Wall Street Sees the Light on Indexed Annuities
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. 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.
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
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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. Wall Street’s embrace of index
annuities will continue to strengthen
because the finance 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.
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