The Growing Role of Fixed Annuities with Bank and Broker-Dealer Clients
Where do FIAs fit in clients’ asset allocations?
In recent years, product innovations among fixed indexed annuities (FIAs) have made these insurance products a rising star. FIA sales fueled by banks and broker-dealers have continued to grow since 2011. At the end of 2015, banks and broker-dealers (BDs) accounted for more than one-third of fixed indexed annuity sales (Index Compendium, April 2016). Banks were also the fastest growing channels for FIAs, with a 30 percent increase in sales and independent BDs experienced six percent growth.1
According to LIMRA, second quarter 2016 fixed annuity sales were strong across the board:
- Fixed indexed annuity sales were $16.2 billion, 30 percent higher than prior year and surpassing previous quarterly sales records.
- Sales of fixed-rate deferred annuities, (Book Value and MVA) improved 46 percent in the Q2 to $10.5 billion.
- Second quarter fixed immediate annuity sales totaled $2.5 billion, up 14 percent.
- Deferred income annuity (DIA) sales jumped 43 percent in the second quarter, to $870 million.
- Overall, sales of fixed annuities grew 32 percent, to $31.5 billion, commanding more than half of the total annuity sales of $58.4 billion in Q2.2
There are several reasons fueling the upward sales trends, but two key motivators revolve around consumer wants and the economy. A TIAA-CREF Financial Advice Survey released in October 2013 revealed 54 percent of Americans are searching for advice on how to make their retirement savings last. WINK added to this by noting “more than half of Baby Boomers ages 50-59 are interested in turning their assets into guaranteed income during their retirement.”3
Several studies have found some retirees are more worried about running out of money than death. Although retiree confidence is up in 2016, only 39 percent of retirees are very confident in having enough money for a comfortable retirement, according to the annual Employee Benefit Research Institute 2016 Retirement Confidence Survey. Thus, it makes sense that banks and BDs need products with certain guarantees to help address consumer needs.
While fixed products and those with contractual guarantees like fixed and fixed indexed annuities are popular with Baby Boomers who are in or near retirement, there are statistics that warrant a look at the burgeoning generations behind the Boomers: Generation X and Millennials. These generations are overtaking the Boomers as that generation is now shrinking.4 This age group has also been heavily impacted by witnessing sharp downturns in the stock market and economy.
During the 14-year span from 2000 to 2014 the S&P 500® Index was cut almost in half twice. However, despite these drops, over this same time period the S&P 500® Index grew by 40 percent.5 For consumers worried about market volatility, fixed indexed annuities offer a guaranteed minimum return, along with the potential to earn additional tax-deferred interest when the market increases.
Paul McGillivray, director of the Attorney Collaborative Network at M&O Marketing, has worked with the BD channel for many years and has seen three “dimensions” in recent years, which have heavily impacted the success of fixed annuities particularly among independent BDs:
1. Product Dimension:
The improved income benefit on fixed indexed annuities during the last six years helps provide what many believe to be a superior platform from which to deliver Guaranteed Lifetime Withdrawal Benefits. A growing number of registered reps and broker-dealers are starting to see this.
2. Consumer/Economic Dimension:
Consumers worry about the safety of their retirement savings and have seen the market fall, so they are looking for asset protection and a fixed annuity provides this appeal.
3. Unique Feature Dimension:
The registered representative is one who drives the sale and much of what the client sees. In recent years, the more sophisticated financial professional has been drawn to the newer volatility control/risk control-type index interest strategies which have been around for about five years, but growing among FIA product offerings in the past three years.
Vice President of Broker-Dealer Sales for Great American Insurance Group, Tony Compton, believes increasing fixed annuities sales is fueled by low interest rates on the products that clients typically consider for guarantees or greater premium protection. The traditional bank product rates are quite low; therefore banks are looking for alternative options for clients. Independent broker-dealers have traditionally looked to bond portfolios for clients seeking a safer option than equities. For BDs, the conservative bond portfolios are now offering lower earnings, so they are looking for options for their clients with a lower risk tolerance.
Compton went on to note, product fees are also an issue that has come to the forefront with many consumers. As clients are becoming more aware of fees, the consumer and advisor have moved to looking at the fixed indexed annuities which now offer many income riders and death benefit riders. These riders are similar to those offered on variable annuities, but in many cases the FIA riders are priced lower and can provide similar income and guarantees to the consumer.
For many registered representatives today, it becomes important to understand where the FIAs fit into the clients’ asset allocation. A traditional rule of thumb for many advisors is working with clients to develop an asset allocation of 60 percent in the equities markets and 40 percent in bond or fixed income options. It is important to understand that fixed indexed annuities are NOT designed to be part of the equities portfolio; they should be an option for the 40 percent in fixed income products.
According to Compton, “Many of the products which were traditionally considered safer are producing very low interest rates right now.” He noted, “Transferring the interest rate risk to an insurance company for the guarantees of the fixed indexed annuity is offering additional options for advisors and clients today.”
Compton mentioned that the insurance carriers are traditionally very nimble to the needs of the industry and clients. Some insurance carriers that offer FIAs are now responding to the needs of fee-based financial professionals by offering FIAs with zero commission, which is designed specifically for the business structure of the fee-only advisor. This opens the doors to both a fee-only business model and the traditional commission-based model, both of which have their advantages for consumers.
The IRI Fact Book 2016 stated, while the product itself (the FIA) is certainly broadening its appeal, it should be noted that sales are also growing due to it now being offered through several major broker-dealers, which historically was solely available through insurance agents. FIAs are finding its place as a rather unique arrow in the independent advisor’s quiver.6
According to NAFA Executive Director Chip Anderson, the fixed annuity market is largely composed of middle-class consumers with an average premium in the $70,000-$90,000 range and a household income of approximately $100,000. It provides much needed guarantees and protection of premium as a part of their retirement plans.
NAFA’s Director of Membership and Development Joe Grecu adds, “With flat revenue and shrinking margins, many banks are realizing that insurance products such as fixed annuities are part of the solution.” Grecu went on to say, “Some of these banks have also tracked increased client profitability and less attrition among their fixed annuity customers.”
Financial professionals in the bank and BD space are seeing the benefit of offering products that provide insured savings and retirement benefits which include:
- Safety: Fixed annuities have no investment risk since they are not directly invested in the market. The contract guarantees the premium and earned interest in the fixed annuity is protected from the financial market’s ups and downs.
- Certainty: Fixed annuities provide a variety of ways to receive income for life – and the income can be guaranteed for life, no matter how long the contract owner lives.
- Protection: Fixed annuities protect both premium and interest.
- Tax Deferral: The interest in fixed annuities grows tax deferred, providing an opportunity for the contract value to grow.
- Minimum Premiums: Fixed annuities can allow clients to save regularly with modest premium amounts.
On top of the increasing sales numbers and consumer trends attesting to the many benefits of fixed indexed annuities, they are also well loved by the people who own them. Among those who purchased a fixed indexed annuity in 2015, more than 99 percent of owners had no complaints (April 2016 Index Compendium, Jack Marrion). Moreover, 85 percent are likely to recommend an annuity to a friend or family member – which means more referrals and business growth for you.7
Guarantees are backed by the financial strength and claims-paying ability of the issuing company.
2 LIMRA Secure Retirement Institute Press Release: Second Quarter 2016 Fixed Indexed Annuity Sales Exceed Quarterly All-Time Record, August 16, 2016. http://www.limra.com/Posts/PR/News_Releases/LIMRA_Secure_Retirement_Institute__Second_Quarter_2016_Fixed_Indexed_Annuity_Sales_Exceed_Quarterly_All-Time_Record.aspx
3 WINK. Perspectives on Annuity Awareness, June 21, 2016. http://www.looktowink.com/2016/06/perspectives-on-annuity-awareness/
4 Pew Research Center, Fact Tank, April 25, 2016. http://www.pewresearch.org/fact-tank/2016/04/25/millennials-overtake-baby-boomers/
5 S&P 500® Daily Index 01/03/00-12/31/14
6 The IRI Fact Book 2016, page 82
7 WINK. The Happiness Factor and Annuity Buyer Behavior, May 19, 2015. http://www.looktowink.com/2015/05/the-happiness-factor-and-annuity-buyer-behavior
Peggy Porter is the director of marketing services for Insurance Insight Group (IIG). She has more than 25 years of experience in marketing communications and her experience covers a broad range of industries, including higher education and retirement living. She has directed marketing communications strategic planning specifically in the life and annuity marketplace for the past 13 years. She holds a master’s degree in mass communication and earned Marketing Sherpa’s Social Marketing ROAD Map Certification.