Here’s a signal that there’s still plenty of room for growth for annuity sales in the registered investment advisor channel. Great American Insurance Group introduced a zero-commission fixed indexed annuity to be sold by a financial professional who is both an insurance agent and an investment advisor representative affiliated with an RIA.
By stripping out agent commissions from its new Index Protector 7 fixed indexed annuity, Great American was appealing to fee-only RIAs as it released the product in August. In the past, these RIAs have shied away from selling commission-based FIAs.
“This opens up the door to thousands of advisors,” said Tony Compton, Great American vice president, broker/dealer sales with Great American.
Most FIAs pay, on average, 3 percent to 6 percent of the contract’s value to the selling agent.
With this product, investment advisor representatives now can offer this solution to their clients and charge a fee for their services, Compton said.
New Comp Options
Under the new annuity compensation structure, exposure to market declines remain the same with an FIA — zero.
But the upside exposure to market gains increases by another 1 percent to 2 percent over the 3.5 percent to 4.5 percent point-to-point cap typically offered by the index contracts, Compton said.
The key to the zero-commission product is that it will allow producers and advisors who own an RIA or who function as an investment advisor representative to build up their assets under management (AUM) using annuities.
AUM compensation models typically charge between 0.5 percent and 1 percent, so the higher the asset base grows, the more advisors are compensated. It is believed that agents will gravitate toward the zero-commission model, at least for a portion of their indexed annuity business, Compton said.
Great American, a subsidiary of American Financial Group, sold $3.7 billion worth of fixed indexed annuities last year, according to Wink’s Sales & Market Report. Most of the company’s indexed annuity sales are conducted through broker/dealers and banks.
New fiduciary rules issued by the Department of Labor have raised investment advice standards. Although the regulations aren’t eliminating commission-based products for their potential conflicts of interest, many industry experts indicate the conflict of interest rule will push companies to develop more fee-based products.
Insurance-only producers, who earn commissions, traditionally have been the channel through which the bulk of fixed indexed annuities are sold.
More recently, sales of fixed indexed annuities by Series 6 or Series 7 registered representatives working through a broker/dealer have exploded. However, the channel that remains untapped is the Series 65 investment advisor representative affiliated with an RIA, Compton said.
“We have a focus on registered reps in the bank and broker/dealer space and now we want to bring RIAs into the space,” he said.
And why wouldn’t RIAs be receptive to the idea? While RIAs as a group are growing, much of the growth is going to the top-echelon 200 or 300 RIAs.
“I’m not convinced that the average or the median RIA is growing, even though I know the industry is growing a lot,” consultant Chip Roame, managing director of Tiburon Strategic Advisors, said in a webinar earlier this year.
In 2014, there were about 12,000 fee-based financial advisors registered with the Securities and Exchange Commission in a universe of about 126,000 independent advisors nationwide, according to Tiburon.
Banks, B/Ds to Overtake Independent Agents in FIA Sales
As distribution channels compete for fixed indexed annuity sales following passage of the DOL fiduciary rule, banks and broker/dealers will overtake independent agents as the likely preferred sales channel for American Equity Life, the No. 2 seller of fixed indexed annuities last year.
As broker/dealers become more familiar with fixed indexed annuities, “it’s certainly our view that long-term distribution in banks and broker/dealers will likely someday overtake what we were getting from independent agents,” John Matovina, CEO of American Equity Life, said in a June presentation at the Des Moines Insurance Conference.
Not only is the independent agent channel “a little more mature in terms of market” than the broker/dealer channel, but in the independent agent channel, there’s “not necessarily a clear identification of where that distribution will be replenished from,” Matovina said.
Over the long term, banks and broker/dealers offer “a far greater opportunity than what we have with independent agents,” he said.
American Equity, with about 540,000 policyholders, sold $6.9 billion worth of fixed indexed annuities last year, according to Wink’s Sales & Market Report. That put American Equity just ahead of Great American Insurance Group and behind the market leader Allianz Life.
Fixed indexed annuities have recorded torrid sales recently, cresting at $53 billion in 2015 and becoming the shining stars of the fixed annuity world.
Investors who need guaranteed income like fixed indexed annuities because investors can capture a portion of the market’s gains while protecting their investment from loss. In a good year, a fixed indexed annuity can perform much better than a bank certificate of deposit.
With a receptive market, and DOL regulators clamping down on commission-based sales generated by the independent agent channel, the race is on to sell fixed indexed annuities through other means. This creates an opening for banks, broker/dealers and RIAs.
Jackson National Life, the nation’s top seller of variable annuities, announced earlier this year that it is readying a fee-only variable annuity to be distributed through broker/dealers affiliated with an RIA, according to a government filing.
“Based on Jackson’s ongoing conversations with our broker-dealer partners, we think the legal/compliance costs of managing a commission-based platform under the DOL proposal will result in more demand for fee-based variable annuity products,” a Jackson National spokeswoman said.
Channels Warm to FIA Product Changes
American Equity’s anchor relationship with an independent marketing organization might generate between $100 million and $150 million annually from a thousand agents reporting into that field organization, American Equity’s Matovina said.
But getting to that $100 million to $150 million level through a bank or broker/dealer could be done with a lot fewer agents, he estimated.
American Equity executives said that banks and broker/dealers are becoming more accepting of FIAs in light of changes to the product structures — such as shorter surrender periods, the disappearance of premium bonuses and simpler choices.
Banks and broker/dealers, which are heavily regulated, were given a boost earlier this year when DOL regulators authorized them as “financial institutions” to sign off on fiduciary transactions involving retirement accounts.
But independent marketing organizations, which recruit independent agents and help insurers distribute life and annuity products, are not authorized to act as a financial institution. This raises the liability exposure to individual agents.