Fixed Indexed Annuities Evolution Away
From Its Original Target Client Class

 
Insurance Industry Creates Client Oriented Equity Indexed Annuity.

The Fixed Indexed Annuity (FIA), originally known as an Equity Indexed Annuity (EIA) was created as a way for risk averse retirement savers to have a shot at higher returns than multi-year guarantee annuities (MYGA). A simple concept for clients who did not trust the securities markets and wanted strong guarantees. The original FIA crediting methods were designed by insurance actuaries, insurance agents and the insurance carriers as an alternative to fixed rate annuity products. The FIA was not seen as a new and high profit generator for the insurance carriers and distributors. The FIA products were built to be fairly simple since the target clients were the typical MYGA, traditional deferred annuity, or bank CD buyers. Sales took off and the securities firms and broker dealers (B/D) took notice to the changes in their assets under management (AUM).

Interference #1

Enter 151a, and the SEC looking to classifying FIAs as securities. Coincidence? I think not! 151a would have taken care of a problem for BD's. Agents who wanted to sell FIAs would have needed a securities license, and to comply with all the fees and fun regulations that came with it! Well, as we know, 151a was vacated by the court. The ruling was a blow to securities folks counting on cornering the FIA market and collecting additional revenue from the AUMs! The securities industry solution to this loss of revenue was to just start requiring the agents who do have securities licenses to write their FIXED PRODUCT FIAs though a B/D anyway. Enormous greed at the expense of the clients as the products offered will have to be "approved" which is locking out certain carriers and distributors. Additionally, the agents and advisors are keeping less commission and have fewer long time insurance experts to utilize for a full picture of the fixed insurance marketplace.

Interference #2

Enter congress and the Dodd-Frank Wall Street Reform and Consumer Protection Act which makes the FIA a non security product for good. This reform has led to the unfettered creation of profit heavy, extraordinarily complex crediting methods and the worst offender of them all, a FEE on a fixed annuity. These new fees can cause the accumulation values to go backwards in some cases! Going backwards is a major "no no" in fixed annuities! State regulators, agents and IMOs should know this "no no" goes against the original (gold standard) feature of the fixed annuity. If new FIA products are being built by the same entities that are just after higher AUM, overrides and bonuses, what chance will consumers have after the DOL ruling? Limiting the distribution channel for qualified FIAs will limit the quality of training to agents, will help push a specialized agenda focused on fee based products, exclude certain carriers and create a way for a group of carriers and distribution entities to manipulate suitability to fit their profit motives. Additionally, how many of these distribution entities are owned by an insurance company? How is an insurance company owned IMO not a conflict for the clients/advisors looking at fixed products?

Let us face it, the FIA of today look and sound more like stock market products with each new FIA volatility crediting strategy released. Terminology such as:
  • Dividends and Multiple Asset Classes
  • Commodities and Real Estate
  • Brands including well known Wall Street investment firms

There has to be money funneling into these well known Wall Street names and banks though the FIA options being purchased. It all just looks a little messy in my opinion.

Interference #3

Look, making an FIA a DOL restricted product is going help the B/Ds and insurance carriers bottom line. All this at the expense of the clients who used to get a guaranteed increase on premium along with guaranteed lifetime income purchase rates WITHOUT FEES. As a former fixed product designer, I can assure you that the risk will be borne by the client, when a qualified FIA is classified basically as a security. Risk averse clients will have one less insurance product to consider as the FIAs will look even more like Wall Street investing than a guaranteed insurance products. The true risk averse class of clients will stay clear and look to a MYGA or bank CD that does what they expect from their fixed bucket! I feel this will be especially true as rates rise and we see the 5.00% guaranteed rate MYGA again!

As of now, I am still viewing this whole regulation issue as a play by B/Ds to get revenue from fixed products for doing nothing of value for the traditional fixed annuity consumers. We have spoken with a number of B/Ds in the past and they dislike FIAs because they can't supervise them and take ?haircuts" on agents. The agents have loved FIAs because they can offer a guaranteed product with no downside risk and nice upside potential. B/Ds prefer variable annuities and mutual funds because they earn AUMs fees each year. They get basically a trail commission even when a client loses money through management fees/loads and 12B1 fees etc. I predict that if FIAs are doomed to DOL ruling on qualified retirement plans, the B/Ds will force the insurance companies to modify the compensation so they will earn ongoing fees each year on the assets. In essence, the clients will continue taking on more risk and pay fees for that privilege. Meanwhile, the insurance carriers take immediate profit year after year through rider fees! As for the fee based adivsors, they would need an FIA to have a non-commission version and then charge a fee. A 1.00% annual fee would actually be an increase over current compensation. An FIA with a 10 year surrender period would have a 10.00% fee compared to the 5.00% - 7.50% upfront commission now. The result will be lower potential returns for the client and the fees could make negative accumulations years possible. The fee based advisors just don't fit in the fixed world, at least not yet. That is another story...

In reality, there are clients who are looking for the highest GUARANTEES from day one. Many of those client have been working with their independent life agent for 5, 10 or even 20 years, as in my case. The outcome of the DOL rule may just create a boom for the old school fixed rate annuity. FIAs will not show well when looking at the strongest guarantees, also known as the minimum guarantees. Based on today's rates, a seven year MYGA would GUARANTEE a 22.98% increase, $500,000 will grow to $614,936. A seven year FIA will at best have a minimum guarantee of 1.00% and grow to $535,000 to $550,000. I have a feeling FIAs may become a less selected option. Agents may not feel the FIA to be in the best interest of the clients purely driven by guarantees. What is best for immediate lifetime income needs? Oh boy, this should be a real advantage for immediate annuity (SPIA) sales. Imagine, comparing a SPIA to an FIA income rider for a the most guaranteed lifetime income starting now! As the numbers show, no insurance product beats the SPIA for immediate guaranteed lifetime income. See my SPIA vs FIA Rider article for those numbers!

Jeff Affronti

Marketing, illustrating, studying and selling fixed annuities since 1995.

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