Why ‘preferred’ FIAs can be bad for the industry: Opinion
November 7, 2014 by Roccy DeFrancesco
There is a disturbing trend in the industry right now. That trend is the creation of what I’ll call “preferred” fixed indexed annuities (FIAs).
Preferred FIAs are different from what I call “proprietary” FIAs. Proprietary FIAs are products created for very specific IMOs (ones that are affiliated in some manner) to use. Proprietary products are usually tricked-up products that sound good but mathematically are inferior to many other products in the markets. IMOs push them, and agents sell them because the commissions are higher than other non-proprietary products.
Preferred FIAs are ones that many different (non-affiliated) IMOs can use but come with certain restrictions — the main one being production requirements with different tiers of commissions.
Why do companies roll out preferred products? To force loyalty and volume from the IMOs it works with.
There is one out there in particular right now that I’m finding especially annoying. It’s a product that is somewhat confusing for the agent and the consumer to understand; and like a proprietary product, it has sales sizzle to it, so it’s pretty easy to sell (and it has high commissions).
The issue is that, if IMOs want to sell this product, they must reach certain production requirements in order to get paid any kind of override. It’s really a bullying tactic by the insurance company.
If the IMO or AFMO (GA or little IMO working under a bigger one) wants to sell a preferred product, it would have to put in $5 million in premium before getting paid any commissions. The insurance company doesn’t give back pay on the first $5 million in premiums placed by the IMO (it’s a bad deal for the IMO and a windfall to the insurance company).
Then to get paid an extra .5 percent override, the IMO must reach $10 million in premiums.
For the big IMOs, $10 million in premiums is not a big deal; but there are many little AFMOs trying to offer this product to agents, so the agents don’t leave them to go work with a competing IMO. Why should an insurance agent care about this article?
Because it will affect the advice insurance agents receive from the IMO(s) they are working with. IMOs will be telling all their internal marketers to push the preferred product so they can: 1.) reach the minimum production requirements so they can start getting paid overrides; and 2.) try to get to the $10 million mark so they can reach the maximum override level.
What is missing from this equation? The best interest of the client.
I’ve had cases come across my desk where agents said they sold clients this relatively new preferred product; and after my review, it definitely would not have been the product I would recommend to the client. But that’s who the marketer at the IMO recommended as the “best” product. Shocking, eh?
Do your own due diligence, and don’t just take the word of an IMO marketer!
It’s vitally important for agents to learn the products in the market so they don’t have to blindly take the advice of a marketer at some IMO.
Note: This article isn’t meant to say that all “preferred” products are terrible. That may not be the case. But many times, it may not be the “best” product for the client, and it is recommended anyway so the IMO can meet and keep meeting its annual production requirements.
