The traditional fixed annuity — a product that credits a fixed rate of interest over a stated period of time — is heating up at broker-dealers.
For example, LPL Financial reaped some $46.7 million for the first quarter in commission revenue from fixed-annuity sales, up 70.8% from the year-earlier period, according to the broker-dealer's quarterly earnings report.
The firm attributes the jump in sales “primarily to increased sales of indexed annuities, as well as a new three-year fixed-annuity product that was introduced beginning in the fourth quarter of 2013,” the company noted in a filing with the SEC last week.
The three-year fixed annuity that's making waves at LPL is widely believed to be the Forethought SecureFore 3, which is offering a guaranteed rate of 2% over the course of three years if the client chooses not to use the return-of-premium feature. The surrender charges over the three-year period are relatively high: 8% the first two years and 7% for the third. Should a client opt for the return-of-premium option, he or she can receive a 1.5% guaranteed rate instead of the 2%.
LPL spokeswoman Betsy Weinberger did not respond to a request for comment.
Two percent isn't much if you're comparing a fixed annuity to returns in the stock market, but if the annuity's used as a CD proxy, it's handily beating that option. Rates for a three-year CD are ranging from 0.35% to 1.45%, according to Bankrate.com.
“It's not a bad rate,” noted Jeremy D. Alexander, president and CEO of Beacon Research. “The yield is selling it.” He counted four insurers offering 2% rates: Delaware Life, Liberty Bankers Life Insurance Co. and Commonwealth Annuity and Life Insurance Co. and Forethought Financial Group Inc. Commonwealth and Forethought are both owned by Global Atlantic Financial Group, an insurer with roots that stretch back to the Goldman Sachs Group Inc.
Last year was a banner year for fixed annuities across the board, with sales rising to $78.1 billion, up 16.6% from the prior year, according to Beacon Research. Of that amount, traditional fixed annuities without market-value adjustments accounted for $21.6 billion, up 14.85% from the year-earlier period. Market-value adjusted fixed annuities, which adjust the amount clients receive if they withdraw their money early, sold to the tune of $6.7 billion, up 41.4% from the prior year, according to Beacon. Indexed annuities accounted for $38.7 billion in sales, up 13.2% from the prior year. Income annuities sold $11.0 billion, up 19.9% from 2012.
Carrie Turcotte, president of Crest Financial Strategies, recently sold Forethought's SecureFore 3 fixed annuity to a client who kept a lot of money in CDs and would do so for years at a time. This particular client was earning less than 0.5% on the CDs. He keeps some cash on the sidelines for liquidity needs in the interim, and he now has a place to park a chunk of his money at a better rate.
The 2% rate is an attractive one at a time when insurers' low returns on bond portfolios are still affecting their ability to provide the most competitive fixed-annuity rates. “Rates [on fixed annuities] haven't been worth considering,” Ms. Turcotte said.
Richard Dragotta, an adviser with LPL, said 2% isn't quite high enough for him to be interested, but noted that there's an audience out there for that product. “I'm not a proponent of locking up money for 2%, but then again it's short-term and rates aren't rising overnight,” he said. “If you're in a high tax bracket, then the tax-deferred growth is even better.”
Over at Raymond James Financial Inc., the top selling fixed annuity — exclusive of indexed annuities — is a product from Commonwealth Annuity and Life. This contract has maturities that range from three to 10 years, and the three-year version of the product is paying 2.25%, according to Scott Stolz, senior vice president of Raymond James' Private Client Group-Investment Products.
Raymond James sold $122 million of the Commonwealth fixed annuities over the last seven months.
“It's a great place to park money and earn something on it in the interim, with the hope you can do something with it not too far down the road,” Mr. Stolz said.