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Carriers Releasing More Fee-Based FIAs

More insurers are adding to the stream of fee-based fixed indexed annuities (FIAs) in the marketplace. Fee-based FIAs are designed to make it easier for advisors to sell under the Department of Labor’s (DOL’s) fiduciary rule, key parts of which have been delayed until July 1, 2019.
But will advisors warm to fee-based FIAs? In time, fee-based products will rise in popularity as advisors become more familiar with them, said consultant Howard Schneider, president of Practical Perspectives, who regularly surveys the advisory market. But for now, fee-based FIA sales remain a blip on the FIA sales screen.

Fee-Based Sales Tiny but Growing

The industry reported an estimated $21 million in fee-based indexed sales in the second quarter. That was double the volume from the first quarter but still a fraction of overall indexed sales, according to LIMRA Secure Retirement Institute.
FIA sales, the bulk of which fall under a commission-based transaction, will range between $50 billion and $60 billion this year, after coming off a record $58 billion in sales last year, according to market forecasts.
Still, there are many more fee-based FIAs on the market now than there were a year and a half ago, when they were almost nonexistent.
Since August 2016, fee-based FIAs have been launched by Great American, Voya Financial, Allianz Life, Nationwide, Lincoln Financial, American Equity and Nationwide.
Ohio National Financial Services, which entered the FIA market for the first time earlier this year, said it has plans for a fee-based version of its ONdex FIA.
American Equity Investment Life Holding’s first fee-based fixed indexed annuity, marketed as Eagle Advisory 8, was launched at the end of August 2017. It joined commission-based Eagle Select 6, Eagle Select 8 and Eagle Select 10 in Eagle Life Insurance’s FIA line. Eagle is a subsidiary of American Equity.
Most recently, Symetra Life joined the ranks of the fee-based FIA issuers with the launch of Symetra Advisory Edge and Symetra Advisory Income Edge.

Equity Index Annuities Attract Flows

Fee-based FIAs offer independent advisors more choices in the face of the Department of Labor’s fiduciary rule, designed to limit conflicts of interest found in commission-based sales.
FIAs, which base interest earned on an increase in an equity index, have also been helped by strong equity market performance. Also, money that in the past would have gone into variable annuities is now going into indexed annuities, market analysts said.
With the Standard & Poor's 500 index up 10 percent this year, FIAs can potentially earn a higher return than other safe money alternatives.
Agents who sell FIAs have shifted their attention from guaranteed income to accumulation-focused products with “upside potential,” Ron J. Grensteiner, president of Eagle Life and American Equity Investment Life, said in a recent conference call with analysts.

Shifting in Favor of Fee-Based Products

Regardless of the fiduciary rule’s long-term fate, advisors in broker/dealer channels will continue shifting to fee-based products, a survey found.
Likewise, advisors say they expect changes in how they manage rollovers from employer-based retirement plans, concluded the survey published by Practical Perspectives.
Trends toward fee-based products aren’t new, but the fiduciary rule gives further impetus to the shift, Schneider said.
“The DOL rule seems to propel them even more” to fee-based products, he added. 
The survey results were published in a report titled “Financial Advisors and Insights on Implementation of the DOL Fiduciary Rule, Q3 2017.”

Challenges With Fee-Based Products

Fee-based products aren’t without their challenges, Schneider said.
Advisors questioned whether they should accept a fee from a fee-based income annuity, for example, since there’s no active management involved.
“They have questions around that and are looking around for guidance from firms or regulators” to make sure they won’t run afoul of the rule, Schneider said.
Whether the rest of the fiduciary rule goes into effect in 2019, or even if lawmakers decide to gut the rule, a fiduciary framework is taking hold and advisors who work through broker/dealers recognize it, he added.
As a result, many broker/dealers are deeply involved in offering advisors fee-based products and implementing fiduciary procedures.

Research Conducted Before Rule Delay

The survey was conducted before Labor Department regulators announced an 18-month delay to the second phase of the rule, Schneider said.
The second phase, delayed until July 1, 2019, deals with exemptions that regulate the sale of annuities sold with retirement funds. Phase two includes the Best Interest Contract Exemption, which advisors consider burdensome.
The exemption requires a financial institution to accept liability for each contract and gives clients the right to sue over investment advice.
A delay was widely expected and considered a win for the financial services industry.

The Shift to Fee-Based Annuities

Twenty-one percent of advisors surveyed said they plan to increase their use of fee-based or low-cost annuities as a result of the Department of Labor fiduciary rule.
The percentage of advisors who said they plan to increase their use of fee-based annuities varies by channel — 6 percent of registered investment advisors said they plan to do so, compared with 31 percent of independent advisors and 25 percent of full-service advisors.
Source: “Financial Advisors and Insights on Implementation of the DOL Fiduciary Rule, Q3 2017” by Practical Perspectives

Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected] [email protected].

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