The economy has clearly changed and so has the role of annuities. Simply put, annuities have had to adapt, and fast. As advisors scramble to keep pace with the changing landscape, a look at the recent past will pay big dividends as we look to the future of the annuity market to see what may lie ahead in 2015 and beyond.
Before we get too far, let’s make sure we are all on the same page about our purpose in providing annuities. By its very design, the annuity is tasked with providing certainty for it’s owners-certainty against loss and certainty for longevity. When risk of loss intensifies in a more volatile market and risk of longevity in lifespan for owners heightens, those basic risks become much more expensive for carriers to hedge. It’s the equivalent of fighting a battle waged on two fronts.
Now, let’s begin with a quick look back. The annuity landscape changed dramatically when the stock market plunged in 2008. The years preceding 2008 saw an arms race of sorts in the variable annuity space. Each month, it seemed a new bigger and better rollup hit the scene. My, how times have changed! In fact, many of the changes coming in the variable annuity landscape are a direct result of re-pricing of risk introduced in 2008. While variable annuities continue to represent the largest piece of the annuity market, a look behind the numbers reveals that the types of variable annuities being sold is moving toward those with living benefits, namely income riders.
To many advisors who have been led to believe that variable and fixed annuities are the only two types of annuities to consider, it may be surprising to find that there is notable growth in fixed index annuities. In its third quarter study, Wink’s Sales & Market Report, indexed annuity sales were $11.4 billion. Sheryl J. Moore, President of both Moore Market Intelligence and Wink, Inc. stated:
“Third quarter year-to-date sales of indexed annuities are greater than they have been in any full year with the exception of 2013’s record-setting sales!”
The question one might ask is this: in the face of historically low interest rates, why are so many advisors steering clients toward indexed annuities? As with variable annuities, the answer is living income benefits. Longevity risks
Brad Johnson, Vice President with Advisors Excel, and coach to some of the country’s most successful advisors, points out:
“Variable annuities must contend with multiple factors when pricing guarantees. These include both market and longevity risk, while fixed index annuities and their underlying guarantees protect them from the higher costs of pricing guarantees against accounts that can fluctuate up and down based on market volatility.”
A variable annuity has to respond to both longevity risk and market risk, a combination that proved very challenging when markets saw deep declines. As a result, many variable annuities have been re-priced to accommodate this dual role. In many cases, the products have been re-tooled with higher internal costs and lower income account rollups and payouts to allow the carriers to remain profitable in these dynamic times.
Given this change in the market environment, what can we expect to see in the annuity’s future? At the risk of cliché, expect to see more change. Lower cost, ETF-based variable annuities are likely to play a role in tax diversification strategies within an investment portfolio. This lower cost structure may also allow for stronger income benefits than what we have seen with traditional mutual fund-like subaccounts that often contain high fees. These high fees have plagued variable annuity owners and are cause for meaningful change. As Brad Johnson shared:
“You can have the fastest racehorse on the track, but it doesn’t matter if you have a 500-pound jockey.”
Fixed index annuities are still being positioned as CD alternatives during these low interest rate times. A much higher percentage though, are occupying the role as a guaranteed income source for retirees. Because of this, indexed products are likely to see more clear lines drawn between those designed for accumulation and those that are best-suited for income generation. In other words, the do-it-all annuity may become a thing of the past.
A notable area of future growth for annuities lies in the retirement plan market. Products designed to create a seamless transition from accumulation to income will certainly have larger audiences in the coming years, assuming plan participants are open to shifting from growth-at-all-costs view to a view that incorporates income planning as a result of all that “accumulation.” Crisis in retirement
In his brilliant Harvard Business Review piece, titled “The Crisis In Retirement Planning,” Robert C. Merton notes:
“To create meaningful engagement in pension planning, a plan provider should begin by asking employees not about risk but about their expectations for income needs in retirement.”
When an advisor does this, expect annuities to play a very important role in company retirement plans. Without this shift in thinking, annuities can be added to plans but we shouldn’t expect people to choose them.
The recent 2013 annuity sales of $220 billion means annuities are continuing to play a large role in retirement planning. As advisors, how can we best prepare for the changes in the annuity landscape? How can we respond to these changes instead of stilling back watching helplessly?
Here is what I suggest: Rather than simply selling your favorite brand or flavor of annuity, first consider what your client is hoping to accomplish. Only then can you ask the right questions of clients and carriers alike, to ensure that you’re properly positioning the best product available for your clients’ objectives. By recognizing the unique attributes of variable, fixed, and fixed index annuities, we can pair the right product with the right objective.
As products continue to evolve, we must evolve as advocates for our clients. Variable annuities may not look like they did six or seven years ago, so learning how they can be of best use is simply part of our job. Fixed index annuities have come of age and are growing rapidly in the annuity spectrum.
Not sure where to turn next? Seeking the council of an expert at a few carriers or an FMO can help you become a more powerful champion for your client’s financial security. Whatever it takes, getting into step with the changes in the annuity world allows you to maintain a truly trustworthy resource that you need to be for your clients. When you serve them, you too will be served.