Have annuity sales bottomed out?

Annuity sales have hit a 15-year low, primarily due to the Department of Labor's fiduciary rule

Nov 29, 2017 @ 2:46 pm

By Greg Iacurci

Annuity sales have fallen to their lowest point in well over a decade, but industry experts believe a turnaround is at hand.

Sales among all annuity products in the third quarter were $46.8 billion, the first time since 2002 that quarterly sales have dipped below $50 billion, according to the Limra Secure Retirement Institute, which tracks insurance products.

Limra and other industry experts attribute the recent dip primarily to the Department of Labor fiduciary rule, which places stricter standards on the sale of investment products such as annuities to retirement investors. The rule partially came into effect in June.

However, with much of brokerages' compliance efforts behind them, annuity sales will likely begin creeping upward again.

"This might be the bottom of it, at least for the near future," said Jamie Hopkins, professor of retirement income at The American College of Financial Services. "I'd expect a slight bounce back in Q4, probably not tremendously higher, and next year back to 2016-type levels."

(More:DOL fiduciary rule driving fundamental shift in variable annuity market)

Variable annuities took the hardest hit in Q3 — their $21.8 billion in total sales was the lowest for the product line in 20 years. Fixed annuities also were down for the quarter, dropping 11% from the previous year.

Variable annuity sales have been trending downward for years, while those of fixed indexed annuities had been on a nearly decade-long run-up prior to the rule.

Insurance companies and broker-dealers have been preoccupied by compliance with the fiduciary rule from the time it was released in April 2016, and therefore diverted some attention from sales and marketing efforts, Mr. Hopkins said.

"If advisers have to learn a new process or add something into the sales cycle, this all impacts the business," said Todd Giesing, the director of annuity research at Limra. "As distributors, manufacturers and advisers get more comfortable in the new environment, we do see the opportunity for Q3 to be the [sales] trough."

Annuity sales into individual retirement accounts clearly demonstrate the rule's impact so far. Overall sales into IRAs were down 20% in Q3 compared with last year, but sales into non-qualified accounts such as brokerage accounts were only down 5%, according to Limra.

One of the DOL's primary goals with its fiduciary rule was to eliminate conflicts of interest that exist for brokers selling investments into the IRA market, specifically those soliciting rollovers from 401(k) and other defined-contribution plans.

A big challenge for brokerage firms has been developing standards around compensation. The regulation requires that brokers and advisers make no more than reasonable compensation when selling retirement products, which has led distributors to re-examine some of the large upfront commissions offered on annuities, particularly variable and indexed annuities.

(More:Trump administration seeks to give boost to 401(k) annuities)

"You take away the 7% upfront commission, that takes away steam for a lot of people," said Bob McCommon, director of special products at Wunderlich Securities Inc., an independent broker-dealer. "For the firm or channels of advisers used to the big upfront commissions, I think that's hurt them."

Limra forecasts next year's annuity sales will be flat or increase slightly — no more than 5% — compared with 2017.

The Trump administration on Nov. 27 issued a delay to some portions of the Obama-era rule that had not yet taken effect, pushing the compliance timeline out to July 2019. Those portions may be revised before then, pending a review by the DOL.

"With all this uncertainty we struggle to see a significant catalyst for growth until we get a little more certainty around what the future looks like," Mr. Giesing said.

Mr. McCommon believes that, aside from the DOL rule and continuing uncertainty around it, other factors are at play, too, such as product development. Several variable annuity providers, for example, have placed a level of volatility control on many contracts, which reduces an investor's upside potential and makes the products less attractive from an accumulation standpoint.

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