Why 2014 Will be Good for FIA Sales
January 24, 2014 by Jack Marrion
For the first time in three years I am very optimistic about the coming year’s indexed annuity sales. In spite of the shenanigans in Washington, the Fed’s floundering and a bull market that is long in the tooth, I believe 2014 will be a very good year for fixed indexed annuity sales.
Reason 1:
Annuity rates, FIA caps and even lifetime benefit rates will continue on their upward path.
Simply put, it’s much easier to sell the potential of a 5% or 6% cap instead of a 3% cap, and rising bond yields are making that a possibility. It isn’t only that bond yields have been low, they’ve been kept artificially low, and so even if the Federal Reserve Board is more restrained in allowing rates to rise than they might have indicated, rates are heading up. This rising yield trend has also relieved pressure on guaranteed lifetime withdrawal benefit (GLWB) roll-up rates and payout factors. However, with index caps in the 5%-8% range next year, agents won’t feel as great a need to sell the roll-up rate and can return to concentrating on telling consumers how they can earn higher dollar yields.
Reason 2:
Product Index Innovations
Three years ago, I mentioned that using indices with strong name recognition in an indexed annuity can help marketing – because the consumers may have heard of the index. Creating your own index means you could provide higher nominal participation by using market hedges with lower volatility and underlying higher dividends or yields. Although carriers have not rushed to create their own index, some are getting involved with indices designed for lower volatility. An index such as this can offer higher caps – or no cap at all – because the likelihood of a high index return is very low, but an uncapped return has stronger marketing appeal and the actual returns of these new indices could track higher. We will see more of these innovative designs in 2014.
Reason 3:
Wall Street doesn’t get decumulation
The surveys since 2008 find a large number of people want a guaranteed income for life – not a formula, best guess, or hope and prayer. The problem is the Wall Street model is built on collecting annual fees for managing a chronic problem of trying to make sure the income lasts for a lifetime. However, an annuity providing a guaranteed lifetime income solves the payout problem, so there is no reason to keep paying fees.
The biggest problem faced by this industry is consumers aren’t aware of indexed annuity GLWBs. As the word gets out, and it is, consumers will start demanding these annuities and Wall Street will have to create a new model.
Reason 4:
Consumers don’t understand how bonds work
When overall bond yields go up, the value of existing bonds goes down. That’s Investing 101. But a survey last summer of its own investors by broker-dealer Edward Jones found 63% of these bond owners weren’t aware of this elementary fact.1 What this means is that agents should be asking every prospect they meet if they own bonds, and if the answer is yes, ask them if they are aware what happens when interest rates go up. You could also throw in that you have a way to transfer this risk of loss to someone else so they don’t get stuck with underwater bonds.
Reason 5:
Bank rates are not going up
Bank rates are not rising because the 2007-08 financial crisis caused banking regulators to demand that banks keep higher reserves and higher equity so they’d be less leveraged. Indeed, last summer regulators proposed even more conservative standards for the eight largest banks. Money kept in reserves and equity dilutes returns, means less money is available. The other factor is over the last 15 years banks added on a number of customer fees – some invalid, some legitimate – and over the last couple of years regulators have either ended or put limits on the fees that can be charged. Both of these events mean banks have less revenue to pay out as interest. The final reason for modest bank yield increases in money market and certificate of deposit rates is customers are not fleeing the banks. Quite the opposite; the amount in money market accounts is at record levels despite low rates. According to the Federal Reserve, there are trillions of dollars sitting in banks waiting for the next big up move in rates, and it ain’t going to happen. It’s annuity time.
Reason 6:
Demographics
There are 20 million more people ages 50 to 74 than there were 10 years ago. Another way to look at this is there are one-third more prime annuity prospects than there were a few years ago. According to the U.S. Census Bureau over half have more than $100K of investable (or should we say annuitable) assets and over a third have more than $250K.
Reason 7:
Attitudes
The mindset for the first half of the last 30 years was that one didn’t need guarantees because the math showed putting your money in the stock market was the road to retirement success. Biases that cause people to continually buy high and sell low hurt their accumulation, and the effects of two horrendous bear markets affected their thoughts on decumulation. Numerous studies have found that today’s number one concern is running out of money in retirement, and this is where an annuity can be a strong fit.
A Great 2014
Due to all of these reasons, I believe both fixed rate and fixed indexed sales will be strong in 2014 and keep getting stronger as the year progresses. This will be a wonderful year for those who advocate the benefits of fixed annuities.
1http://www.businessinsider.com/americans-confused-about-rising-rates-2013-8
Guarantees provided by annuities are subject to the financial strength of the issuing insurance company; not guaranteed by any bank or the FDIC.
