Annuity Industry Must Adapt to ‘Very Challenging’ Times: Raymond James Vet
July 20, 2017 by Alex Padalka
The annuities industry is facing a very challenging environment in light of the partial implementation of the Department of Labor’s fiduciary rule, Scott Stolz writes in ThinkAdvisor. And how the industry adjusts to what financial advisors choose to offer their clients will determine whether it survives at all, according to Stolz.
The DOL’s fiduciary rule, which aims to reduce conflicts of interest by requiring advisors to put clients’ interests first, is pushing more and more advisors to leave the commission-based model for the fee-based approach, according to Stolz, a senior VP at Raymond James, which distributes annuities from several insurers. The annuities industry ostensibly has an answer: fee-based annuities, which have actually been around for more than 10 years, he writes. In fact, insurers have on average rolled out about two fee-based variable and indexed annuity products every month for the last 12 months, according to Stolz. Nonetheless, last year’s sales in fee-based variable annuities were just $1.2 billion — a little over 1% of total annuity sales, according to Morningstar data cited by Stolz.
Many advisors stayed away from the first generation of fee-based annuities due to the high net cost to the client and little obvious benefit, he writes. The second generation of fee-based variable annuities, such as the ones introduced by Jefferson National, came with a low monthly fee and no mortality or expense charges — but lacked a living benefit and death benefit, according to Stolz, which put off some advisors. Iterations of the product came with a small three-year surrender charge, which some advisors may balk at as well, he writes.
Annuity companies must take the DOL rule into account and understand that advisors will need to justify recommending fee-based annuities, which in turn will requires a lot more paperwork and compliance oversight, according to Stolz. Fortunately, justifying fee-based annuities in a post-DOL rule world will become easier as regulators focus less on the number of transactions in fee-based accounts and take into account the financial planning aspect of an advisor’s job, he writes.
Nonetheless, Stolz gives the annuity industry just a 50/50 chance of success. In fact, he writes, annuity sales will drop over the next one or two years. And while sales may potentially recover, they’re not likely to come back to the record levels of a decade ago, according to Stolz.
What’s more, most of the growth is likely to come from fixed and indexed annuity companies, which are rolling out fee-based annuities as they just adjust to a post-DOL rule environment, he writes. Fixed and indexed annuities have a clear advantage over variable annuities, according to Stolz: the commission savings can go toward raising annuity rates and caps, which is usually more popular with consumers than fee savings. And variable annuity companies will have to lower or cut mortality and expense charges to compete, he writes.
The silver lining, according to Stolz, comes from retiring baby boomers. Their demand for annuities will grow as they become more conservative and start looking for ways to lower their tax liability, he writes. Meanwhile, since so many baby boomers aren’t prepared for retirement, guaranteed lifetime income will become ever more popular, according to Stolz. Nonetheless, the annuity industry faces some uncertain times ahead, he writes.
Click here for the ThinkAdvisor column by Scott Stolz, Do Fee-Based Annuities Have a Future?
