Wall Street sees the light

In one recent weekly issue of Investment News there were three articles on fixed annuities—this from a periodical that in the past might have mentioned fixed annuities three times in a year. One of the articles was titled "Wirehouses warming to indexed annuities," centering on how wirehouses are now embracing them. As a Merrill Lynch managing director said, "Five years ago, nobody hated the product more than me, but now I've seen the light." Wall Street has discovered index annuities. Why now? They say it's because the products have changed and are no longer "bad" but that's not the real reason. Wall Street is looking at index annuities because they failed to kill them and their traditional solutions aren't working well.

Exaggerated tales of abuse

As index annuity sales grew after the millennium bear market, Wall Street and its minions bombarded securities regulators with exaggerated stories of index annuity sales abuses and how agents needed to be stopped. In truth, there were sales abuses, but never even close to the extent that the naysayers proclaimed. Because the annuity industry remained silent and let the securities industry write the story the media was full of tales—actually a few tales repeated ad naseum—of how bad index annuities were. The result was SEC Rule 151A, which would have killed index annuities. However, the annuity industry finally rallied and managed to kill the rule instead; meaning index annuities would still be competing for consumer dollars.

Can't beat them, join them

Wall Street is extremely creative in developing products that try to increase returns, but they do a lousy job of transferring risk away from the consumer. After the Crash of '08, Wall Street kept coming up with products that might increase the marginal return at a given level of risk, but failed to grasp that now the goal of many consumers wasn't to make an extra percent or two, but to keep safe 100 percent of what they already had. As Wall Street started to realize this they reexamined their choices and discovered that fixed index annuities provided an excellent solution. If you can't beat them, join them.

Markets still uncertain

Wall Street's embrace of index annuities will continue to strengthen because the financial markets continue to look very uncertain. The good news is it's hard to bash something that you're doing too, so there will be an increasing number of media stories about how good index annuities are and consumer demand will shoot up. The bad news is the independent agents that have had index annuities almost all to themselves will face increased competition. However, I believe, overall, that the good outweighs the bad.