A Conversation with Luma’s Director of Strategic Initiatives, Tara York, and Director of Annuity Products, Jay Charles
Written by Luma Investment Solutions on Jun 16, 2023
Tara York: We saw economic factors such as interest rates and market volatility impact annuity sales in 2022. Do you anticipate this trend to continue throughout the remainder of 2023?
2022 was an incredible year for annuities. We saw sales hit record levels, especially among the fixed products as a result of the high interest rate environment, and I certainly expect that trend to continue in 2023. Already in the first quarter, we’ve seen fixed and fixed indexed annuities do very well and hit, or possibly exceed the record levels from 2022. However, as interest rates stabilize and equity markets continue on their upward trajectory, you would expect the market for annuities to soften a little bit and we are seeing that in sales data.
Additionally, we’ve seen carriers drop rates slightly in the fixed rate and fixed index annuity segments. With that, I wouldn’t be surprised if we see a shift into some of those products like registered index-linked annuities or traditional variable annuities that expose the end investor to a little bit of downside to allow them to participate in that upside potential of those products. So that’s one thing that I’m looking at, especially as we’re entering the second half of this year, a potential shift in the overall product mix. I think overall though, as a category, we’re probably going to be very close to 2022 as far as volumes, maybe even eking out a little bit higher. The future is certainly bright for annuities.
Tara York: It’s being reported that annuity sales are expected to continue to grow throughout the remainder 2023. For advisors who may be reluctant to incorporate annuities into their investment strategy, what advice would you give them?
First and foremost, it’s important that we recognize we are living through a retirement crisis in America. We’re seeing social security benefits continuing to decrease over time for individuals as they approach retirement. Pensions are becoming an artifact of the past, and 401(k)s continue to be underfunded by the average American citizen. So, time is really of the essence to make sure that individuals, baby boomers and Gen X are focusing on securing their retirement and an annuity is a fantastic way for that to happen in addition to some of the other retirement vehicles I mentioned before. Annuities, I think for these reluctant advisors, can provide principal protection, fantastic tax benefits, as well as guaranteed income for life. So as part of a well-balanced portfolio, an annuity is a great asset class to consider that can provide diversification benefits, but more importantly, provide stability for the end investor to meet their basic needs in retirement in a similar manner to that of social security or pensions.
You’ve touched on the recent growth of the overall annuity market; do you have anything to add as it relates to the growth of in-plan annuities – annuities as an investment option within 401(k) plans?
As we see annuities enter the 401(k) market and be included in 401(k) and other qualified plans, I think we’re going to see consumers gravitate towards this product set because it’ll be much easier for them to allocate a portfolio of their portfolio or their 401(k) into the annuity. They’re also going to have access to pre-selected products that the plan provider has done extensive due diligence on and ensure that product is going to be in the best interest of the client. So, from that standpoint, I think the Secure Act and what it has done for 401(k)s and other qualified plans will make annuities more accessible, and we will likely see a deeper penetration of the product set among consumers – hopefully bringing it to a group of consumers that may not have had access to the product set in the past.
Let’s move on to the technology that is available to advisors today. How does financial technology like Luma enhance the overall experience and effectiveness of annuities for financial advisors and their clients?
One thing to keep in mind is technology is not going to replace the advisor or even the wholesaler of these products. Technology needs to be viewed as enhancing the advisor experience and their ability to better meet client needs. Technology like Luma drives advisors to become more efficient. Luma has both the education, the product research, and the seamless e-app integration that allows advisors to identify the product, learn about the product, and then ultimately seamlessly buy that product on behalf of their client. This ensures that from an industry standpoint, we’re reducing the not-in-good-order applications or NIGOs. It also ensures that clients are getting into the products more quickly as well as it’s much easier for carriers to process a digital application over a paper application.
And furthermore, after the sale, advisors using our lifecycle management capabilities can ensure that these products continue to perform as anticipated and make adjustments to those products over time. The third thing that I’d highlight is technology like Luma ensures that the client is getting the product that best meets their needs. And through Luma’s advanced analytics, the ability to compare products side by side and configure products to a specific client situation ensures that every option in the product, such as riders or subaccounts, are built into the client’s ultimate annuity solution. And from that standpoint, we can drive to better client outcomes, which means a more secure retirement and a stronger financial future for the end investor.
You mentioned electronic order entry. What would you say to advisors that are reluctant to adopt electronic order entry?
For advisors not implementing electronic order entry in their workflow today, it’s simply education around the benefits of an e-app system. One thing that advisors need to realize is that they can receive their commissions more quickly through an e-app experience, they are less prone to making mistakes on the application, and their clients will access to the annuity more quickly by utilizing an e-application. The other thing I’d say is in many cases advisors are not necessarily the ones filling out the applications. As they think about the size of their teams and the resources, there might be an opportunity to drive more efficiencies in their own business and free up resources to provide more value-added services by not wasting time filling out a paper application and adopting e-app.
So, what I hear you saying is advisors should not be concerned about technology impacting the importance of their services to clients, but it’s more about optimizing the advisor workflow. And that’s something that more and more advisors should consider whether it’s electronic order entry or the advanced analytics offered through platforms like Luma. Given the need for more adoption of technology, how do you envision the future of FinTech in relation to the annuity industry? And what emerging technologies or trends do you anticipate will have a significant impact?
When I think about FinTech, I really don’t think there’s going to be a term FinTech in the next five to 10 years. The technology that we’re talking about today as FinTech will just become synonymous with financial services. Financial services will be completely powered by technology. What we’ll see is a trend that advisors who are consumers in their daily lives will be demanding that same technology and experience that they have on the consumer side through either their banking app or the seamless purchase experience that Amazon provides. They’re going to be demanding these same types of luxuries in their business life as well.
Think about it from this perspective, most financial advisors probably have not stepped into a bank branch in the past five years. They’re doing everything on their mobile device. Filling out a paper application for an annuity and going through several different systems in order to execute the purchase, is something that for many advisors in their consumer life, they would never accept. And I think in their professional life they won’t as well.
So, we’ll see a transition to advisors demanding that same experience. And I think technology is going to be the way that is delivered through an advisor experience. I think we’ll see technology deliver a better client AND investor experience. Many investors are expecting to know exactly where their annuity application is in the process. They expect things to be processed more seamlessly. They see it in their everyday life when they order a package or takeout. So, utilizing that same type of tracking mechanism for both the advisor to communicate to the end client where they are in the process, but also for the end client to know where they are in the process. I think it’s going to be something that we also see for financial services.