Indexed annuities, never a particularly strong seller in the bank channel, are facing some stiff competition from market-linked CDs, Kehrer-LIMRA Director of Research Ken Kehrer, hosting an American Bankers Insurance Association conference call Thursday. “[Index annuities] peaked in the third quarter of 2009 and have fallen every quarter every since,” he said. “Market-linked CDs will reach $35 billion this year.”
Market-linked CDs go by many names, including indexed-linked CDs, equity-linked CDs, structured CDs and, according to a white paper Kehrer wrote on the products, Power CDs. They have several key advantages that make them popular among banks and their customers. On the bank side, while financial advisors sell the product on which they earn a commission, the institution keeps the deposits so there’s no disintermediation. For customers looking for upside potential but terrified of market volatility, market-linked CDs can pay more than traditional CDs, whose rates are in the toilet right now, and the deposits are guaranteed by the FDIC, peace-of-mind that helps seal the deal for many of banks’ traditionally conservative investors.
How attractive? Well, Wells Fargo has sold more than $5 billion of them and Sun Trust has issued over $1 billion in market-linked CDs and sold $400 million of them last year alone.
Sun Trust has been selling the product through its advisors since 2003, Ted Lai, director of Sun Trust Robinson Humphrey Capital Markets said on the call. He explained that the product is essentially a combination of a zero-coupon bond and an option that provides market exposure. “Like a call option, you’re buying upside above a certain level,” he said.
Market-linked CDs can track a number of different types of investment. Sun Trust offers new products monthly, mostly tied to the S&P or the Dow, but it isn’t unusual to find a market-linked security tied to an international index, commodities such as gold or LIBOR rates.
For banks that don’t have the capital-markets clout to issue their own market-linked CD, there are options. Many banks sell market-linked CDs issued by HSBC or JP Morgan Chase, two banks that have actively embraced the product. Alternatively, banks can sell a white-label product through a third-party provider such as CD Funding, as Iberia Bank has done. Vance Richard, head of the Lafayette, La., bank’s investment arm, said his advisors started selling HSBC and JP Morgan Chase market-linked CDs back in January 2009, but the products have only really taken off since Iberia partnered with CD Funding in June this year.
“We saw a multiplier in June of four times’ what we’d been doing,” Richard said. “Market-linked CDs have been 25% to 30% of our revenue for the past four months,” and the deposits remain on the bank’s balance sheet.
Market-linked CDs can’t compete with indexed annuities’ lifetime withdrawal benefits, guaranteed minimums or more esoteric mix of underlying indexes, but Kehrer said market-linked securities are proving so popular that they’re pushing indexed annuities off banks’ product shelves.
“For banks that issue their own, there’s so much support from the retail bank side that market-linked CDs will be a successful product,” he said. “There is a role for indexed annuities, but they’ve always been low on banks’ distribution poles. The banks I follow that sell both have moved indexed annuities to the back burner.”