For over two decades, according to LIMRA’s Secured Retirement Institute, variable annuity sales were highly correlated to the S&P 500. At the end of 1990, the S&P was just above 300, annual VA sales were $17 billion, and the trend for both was upwards.
However, that trend abruptly changed in 2012. The S&P 500 had risen over 1,200, and annual VA sales were $147 billion. Since then, the S&P 500 has achieved record highs, while variable annuity sales are on pace for a 20-year low.
How did that happen? More importantly, what must occur to change the trend?
1. The industry needs to unite to change the narrative.
Anyone that read my first annuity column on ThinkAdvisor was treated to a pop-up ad that read “I Hate Annuities, And You Should Too.” It is virtually impossible to search for annuity information on the internet without seeing that misinformed ad.
But the problem goes beyond that. Even positive articles on annuities are muted by comments about “high” commissions and fees. We, the insurance companies and the distributors, need to come together to tell the story about the millions of retirees who sleep well at night because of the annuity income they receive every month.
2. We need to get back to selling the benefits of tax deferral.
Long before we had living benefits, variable annuities were sold mostly for tax-deferred growth with a guarantee of principal at death. Well, guess what? Those benefits still apply.
Yes, I know that variable annuity policyholders give up the opportunity for long-term capital gains and stepped-up cost basis at death. But ask the mutual fund shareholders who are now receiving their 1099s for 2017 how receptive they would be to sheltering those taxes.
Keep in mind that anyone 65 and older will have their Medicare premiums determined by their level of adjusted income. Tax-deferred income does not count toward that calculation. It also doesn’t count toward the 3.8% investment surtax that helps pay for Obamacare.
3. Quit moving the goal line on existing policyholders.
Beginning in 2011, the variable annuity companies began to not only de-risk their current product offerings, but many also took steps to reduce their future liability on existing policies. This was accomplished by eliminating sub-account options, prohibiting additions to existing policies (or, if they didn’t have the right to do that, reducing commissions on the additions), forcing annuitization of the policy and offering to buy out existing policies.
I certainly understand why so many companies chose to do this. Their original pricing assumptions proved to be faulty, so they needed to protect their balance sheet. However, I think it’s important that we all acknowledge the cumulative impact these individual decisions have had on advisors’ perception of the variable annuity industry.
Many advisors believe that the insurance companies changed the rules of engagement after the fact. Each of these decisions creates the need to have an additional conversation with the policyholder — and not in a good way.
4. Help advisors manage their existing policies.
Living benefits on a variable annuity are a terrific retirement planning tool. However, if you don’t follow the rules that govern the benefit, then you can essentially end up paying for nothing.
Each new product iteration makes it that much harder to manage older versions. For obvious reasons, the industry throws most of its resources behind the sales effort and therefore dedicates very little to making it easier for advisors to service their existing block of business.
While variable annuity sales were growing, this was a winning strategy. However, as sales have slowed and the existing policies have aged, advisors now find themselves spending significantly more time trying to service existing policies than selling new ones. I would contend that providing better support for the old business will give advisors confidence to add new business to their existing book.
5. Bring back investment flexibility with living benefits.
In an attempt to further reduce the risk of a living benefit, most insurance companies have introduced — and often require — volatility-managed investment options. Unfortunately, to date, most of these investment options have underperformed even a balanced index.
In a time of record stock market values, it becomes very difficult to explain to a client why his or her variable annuity performance has badly lagged other equity investments. The fact of the matter is that the policyholder has already paid to insure his or her lifetime income by choosing to pay extra for the rider.
By also restricting the policyholder to a volatility-managed investment option, the issuer is essentially also requiring the policyholder to shoulder much of the hedging costs as well. I certainly understand the attraction of an investment option that captured most of the upside with significantly less volatility. But if these strategies actually performed as they have been marketed, they would be attracting assets beyond just the variable annuity world.
6. The distributors and the Insured Retirement Institute need to initiate a dialogue with FINRA regarding how fee-based annuities differ from commissionable annuities.
Annuities are some of the most highly supervised products offered by broker/dealers and banks. At the end of the day, the current supervisory procedures were designed to make sure an annuity was not recommended just because of the commissions they pay.
Advisory annuities pay no commission and therefore have no surrender charge, yet all distributors continue to supervise them as if they do. Until this level of supervision is modified, advisory annuities will never gain traction.
In addition, as more and more advisors migrate to a fee-based only model, annuity sales will continue to slide. Furthermore, the insurance industry will need to have the same conversation with state insurance regulators. If the distributors are successful with FINRA but the states continue to require the same suitability forms, then we will win only half of the battle.
One might conclude that by advocating these six steps, I’m really just suggesting that we go back in a time machine and return to a time before the variable annuity companies de-risked their product offerings. Clearly, that’s not possible. The financial crises combined with persistently low interest rates have permanently changed the risk profile of the variable annuity industry.
However, just as the products became too aggressive before the financial crises, I believe they have now become too conservative since then. The variable annuity sales model as it exists today is broken. If you don’t believe me, reflect again upon the widening gap, between the S&P 500 and annual VA sales, noted earlier. It’s time the industry players united to get things back on track.
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