Since the mid-1990s, when banks first reported retail investments income to the federal government, industry production could be characterized as “onward and upward.” Almost each year, income from the sale and servicing of annuities and mutual funds (investment income), as reported to the Federal Deposit Insurance Corp. and Office of Thrift Supervision, surpassed the totals from the year before (see Chart 1).
Last year was one of the few exceptions to the story, however.
In the first half of 2005, investment income at the nation’s banks and thrifts plunged 15% compared with the same period in 2004–from $3.3 billion to $2.8 billion, according to the Bank Insurance Market Research Group.
How to explain the decline? Interest rates, as is so often the case, are the main culprit, particularly in the way rates have affected fixed annuity sales. Fixed annuities have long been a staple in retail bank brokerage programs.
Indeed, FAs have accounted for some 50% or more of production at bank investment programs in many years over the last decade. In BIMRG’s “2004 Bank Insurance and Brokerage Productivity Study,” for instance, FAs comprised 49% of total investment sales, compared with 21% for variable annuities and 30% for mutual funds. In the 2002 study, fixed annuities comprised 59% of total investment sales, compared with variable annuities (15%) and mutual funds (27%). In the first half of 2005, by contrast, the fixed annuity share appeared closer to 30%.
In 2005, bank programs were hammered by a flat yield curve in which the interest rates offered by FAs differed little from what consumers could get from bank certificates of deposit. In such situations, bank customers invariably opt for the safer, more liquid, FDIC-insured CDs.
Here is a sampling of comments from institutions, as reported in Singer’s Annuity Funds Report.
At Michigan’s Citizens Banking Corporation, brokerage and investment fees totaled $5.9 million in the first nine months of 2005, a decrease of $300,000 or 4.8% from the same period of 2004.