In 2017, insurers prepared for the U.S. Department of Labor’s fiduciary rule by rolling out many fee-based products. LIMRA reported in November, however, that fee-based products accounted for only about 0.1% of U.S. individual annuity sales in the third quarter.
Will anyone buy, or sell, the new fee-based annuity contracts in 2018?
In my opinion, as an annuities sales executive, the answer is yes.
I may be biased, however, there’s a reason many of the top fixed-indexed annuity insurers are introducing fee-based products: there’s tremendous opportunity in the Registered Investment Advisor space. This market includes more than 12,000 firms that manage $70.7 trillion for more than 35.6 million clients. (My source for that is the 2017 Evolution Revolution Report from The Investment Adviser Association and National Regulatory Services.)
Insurers must recognize that technology is key when it comes to tapping into the RIA market. These advisors require sophisticated technology platforms to ensure they are providing fiduciary advice that’s in their clients’ best interest. Integrating with these platforms is the springboard to merging the insurance and advisory worlds.
Additionally, insurers cannot overlook consumer demand. Consumers are demanding solutions with lower costs and better value proposition. They want choices. As in how they pay for services or receive financial advice.
While anything new, specifically fee-based fixed-indexed annuities, is going to be a small percentage of total sales, we have to start somewhere.
Having a fee-based or guaranteed income solution on a fixed-indexed annuity chassis is new to the RIA marketplace. When positioned effectively within a portfolio, it may provide a better risk adjusted return and other benefits such as tax deferral and lifetime income. As fiduciaries, advisors can’t deny the solution to their clients when it can create better results for them.
At my company, for example, since we removed compensation from the product, the upside potential to the client is much higher than typical commission-based annuities: We are currently seeing one-year returns that exceed 17%.
While these recent returns are impressive, the product isn’t meant to compete with equities. It is designed to serve as a foundational part of a portfolio. Modern Portfolio Theory speaks to diversification of an entire portfolio to maximize return relative to risk. Nearly all advisors include some form of fixed income within a managed portfolio. Fee-based fixed-indexed annuities can better withstand a rising rate environment compared to their fixed income counterparts. Not to mention, as we know, the current bull market is coming up on year 10, and it can’t run forever.
Many insurers are committed to bringing fee-based fixed-indexed annuities to more advisors and the clients who need them, because these products offer a unique value proposition. By expanding the tool box with fixed-indexed annuities, the value potential advisors can offer is enhanced and may help them get their clients an even better overall result.
Introducing insurance into the advisory world will take time and work. Taking a non-discretionary tool and using it in a mostly discretionary world has its challenges, but as one RIA in Massachusetts stated, “If it’s the right thing to do for the client, then the juice is worth the squeeze!”
The timing is right as advisors need alternatives in the face of low fixed income yields and the aging equity bull market. In order to respond, insurers must be equipped to provide the technology and resources advisors require to seamlessly integrate fixed-indexed annuities into their product portfolio.
— Read 3 Ways to Help Americans Save More for Retirement on ThinkAdvisor.