The Future Of Annuities
May 31, 2017 by Ben Mattlin
In the annuities business, the last few years have left some people scratching their heads. Consider this: In 2016, sales of new variable annuities (VAs) fell more than 20% from the preceding year, according to Morningstar, to represent less than half of the overall market for the first time. Over the same period, sales of fixed annuities advanced 14%, led by fixed-indexed annuities (FIAs), which soared 12% to a record $61 billion in sales.
Then the U.S. Department of Labor’s fiduciary rule was put on hold just weeks before it was set to go into effect, so the Trump administration could examine whether it’s good or bad for the industry. As of this writing, the consensus expectation is that the regs will be made less stringent if they’re not repealed altogether.
The Beginning of the End?
Where all this leaves the industry is anybody’s guess, and opinions vary widely. Yet optimists insist the death of annuities has been greatly exaggerated. “We expect long-term growth in the annuity marketplace given demographic trends and the fraying of traditional government and corporate safety nets,” says Brian Kroll, head of annuity solutions at Lincoln Financial Group, based in Hartford, Conn.
That may be true, but it could still be a bouncy road ahead. “For the balance of the year, I expect VA sales to flatten out and perhaps even increase a bit,” says Scott Stolz, senior vice president in private client group investment products at Raymond James Financial in St. Petersburg, Fla. “In other words, I think we have hit a bottom.”
Fixed annuities, on the other hand, will “continue to gain acceptance as alternatives to bonds and CDs,” Stolz says. “As interest rates rise, advisors will look for ways to get a decent return for clients with no exposure to interest rate risk.”
The Impact of a DOL Repeal
If President Trump and Labor Secretary Alexander Acosta put an end to the DOL reg, as expected—both have made statements opposing it, essentially arguing that the fiduciary standard unfairly straitjackets the market—that would likely have a big impact on future sales trends. “Presumably, this would reverse all of the concerns that have hurt annuity sales [and] I would assume that will cause sales to increase,” says Stolz.
It’s a widely shared view, but Michael Kitces, a director of wealth management at Pinnacle Advisory Group in Columbia, Md., and a frequent commentator at www.kitces.com, argues the opposite. “Most of the industry has this dead wrong,” he says. The DOL ruling wasn’t bad for annuities, he maintains, and gutting it or eliminating it won’t necessarily improve annuity sales either. Rather than choking off the industry, the new fiduciary standard, if allowed to stand, could actually spur the creation of better products and more responsible sales practices.
Kitces goes on to say that there’s not much point in comparing future sales with those of the past two years. “The dynamics of what annuities did, better or worse, in 2016 versus 2015 was entirely about what was happening with annuities in the past, when Trump wasn’t president and the DOL fiduciary rule wasn’t applicable,” says Kitces. “It has no bearing on the future.”
That may be true, but not everyone is convinced. Erin Botsford, the founder and CEO of Botsford Financial Group in Dallas and Atlanta, argues that the fiduciary ruling made it “more difficult for advisors to sell or recommend VAs and fixed-indexed annuities,” both of which fell under the new fiduciary standard for full disclosure of all fees and expenses, among other strictures.
The future of annuity sales, she adds, may well depend on what Trump and Acosta do about the ruling. “If they can roll it back completely, annuity sales will come back,” says Botsford. That would be good news not just for the industry but also for consumers, she says, because the ruling as it stands is “so onerous it will discourage advisors from recommending the very types of products the small investor could use.”
