Fixed indexed annuity sales displacing some VA products at BDs

"Both higher interest rates and persistent low interest rates were cited as potential sales drivers, which seems paradoxical but in fact is simply viewing the product from two different perspectives," according to the report. "In a persistent low interest rate environment, sales are boosted by the product being an attractive alternative to low interest products such as CDs. As rates rise, index options become less expensive and FIAs are able to provide more upside potential, making the product more attractive from a growth standpoint."

Despite the growth and apparent optimism in fixed indexed products, variable annuities are still the market leader, IRI found. VAs with guaranteed lifetime withdrawal benefits account for about half of total annuity sales. The June report found total variable annuity sales in first-quarter 2015 were nearly $32 billion, after falling 5 percent from the previous quarter. However, variable annuity net assets were up 1.4 percent to $1.95 trillion.

"New sales continue to flow into VAs, though at a slower clip than last year," John McCarthy, senior product manager of annuity products for Morningstar, said in a statement. "Investors are showing their preference for more aggressive investment options inside variable annuities, which may indicate a loosening of the risk aversion we've seen in the recent past. This trend is playing out via the continued flows into 'investment oriented' VA contracts, which in addition to core holdings, also offer alternative and noncorrelated investment choices."

The FIA survey asked respondents how many of their reps were using fixed indexed annuities. Twenty-nine percent of respondents said more than half of their financial professionals use FIAs for their clients; the same percentage said between a quarter and half of the reps use them. About one-fifth of respondents said fewer than 10 percent of their reps recommend fixed indexed annuities to their clients.

The survey found surrender charges and commissions were fairly low among the broker-dealers surveyed. Eighty percent of respondents said they don't allow surrender charges longer than nine or 10 years, and the majority receive commissions of 5 percent or less. None of the distributors surveyed received more than a 7 percent commission.

Half of respondents said their reps were somewhat receptive to using fixed indexed annuities with lifetime income benefits, saying they were open to using them but would frequently opt for a variable annuity with the same benefit instead. However, 43 percent said they reps were either very or extremely receptive about using the FIA with a lifetime income benefit, with 14 percent saying reps actually request those products.

Regarding FIAs that don't offer a guaranteed minimum withdrawal benefit, almost two-thirds of respondents said their reps are very receptive to using those products FIAs and frequently use them to replace CDs.

Respondents believe consumers share similar levels of enthusiasm for FIA products. Almost 40 percent said consumers were very receptive to fixed indexed annuities, and 31 percent said consumers were neutral. None of them said consumers were not at all receptive.

"Inadequate understanding of the products can create suitability and compliance risks, making it critical for distributors to provide training and support," according to IRI. Almost two-thirds of respondents cover fixed index products in their broader annuity training, and 29 percent have specific FIA training. Almost 60 percent of respondents have suitability reviews and sales approval processes that cover all annuities, and 21 percent have a specific FIA process.

"While variable annuities capture the lion's share of premium dollars in third-party distribution channels, sales of FIAs are growing, reflecting the appeal of the product to both advisors and consumers," according to IRI.