Wall Street Eyes IAs, After Long Battling Them

February 21, 2011

By Linda Koco

Feb. 8, 2011 -- The indexed annuity market is about to get some new competitors — from Wall Street.

Jack Marrion, president of Advantage Compendium, St. Louis, says at least a couple of big Wall Street securities firms are already preparing to make filings for their indexed annuity products, perhaps by spring or summer.

The products will be indexed annuities (IAs) and sold as insurance products, not securities, he says.

To make that possible, the as-yet undisclosed firms have developed business relationships with insurance companies, says Marrion, who consults with some securities firms on indexed product development.

The development may surprise IA professionals who have battled with many securities interests over whether indexed annuities are securities.

When the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was enacted with an amendment saying indexed annuities are not securities if the products meet certain conditions, many industry watchers believed that the securities industry involvement with IAs had become a non-issue.

They further believed that that the securities industry would not have any interest in marketing indexed annuities because:

-          Securities firms don’t like the products; and

-          Securities firms that do want to offer an indexed annuity — for, say, competitive or customer needs purposes — would likely offer a registered indexed annuity to sell as a security. 

Marion says neither argument holds water. The big Wall Street firms did not engage in the battle over whether IAs are securities, he explains. 

“It was the stock brokerage firms, their various associations, some variable annuity carriers, and some securities regulators that pushed to have the product declared a security,” he says. “They said they wanted to control the sales practices related to IAs.”

The brokerage interests “never liked the products and they still don’t like them,” he says. But the big Wall Street firms don’t necessarily share that view.

As for the expectation that the big securities firms would probably only be interested in offering registered indexed annuities, Marrion says this is not the case. The firms appear to be product-neutral, he says. “They are considering all options right now.”

Jim Pedigo, a consultant with Financial Rate Watcher$, Inc., Longwood, Fla., terms the potential entry of big Wall Street firms into the IA market a “great” development for the business.

“The big securities firms will disseminate more information to the public about indexed annuities,” he explains. “A more informed public will make for a better buying public.”

Some of those firms have been pulling back on their variable annuity business over the past year, Pedigo points out. They will likely begin to focus more on the fixed arena instead, he says. If they launch their own IA, they will likely position it as a “crossover product” for their reps to use.

Because it is a hybrid product, sitting between fixed and variable annuities, the reps can use it when moving from selling securities to selling insurance, he explains.

This approach should appeal to older clients at the big securities firms, Pedigo says. In particular, it should appeal to clients who are seeking potentially higher returns than available in today’s bank certificates of deposit but with downside guarantees. The same clients may also like the product’s guaranteed lifetime withdrawal benefit (GLWB) rider, if the firms decide to offer on with their product, he says.

Pedigo thinks the big Wall Street firms that enter this market will initially offer their IAs through their own distribution networks. That will pose a competitive threat to IA professionals in the independent agency system, he says.

But once the firms are sure their products work, “they will start coming after us in the independent agency system,” he predicts. That’s because many independent agents are already comfortable selling IAs and they will be able to expand distribution.

Linda Koco, MBA, is a contributing editor to InsuranceNewsNet, specializing in life insurance, annuities and income planning. Linda can be reached at [email protected].


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