The Markets December 14, 2016

Fiduciary Rule Drives Reconsideration of Fee-Based Annuities

Nearly half of insurers feel the DOL conflict of interest rule would positively impact sales of fee-based annuities, according to Cerulli Associates; less certain is how to effectively package and price such products. 
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U.S. variable annuity (VA) and fixed-index annuity (FIA) sales are expected to decline by at least 10% through 2018 as the industry struggles to adapt to upcoming fiduciary reform regulations put forth by the Department of Labor (DOL), according to data shared by Cerulli Associates.

There can be little doubt that annuity providers, many of them at least, would like to see the significant reforms halted or dialed back under the pending Trump administration. They argue they will never be able to make the new fiduciary standard’s “best-interest contract exemption” or “BIC” provisions workable, given the commission-based distribution arrangements traditionally used for fixed-index annuities.

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Annuity providers would much prefer to be allowed to use the distinct “84-24 exemption” to continue to use commission-based sales structures—which had been initially proposed by the DOL but subsequently reversed in the final version of the rulemaking published last year and slated to start taking effect in April 2017. Utilizing this exemption would still likely require some changes that are in the best interest of the end investors purchasing annuity products, but many insurers believe 84-24 is an easier compliance hurdle to jump over. 

Polling conducted in this evolving environment by Cerulli Associates suggests that insurers feel the biggest challenge they are facing for the foreseeable future is the DOL rule—even as concerns about lasting low rates and stagnant global economic growth add additional headwinds.

“Insurers’ responses to new the regulatory landscape will significantly impact the future of VA and FIA sales,” argues Donnie Ethier, associate director at Cerulli. “In order to ensure future relevance, insurers must examine both the pricing and positioning of their products.”

NEXT: Growth in either direction 

Cerulli predicts investor interest in all sorts of fee-based products will grow as the DOL rule is implemented—and even if it is not.  

“This interest has been slowly growing within the industry over the past few years, as most insurers and distributors think they will be needed to comply with the DOL rule,” says Ethier. “Adoption of the fee-based model has been mostly overlooked by the industry … However, what was once considered an opportunity is now a necessity.”

The Cerulli research shows nearly half of insurers surveyed said that sales through fee-based platforms would be positively impacted as a result of the rule.

“They could also be a source of future innovation, given that few versions currently offer guarantee lifetime benefits,” Ethier says. “This may be an opportunity for developing new benefit ideas for this contract class. Insurers will need to focus on coming up with new ideas to provide the guarantees that investors want while minimizing risk to the company.”

If insurers can develop creative products that focus on how advisers do business, they can aid their cause in the years ahead, Ethier concludes. "It's also important that insurers remain sensitive to cost and compliance considerations and that most broker/dealers want to control the messaging regarding the Conflict of Interest Rule to their adviser networks."

Information on how to obtain Cerulli's latest annual report, U.S. Annuities and Insurance 2016: Adapting to the Fiduciary Reality, is available at www.Cerulli.com. 

Data & Research December 13, 2016

FINRA Offers Insight on Investor Profiles

Even though more than half of investors turn to financial professionals, investment literacy is low especially among women, a new survey finds. 
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Fifty-six percent of investors holding assets outside retirement accounts are using a financial professional such as an adviser or broker, according to a new report by the FINRA Investor Education Foundation. The main reasons respondents said they turn to financial professionals are improving investment performance (81%), avoiding losses (78%) and learning about investments (63%). But despite these trends, survey results indicated that knowledge of investment concepts is low, particularly among women.

“On a 10-question investor literacy quiz, on average, men answered 4.9 questions correctly compared to 3.8 for women,” explains FINRA Foundation President Gerri Walsh. “Interestingly, both genders got the same number of questions wrong: 3.4. But women were significantly more likely to say they did not know the answer to a question compared to men, perhaps pointing to differences in investor confidence by gender.” 

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Overall, only 10% of respondents who took the investor literacy quiz could answer eight or more questions correctly. The majority (56%) were able to answer fewer than half of the questions correctly.  

Through a series of follow-up questions, the study also offered insight into investors’ perceptions. Seventy-percent of respondents said they believe the fees they pay for investment accounts are reasonable.

Notably, 43% of investors using a financial professional are worried that sales incentives present a conflict of interest.

Furthermore, the study also pointed out generational differences in investing preferences. Thirty-eight percent of investors between the ages of 18 and 34 have used robo-advisers, compared to only 4% for those ages 55 and over. Moreover, only 22% of those aged 55 or older knew what crowdfunding was. Fifty-eight percent of those between the ages of 18 and 34 were aware of this concept.

A greater percentage (61%) of younger investors between the ages of 18 and 34 is worried about being victimized by investment fraud, compared to 28% of those ages 55 and older. 

In addition, the survey offered insight into asset allocations among investors. Seventy-four percent of households surveyed reported owning individual stocks and 64% reported owning mutual funds. Individual bonds are held by 35% of the population and annuities by 33%. Twenty-two percent reported holding investments in exchange-traded funds (ETFs). The rate was even lower for REITS, options, private placements, or structured notes (15%), and commodities or futures (12%).

These findings were taken from the Investors in the United States 2016 report. The survey is a new component of the FINRA Foundation’s National Financial Capability Study, which the company defines as one of the largest and most comprehensive financial capability studies in the country.

The survey’s full data set, methodology and related questionnaire are available at USFinancialCapability.org.

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