016. Low interest rates and attractive product features are driving their popularity, according to a recent article from Investment News. Even with the DOL fiduciary rule looming, which will likely make sales more difficult, the financial products are still surging ahead.

On the flip side of the annuity coin, variable annuity sales are expected to drop to their lowest level in almost 20 years as they continue on their multi-year downward spiral. While Limra projects indexed annuity sales to hit $62 billion by the end of the year, they also estimate a 21% decrease in variable annuity sales. Projections show about $105 billion in VA sales, down from $133 billion last year, dropping the figure to its lowest point since 1998.

“When we look at variable annuity sales, we see a majority of them through broker-dealers, and we’ve really seen the sales tail off on the independent broker-dealers this year,” said Todd Geising, assistant research director at the Limra Secure Retirement Institute.

Independent broker-dealers represent the largest distribution channel for variable annuities, holding about 32% of sales. But has broker-dealers pull back from VAs, they’ve turned to indexed annuities to fill the void. Since the start of the year, sales of indexed annuities in the IBD channel have grown 60%.

Director of annuities at Wunderlich Securities Inc., Robert McCommon, has said that the changing in the tide was easily seen at his firm, where 225 registered representatives are employed. There, indexed annuity sales now represent about 40% of their annuity business, up from around 20-30% over the last few years. The brokers at Wunderlich, much like those across the industry, have been using indexed annuities inside the fixed-income portion of their clients’ portfolios. Many find that the possibility of annuities delivering a higher return than bonds and CDs in this low-interest-rate environment very attractive.  The living-benefit features in indexed annuities are also drawing attention, as they have become more competitive with those offered on variable annuities.

One of the reasons why variable annuities have become less attractive to brokers is that many consumers have been diluting their upside potential with guaranteed-income riders as a means of controlling market volatility. While this makes brokers turn away more frequently from VAs, another reason for doing so is the pending implementation of the Department of Labor’s fiduciary rule. The new rule will raise investment-advice standards in retirement accounts, and subsequently variable annuities have suffered.

The DOL placed variable annuities under the compliance regime of the best-interest contract exemption, also known as BICE. This allows for commission sales of the products but exposes firms to greater litigation risk. But while VA products are suffering, the same does not appear to be happening to indexed annuity sales.

“That’s perhaps due to a lesser awareness and preparation for the rule among independent insurance agents when compared with broker-dealers, because many didn’t expect indexed annuities would ultimately fall under the enhanced compliance regime of BICE,” said Mr. Geising.

Independent agents represent the greatest distribution outlet for indexed annuities, holding almost 60% of sales in the second quarter this year. IBDs represented just 16% of the total. With Limra projecting a significant drop in indexed annuity sales next year, many industry experts believe that independent agents will take a fire-sale mentality for indexed annuities before they’ll be more difficult to sell in April.

“You have agents selling like they have fourth- and fifth-stage cancer,” said annuity industry guru Stan Haithcock. “They’re going 100 miles per hour right now.”

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