LIMRA reported that total annuity sales in the second quarter were $59.5 billion, up nearly 15% from the previous quarter. It's been almost three years since the industry has reported sales at these levels. When LIMRA releases third-quarter sales in the coming weeks, I expect to see even better numbers. So, what's going on?
A Wall Street Journal article from Oct. 27 attributed this increase mostly to the elimination of the Labor Department's fiduciary rule. I couldn't disagree more with this conclusion.
Reasons for increase
In my opinion, there are three reasons we've seen an increase in annuity sales: 1) advisers re-entering the space after the uncertainty caused by the DOL fiduciary rule was eliminated, 2) rising interest rates and 3) aging baby boomers searching for protection for their retirement income portfolio.
Although the DOL fiduciary rule may no longer be in effect, the truth is most of the changes distributors put in place to comply with the rule are still in place. For example, distributors who lowered and/or levelized commissions have, for the most part, retained those commission levels. In addition, new procedures established to enhance already stringent supervision requirements mostly remain.
Free steak dinners
To be sure, annuity sales have benefited from the death of the DOL fiduciary rule, but not because of free steak dinners. Throughout the process of enacting the rule, some advisers were uncertain about how their firms were going to alter the sales process to comply. Some even feared compensation would go away completely.
Therefore, many advisers moved to the sidelines until the dust settled. Having more clarity from a regulatory perspective, many of those advisers are once again using annuities as part of the retirement income plan. However, in my view, that only partly explains the recent sales surge.
Not only are higher interest rates making both fixed and indexed annuities more attractive due to better potential returns, but the increase in rates has also helped stop the four-year decline in variable-annuity sales.
Although industry variable-annuity sales are still approximately half of what they were prior to the financial crisis — at $25.8 billion for the most recent quarter — they remain the single largest sales component in the annuity space. Higher rates have allowed many variable-annuity companies to increase the level of guaranteed income the products offer through the living benefit riders and/or have allowed for greater investment flexibility when offering these riders.
Aging baby boomers
Last, and most important, aging baby boomers are increasingly looking for ways to protect their retirement income portfolios. Now that the bull market is approaching its 10-year anniversary, retirees and pre-retirees are getting increasingly nervous every time the headlines scream about the latest market "plunge."
Given that fixed and indexed annuities provide principal protection, advisers may recommend these products to provide downside protection for suitable clients.
Most of the increases in annuity sales are being driven by record indexed-annuity sales and near-record fixed-annuity sales. LIMRA reported that indexed-annuity sales were $17.6 billion in the second quarter, up 21% over the first quarter and 12% higher than the previous quarterly record set in the second quarter of 2016, another period of market volatility. Fixed-annuity sales were $11.4 billion, the highest since first-quarter 2016 and up 31% over the previous quarter.
Recently, I asked one of our advisers why they shifted their annuity business to mostly indexed annuities rather than variable annuities. His answer was very simple, and it had nothing to do with commissions or steak dinners. And given the extra compliance steps that exist at most distributors, it isn't because it's easy business to do.
Instead, he said, "My clients are older, and they no longer want to take as much risk as they move into retirement."
Given the projected demographics and baby boomers' retirement goals and income needs, as well as the recent increase in market volatility, I would expect to see continued strength in industry annuity sales — particularly in the fixed and indexed categories.
Scott Stolz is senior vice president of private-client group investment products and wealth solutions at Raymond James.