Following Nationwide's entry in the fee-based segment of the US fixed indexed annuities (FIA) market with the launch of the Clear Horizon index annuity, SRP spoke to Mike Morrone (pictured), associate vice president of fixed annuity product strategy at Nationwide about the increased issuance of fee-based FIAs, the index selection and why the Department of Labor (DoL) fiduciary rules' will not harm this segment of the market in the long run despite the recent slow-down in issuance.

"This is our first fee-based fixed indexed annuity product but Nationwide is not new to the variable annuities segment where we have been active for many years (according to SRP data Nationwide has previously marketed the Clear Horizon index annuity, an open-ended cliquet structure linked to the S&P 500 Composite Stock Index)," says Morrone, adding that Clear Horizon was not offered as a fee based product but as a commission based product just as the firm's New Heights suite of FIAs.

According to Morrone, the decision to launch this new FIA comes on the back of the discussions the annuities provider has had internally to "continuously develop our product range" but also because of client demand seeking flexibility when paying their advisors.

"Fee-based advisors is a growing segment in the US and our responsibility is to come out with products that meet our clients' financial needs," says Morrone, adding that this is just an addition to Nationwide's index-based products which "continues to offer many advantages to clients.

"On one hand you have the capital protection and that is a requirement clients in this segment continue to demand," says Morrone. "On the other hand you get more upside potential then other fixed investment instruments which adds the potential to increase the payout when the product expires."

The FIA segment has driven significant activity in the annuities market over the last few years and 2016 was a record year for this segment with sales hitting a record US$60.9bn in 2016 - up 12% from 2015 sales of $54.5bn, despite a 13% fall to US$13.6bn during the first quarter of 2017.

"This gives you an idea of the role these products are playing in clients' portfolios," says Morrone. "Principal protection and upside potential remain two key elements in the annuities space. In the current interest rates environment people are seeking yield without putting their capital at risk so FIAs meet that purpose."

According to Morrone, Nationwide has been very active in the FIA market over the last four years as it seeks to remain a leading provider of these products. "We will continue working to meet the needs of our clients and to offer a range of products for different risk profiles," says Morrone, pointing that Nationwide has "very robust capabilities" when it comes to evaluating indexes and underlying strategies before they are deployed in its products.

Nationwide has added two new indexes to its indexed range over the last couple of years including the NYSE Zebra Edge Index, an index that incorporates behavioural finance research on high-turnover, or 'popular' stocks, with the goal of capturing higher returns with lower volatility; and the JP Morgan Mozaic IISM Index, an index that attempts to provide a broadly diversified asset allocation while targeting a level volatility.

"[Before we made a final decision] we looked into over 100 indexes," says Morrone. "Our research team took around one year to review these indexes to make sure we were choosing the most suitable indexes for our products."

Nationwide uses a proprietary methodology in the index selection and also applies "a set of basic principles" that indexes supplied from investment banks it works with have to meet before they are considered, according to Morrone. This includes the sales support of the index, approved consumer marketing materials, a consumer 800 number for clients to use if needed, and a website domain where the performance of the index can be tracked and followed during the life of the product.

"If an investment bank cannot meet those requirements we would not consider their indexes," says Morrone. "Nationwide does not really look at the name of the investment bank providing a particular index as our main requirement is that the index adds value to the end client, is transparent and easy to understand."

According to Morrone, Nationwide remains open to consider any type of index strategy that meets the needs of its clients. "We have also seen a number of different index strategies used in the fixed indexed annuities market such as risk control indexes but in our view there is no index better than the other," says Morrone. "All indexes have the pros and cons, and as long as the client understands the exposure (what is the index tracking), how the index is calculated and the risks involved (how will the index perform in different market situations, we do not favour any particular indexes. Those are Nationwide's basic requirements when we partner with an investment bank."

This kind of product, says Morrone, has a level of complexity and it is important to educate clients on how FIAs work. "People need to understand before investing or using a product what they want to achieve ie. yield, income, protection," says Morrone.

Despite the recent downturn in the FIA segment over the last few months which "some commentators have pointed at the uncertainty around the DoL fiduciary rules", Morrone remains confident these products will continue to deliver value to its clients. "Although, we have no data to support that claim it is true that uncertainty can have an impact on activity," says Morrone. "We think however that once the rule is in place and comes into effect the FIA market will resume its normal activity. As I said before the need for capital protection and upside potential is not going away which is why these products have become so popular among baby boomers in the US."

Morrones personal forecast for the FIA market is not only that it will continue to grow but that will also provide opportunities to introduce new strategies.

"Nationwide will continue to look at growing its offering across product types and fee-based FIAs will play a core role in our range as they meet specific client needs," concluded Morrone.

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