Life Annuity Specialist
Distributors Hope a Simple Annuity Will Tempt Fee-Based Advisors
A few years ago, David Lau dangled a new type of annuity in front of the fee-collecting advisors that buy products off his platform.
They already could purchase complex products, like fixed-indexed and variable annuities. He decided to introduce a simple fixed-rate annuity from Security Benefit paying about 3.5% annually for four years.
“It really took off,” said Lau, whose company, DPL Financial Partners, now features about a dozen fixed-rate annuities with durations of three to 10 years from four insurers.
The products, also called multi-year guaranteed annuities, are filling out the lineup of choices that a fee-based advisor can make. Sales are still minuscule, or roughly $10 million for the third quarter, according to Wink’s Sales & Market Report, but Lau sees growth potential.
Right now he’s selling the products from Security Benefit, Great American, Midland National and Guaranty Income Life. Two more insurers are expected to join in the first quarter and a third in the second quarter, he said.
Still, there are fewer fixed-rate annuities than more recent entrants like fee-based index-linked variable annuities, he said.
Ed Mercier, president of RetireOne, another insurance platform serving independent advisors who earn a fee, described what’s happening as an “expansion of the carriers’ development to support the fiduciary industry.”
“Variable annuities led the way, fixed indexed annuities followed and now we’re seeing the rest of the product set come about,” he said.
Wallet Share
Advisors who collect fees for services are going to have more options for clients who would traditionally look to money market funds or bank certificates of deposit as a safe bet for conservative investors to put cash, Lau said.
“A low-rate environment makes the other products – certificates of deposit, bonds, cash –more problematic,” he said. “When you are using a bond yielding 1.5%, if inflation is at 4%-5%, you are on a real return basis locking in losses for your client.”
Also, fixed-rate annuities are a way for advisors to get more “wallet share” from clients, said Lau. Clients open CDs on their own so advisors don’t benefit as those assets aren’t managed by the advisor. But an annuity would end up as an asset under management from which advisor would collect a percentage, he said.
For the moment, shorter-duration products – five years or less – are more attractive to advisors and a two-year product would soon be available on MYGA Marketplace, a new platform DPL has just rolled out that’s designed only for fixed-rate annuities.
He said advisor demand was high enough to justify an exchange platform where they could easily compare the fixed-rate products from different insurers. By this time next year, he expects the exchange to triple in size.
Chris Chen, a Massachusetts-based advisor who collects a fee for managing his clients’ wealth, said that if he were looking to buy a fixed-rate annuity as an alternative to bonds, he would lean toward a five-year product or shorter.
“With interest rates trending upwards, it may not be the right time to lock in a long-term rate,” he said in an email.
“DPL would be a good place to go,” he added. “I would then compare with what is available in the wider marketplace.”
Rates that DPL offers are high compared to the fixed-income marketplace, he said, “leading me to conclude that their insurers are taking a fair amount of risk.”
Credit ratings of insurance companies remain a key consideration in selecting a rate, especially for the longer term, Chen said.
Mike Reidy, head of registered investment advisor distribution at Security Benefit, said the insurer’s Advanced Choice Fixed Annuity with a four-year rate would be available to buy.
Based on December numbers, Advanced Choice pays 2.45% yearly, and for accounts over $125,000, it’s 2.55%, he said.
A four-year CD from Connexus Credit Union was yielding 1.06% annually for a $5,000 minimum deposit, according to a Friday listing of the best available rates on BankRate.com.
“If we were going to be serious regarding our commitment to the RIA space, we felt we needed to support DPL with multiple commission-free annuity products including a MYGA product,” he said.
Twice the Yield
Secure Retirement Institute forecasts that in each of the next three years, about $50 billion of fixed-rate annuities are going to come out of their surrender periods, when investors are penalized for turning them in early. Some of that money is expected to be reinvested in fixed-rate products.
Chip Roame, managing partner of Tiburon Strategic Advisors, said in an email that he thinks most financial advisors are using the annuities as a replacement for bonds given continuing low interest rates. He pointed to Envestnet’s “annuity supermarket,” for example.
MYGAs can pay twice the rates compared with alternatives, he said.
Pacific Life last week rolled out its first fee-based fixed-rate annuity, the company said.
The product, called Pacific Harbor, comes with no withdrawal charges and is available only through Pacific Life for now.
But the company is looking forward to expanding to additional registered investment advisors next year, said Ryan Stowe, assistant VP of registered investment advisor product design with Pacific Life.
“Pacific Life is committed to building a broad set of fee-based annuity solutions for the large and growing advisory market,” he said in an email.
Pacific Harbor’s three-year product yields 2.05% for purchase payments of less than $200,000 and the five-year pays 2.20% for amounts of less than $200,000, the company said.
Pacific Life’s Expedition 2 fixed-rate annuity, which is sold via a commission, yields 1.25% a year for three years for an investment of less than $100,000, and 1.70% a year for five years for an investment of less than $100,000, according to the company.