In the annuities business, the last few years have left some people scratching their heads. Consider this: In 2016, sales of new variable annuities (VAs) fell more than 20% from the preceding year, according to Morningstar, to represent less than half of the overall market for the first time. Over the same period, sales of fixed annuities advanced 14%, led by fixed-indexed annuities (FIAs), which soared 12% to a record $61 billion in sales.

Then the U.S. Department of Labor’s fiduciary rule was put on hold just weeks before it was set to go into effect, so the Trump administration could examine whether it’s good or bad for the industry. As of this writing, the consensus expectation is that the regs will be made less stringent if they’re not repealed altogether.

The Beginning of the End?
Where all this leaves the industry is anybody’s guess, and opinions vary widely. Yet optimists insist the death of annuities has been greatly exaggerated. “We expect long-term growth in the annuity marketplace given demographic trends and the fraying of traditional government and corporate safety nets,” says Brian Kroll, head of annuity solutions at Lincoln Financial Group, based in Hartford, Conn.

That may be true, but it could still be a bouncy road ahead. “For the balance of the year, I expect VA sales to flatten out and perhaps even increase a bit,” says Scott Stolz, senior vice president in private client group investment products at Raymond James Financial in St. Petersburg, Fla. “In other words, I think we have hit a bottom.”

Fixed annuities, on the other hand, will “continue to gain acceptance as alternatives to bonds and CDs,” Stolz says. “As interest rates rise, advisors will look for ways to get a decent return for clients with no exposure to interest rate risk.”

The Impact of a DOL Repeal
If President Trump and Labor Secretary Alexander Acosta put an end to the DOL reg, as expected—both have made statements opposing it, essentially arguing that the fiduciary standard unfairly straitjackets the market—that would likely have a big impact on future sales trends. “Presumably, this would reverse all of the concerns that have hurt annuity sales [and] I would assume that will cause sales to increase,” says Stolz.

It’s a widely shared view, but Michael Kitces, a director of wealth management at Pinnacle Advisory Group in Columbia, Md., and a frequent commentator at www.kitces.com, argues the opposite. “Most of the industry has this dead wrong,” he says. The DOL ruling wasn’t bad for annuities, he maintains, and gutting it or eliminating it won’t necessarily improve annuity sales either. Rather than choking off the industry, the new fiduciary standard, if allowed to stand, could actually spur the creation of better products and more responsible sales practices.

Kitces goes on to say that there’s not much point in comparing future sales with those of the past two years. “The dynamics of what annuities did, better or worse, in 2016 versus 2015 was entirely about what was happening with annuities in the past, when Trump wasn’t president and the DOL fiduciary rule wasn’t applicable,” says Kitces. “It has no bearing on the future.”

That may be true, but not everyone is convinced. Erin Botsford, the founder and CEO of Botsford Financial Group in Dallas and Atlanta, argues that the fiduciary ruling made it “more difficult for advisors to sell or recommend VAs and fixed-indexed annuities,” both of which fell under the new fiduciary standard for full disclosure of all fees and expenses, among other strictures.

The future of annuity sales, she adds, may well depend on what Trump and Acosta do about the ruling. “If they can roll it back completely, annuity sales will come back,” says Botsford. That would be good news not just for the industry but also for consumers, she says, because the ruling as it stands is “so onerous it will discourage advisors from recommending the very types of products the small investor could use.”

New Innovations
But not all annuities participants are waiting for decisions from the administration. In reaction to changing market forces, many insurance companies have been conjuring new types of annuity products and add-ons.

“I’ve seen quite a few variations of annuities coming out, new product innovations across the spectrum,” says Drew Horter, the president and chief investment strategist at Horter Investment Management in Cincinnati. “Annuity sales are likely to rise to fill insurance needs, to fill retirement-income gaps, so retirees can make sure they have enough money to live off of for the rest of their lives.”

Horter cites “unique income riders for fixed annuities, and immediate annuities with unique bonus features.” He declines to recommend one brand over another.

The breadth and variety of annuities currently on the market or soon to be launched can’t be denied. Josh Jalinski, the president of Jalinski Advisory Group and Wealth Quarterback LLC, a registered investment advisor, both based in Toms River, N.J., is encouraged by many of the new offerings. “Among the product innovations that we see, we particularly like income riders without a fee,” he says, singling out the Midland National IncomeVantage, a fixed-indexed annuity with no fees, loads or sales charges. “Products like that will become popular,” he says.

If the DOL rule stays, he anticipates a surge in “fiduciary-minded fixed-indexed annuities,” he says, such as those offered by Great American Insurance Group and American Equity, which are fee-based, not commission-based, to avoid the rule’s requirement of having clients sign a best interest contract exemption (BICE) to indicate their full knowledge of all associated costs. “In light of the BICE, an advisor might just say, ‘Screw it. I’ll take the flat fee and not have to fill out all this extra paperwork.’ So if the DOL rule stays, more of these fee-only fixed-indexed annuities are going to come to the forefront.”

VAs, on the other hand, are “playing defense,” he says. “I don’t know how they’re going to be sold” under the new standard.
A possible exception, says Jalinski, is the low-cost investment-only VAs popularized by Jefferson National, a unit of Nationwide and Jackson National. “There’s always a need for that, low-cost tax deferral on a fee-based chassis,” he says.

Other Forces at Work
Whatever happens with the regs, it’s undeniable there are always other market forces at work: most notably, equity returns and interest rates. “We see the demand for fixed-indexed annuities continuing to grow,” says Carolyn Johnson, CEO of annuities and individual life at Voya Financial, the retirement products and services company.

People haven’t forgotten the market downturn during the financial crisis, notes Johnson, who is based in Windsor, Conn. They see VAs as too risky, too volatile, given their underlying mutual-fund-like investment accounts. Instead, clients are drawn to the safer growth that FIAs can offer. “Fixed-indexed annuities provide upside potential by linking to an index like the S&P 500,” she explains, “while a floor offers downside protection if equity markets turn volatile. Plus, they also provide tax-deferred growth.”

Johnson says that Voya recently launched a single-premium deferred FIA called Voya Journey Index Annuity, which “offers full participation in the growth, if any, of one or more dynamic indices over a seven-year period,” she says, quoting company literature. It was designed as “a good alternative to bank CDs, since consumers can potentially earn a better return,” she says, especially in this low-interest-rate environment.

Johnson acknowledges that Voya isn’t the only annuity provider that’s coming up with new products. “Given the current regulatory environment, we also expect to see more annuity manufacturers roll out products that are built for the advisory market,” she says. “A fee-based model naturally lends itself to more regular touch points with advisors, which gives consumers the opportunity to develop a holistic financial plan that meets their needs.” She adds that Voya is “planning to roll out an advisory version of our Voya Journey Index Annuity product later this year to meet the evolving needs of our customers and partners.”

But even if the fiduciary ruling doesn’t remain in effect, Johnson is unfazed. “Regardless of the future status of the DOL’s fiduciary rule, Voya is confident in our ability to meet the needs of our distribution partners and any changing demand for various product suites,” she says.

Kroll, at Lincoln Financial, is similarly bullish. “Innovation and product development have brought more options to the marketplace than ever before, in fee- and commission-based models,” he says, adding, “Both can be in the client’s best interest.”

An example of Lincoln Financial’s new annuity offerings: Kroll says that Lincoln recently partnered with BlackRock to launch a fee-based VA that invests exclusively in exchange-traded funds (ETFs), the first of its kind, he says. Built with iShares, the family of ETFs run by BlackRock, it’s called Lincoln Core Income. It “captures trends in both passive investing and fee-based advice—an area that we believe presents a significant long-term growth opportunity,” he says.

And that’s just the beginning for this still-evolving industry. “Given that the need for guaranteed lifetime income in retirement has never been greater, we expect product innovation will continue across the industry,” says Kroll.