ATLANTIC CITY, N.J. — Clients and their financial advisors have grown increasingly interested in fixed index annuities as the products tie in new benefits while becoming simpler, but they’re still not always the right choice.
Advisors need to weigh the tradeoffs of FIAs, which can include fees, the costs of new benefits attached to the products, a client’s liquidity needs and his or her overall risk profile, Private Advisor Group registered principal Klaudia Maslo says.
The firm, which is LPL Financial’s largest hybrid RIA with 624 advisors and $15.3 billion in assets under management, held a session about FIAs at its annual conference on April 23. Sales of the products have been expanding in recent years, but they’ve recently hit a speed bump, according to research firm Wink.
Total sales of index annuities fell 7% to $53.9 billion in 2017 — the first decline in a decade — but Wink CEO Sheryl Moore notes that some initial forecasts predicted a 35% drop. Partial implementation of the fiduciary rule last June ushered in the worst sales of all types of annuities in 16 years.
The rule caused annuity issuers to halt some of their offerings in order to adjust their products and distribution methods while prompting some advisors to hold up on broaching the topic with clients. Private Advisor Group Chief Compliance Officer Pat Sullivan made members of his supervisory team available to discuss how they evaluate the products.
Few industry experts expect sales of FIAs to fall in 2018. Enhanced living- and death-benefit riders and better investment return potential than other fixed annuities have led to their popularity, Maslo says. The riders come with extra costs, though, so advisors should ensure clients use them properly and avoid surrender penalties.
“The client really should be able to stay with the investment long term, because they are meant to be long term retirement vehicles,” Maslo says. “Unfortunately, as we age, things come up, and you’ve got to be prepared for the unexpected.”
Maslo’s colleague on the firm’s supervision team, Dick Wagner, outlined two client profiles in explaining what kind of investor might be served by an FIA. For a retiree collecting Social Security payments but no pension, placing around 10% of their portfolio in an FIA with a rider “makes a lot of sense,” Wagner says. For a retiree getting Social Security while receiving a pension, not so much, he says.
FIA products have also been changing in appealing ways as variable contract sales keep falling, according to Michael Baney, the northeast district director for Allianz Life Insurance Company of North America. The Minneapolis-based firm has been the No. 1 seller of FIAs for 17 of the past 18 years, Baney says.
The products have shed a confusing two-tiered structure, back-end sales charges and moving parts like an annuitized portion of the investment. Average FIA commissions decreased 15 basis points sequentially in the fourth quarter to 6.13% of premiums, according to Wink.
“Forget everything you ever knew about index annuities because they’ve changed so dramatically, and they’ve really gotten simplified and easier to understand,” Baney said in a presentation for advisors at the conference. “They provide a lot more benefit than they ever did before.”
Indeed, sales trackers predict FIAs will rebound after their decline in 2017. Research organization LIMRA, which reported record FIA sales in 2016 of $60.9 billion, estimates they will rise again this year by 5% to 10%.
Experts say the baby boomer retirement wave and the appeal of new products will fuel the recovery of FIAs and other annuities. Moore, the Wink CEO, also sees reason for optimism after the grim year for sales.
“While early projections of 35% sales declines were amusing, I would hardly say that a 7% loss in sales is an unmanageable hurdle, given the challenges the DOL’s rule had presented,” Moore said in a statement.
On the other hand, advisors need to remain vigilant about the fees in the product, says Sullivan, who, alongside John Hyland, is also the co-owner of Private Advisor Group. The expenses include sub-account fees, mortality fees, administrative fees and rider benefit fees, he says.
Advisors should also be sure to explore whether the product actually fits the client, rather than the question of whether they would like it, when seeking approval from the home office for any purchases, Maslo adds.
“We see a lot of ‘the client wants’ or ‘the client likes.’ They talk to other people and something was explained to them,” she says. “It all comes down to, do you really need it?”