Wells Fargo pushes insurers to lower commissions on indexed annuities

Annuity gatekeepers at broker-dealers are closely watching Wells Fargo Advisors as it presses insurers to lower commissions for the indexed annuities sold by its representatives. Last Monday, Wells Fargo launched an updated annuity platform that offers indexed annuities that have new features. Indexed annuities are fixed annuities that credit a minimum guaranteed interest rate and an interest rate tied to the performance of an index. The indexed annuities sold at Wells Fargo now must conform to rules that include commissions limited to 4%, a minimum cap rate of 3% and a surrender period that can't go beyond eight years. Carriers offering their wares on the platform are also restricted to using two indexes and two crediting strategies — monthly averaging and point-to-point. As the name suggests, monthly averaging strategies average the monthly highs and lows of a given index. Point-to-point strategies look at the index's performance at two points in time, which could be the beginning and end of a year. Point-to-point and monthly averaging “are the easiest strategies for clients to understand,” said Bernie Gacona, director of annuities at Wells Fargo's retail retirement unit. He also noted that clients will reap the benefits of lower commissions. “We had all the carriers price the products with a 4% commission, which is a little lower than the industry,” Mr. Gacona said. “It allows for higher caps on the product.” As a result, the cap — the limit on how much of an index's performance a client can capture — has been boosted anywhere from 75 to 150 basis points, depending on the product, he added. In the broker-dealer channel, life insurers generally offer indexed annuities with a more modest commission and surrender period than what would be seen in the independent agent channel. Indeed, insurance executives at other broker-dealers find Wells Fargo's move to be an intriguing one, and they are curious to see how it will fare. Wells Fargo's push toward simplicity comes at a time when insurers are running in the opposite direction, adding more features to their indexed annuities to better distinguish themselves on the shelf, noted Scott Stolz, senior vice president of PCG investment products at Raymond James Insurance Group. “We have talked about doing exactly what [Mr. Gacona] is talking about,” said Mr. Stolz. “Whatever the insurers design for them, we'll take a hard look.”

PASSED TO CUSTOMERS

“I would be in favor of reducing commissions if the reduced commission is passed along to the customer in the form of a higher cap rate,” said Bob Steinke, senior vice president and head of the managed and insured solutions group at Janney Montgomery Scott. And with respect to simplicity, “The waters have been muddied by contracts with lots of different indexes and different crediting methods,” he said. In order to keep discussions about indexed annuities simple, broker-dealers these days may offer products with a variety of indexes and crediting strategies, but emphasize only a couple of those options when marketing the product. Still, a firm of Wells Fargo's size might wield enough influence to nudge manufacturers into making such products more widely available to broker-dealers. “The change will come when manufacturers limit the number of crediting options, as opposed to us on the distribution side having a product with five crediting options and then limiting it to two,” said Mr. Steinke. “Products built to the taste of the distributors are products that sell better and are given more profile.” Wells Fargo's decision to adjust the products it offers comes at a time when indexed-annuity sales are experiencing a surge in popularity. During the second quarter of 2014, sales climbed to $12.6 billion in total, up nearly 37% from the year-earlier period, according to Wink Inc. Beacon Research, which uses a different methodology to measure sales, also reported a steep rise: $12.9 billion in the second quarter, compared to $9.1 billion in the same period of last year. Fixed annuities overall have been beating their variable-annuity cousins on growth. Per Beacon Research, total fixed-annuity sales for the second quarter hit $24.3 billion, up from $17.1 billion in the second quarter of 2013. Variable annuities, meanwhile, reached $35.6 billion in the second quarter of 2014, down from $37.3 billion in the year-earlier period, according to Morningstar Inc. At Wells Fargo, fixed-annuity sales surged close to 120% year-over-year for the second quarter, largely driven by indexed-annuity sales, Mr. Gacona said. He did not share dollar figures. Interestingly, most of those indexed-annuity sales are coming from Wells Fargo's bank representatives, rather than its wirehouse advisers. Mr. Gacona noted that of all the indexed-annuity sales at Wells Fargo, only 18% to 19% involved the sale of a living benefit. Nevertheless, he has high expectations for the third quarter.