Insurance companies have been launching a barrage of annuities, new commission structures and platforms-aimed directly at fee-based and fee-only advisors.

It could be starting to have an impact.

Ten years ago, Steve Gaito, a Raleigh, N.C.-based fee-only CFP licensee, wouldn't have given an annuity the time of day-"mainly because they didn't have living benefit features," he says. "It was trying to be sold like a mutual fund investment with a few guarantees.

"Now," Gaito says, "it really is an appropriate investment for someone who has a retirement income need. It almost replaces the old traditional pension."

Gaito's comments come amid a series of due diligence meetings with his broker-dealer, LPL Financial in Boston, which recently announced a variable annuity platform for fee advisors. Although Gaito charges clients an hourly fee, the LPL Financial platform aims to make it easier for advisors who charge a fee for assets under management to include variable annuities-a new but important growing trend.

It also is expected to aid advisors in reviewing a client's annuity assets alongside other investment assets. Gaito still doesn't consider annuities the "greatest investment known to mankind," but he likes the fact that new LPL offerings come with no surrender fees. He especially likes the tax-deferred variable annuity offered by the U.S. business group of Sun Life Financial in Wellesley, Mass., because it comes with inflation protection built in. "I really think it's a home run!" he says.

Fee-only and fee-based advisors are an important target for annuity business growth. In 2010, according to Cerulli Associates in Boston, insurers estimated that just 6% of their sales came from registered investment advisors-the lowest of any distribution channel.

But as more insurance agents and registered reps become fee-based advisors, insurers are taking dead aim. New products and platforms seek to snare even anti-annuity fee-only advisors-like Ray Mignone of Little Neck, N.Y.

"In most cases, I don't believe in annuities," Mignone declares. "If [clients] already have annuities, we try to get them [if the surrender period has expired] into a lower-cost annuity at TIAA-CREF or Vanguard."

Traditionally, TIAA-CREF in New York, and Vanguard Group in Valley Forge, Pa., have stuck with simple low-fee annuities with no surrender fees. They have shunned complex gizmos like guaranteed lifetime withdrawal benefits. But that soon may change.

TIAA-CREF reports it has on the drawing board, targeted for a 2012 debut, a fixed cashable immediate annuity with a feature designed to rival guaranteed lifetime withdrawal benefits. A patent on the product has been filed with the U.S. Patent and Trademark Office, says John Wesley, TIAA-CREF's product manager of non-qualified plans; he says it slightly resembles the Hartford's "Personal Pension Account."

"The cool part is we generate more cash for less amount of assets than a guaranteed lifetime withdrawal benefit," Wesley says. With this product, if the client dies, remaining assets can pass to a beneficiary rather than going to the insurance company. If the client withdraws cash value, income from the annuity drops proportionately, and there is a market value adjustment if a client withdraws more than just the income. There is also a surrender fee equal to six months' simple interest. If the client withdraws all the money but lives to around age 90, full payments resume at that time for life.

A guaranteed lifetime withdrawal benefit remains something "we're looking at very closely," Vanguard spokesperson Amy Chain says. A filing for a Vanguard product that included a guaranteed lifetime withdrawal benefit was withdrawn from the Securities and Exchange Commission in the 2008 market turmoil. Vanguard recently rolled out a variable annuity cost calculator as well as a platform with Hueler Income Solutions, Minneapolis, that lets advisors and clients compare real-time quotes on less-costly, institutionally priced income or immediate annuities as well as rates on fixed deferred annuities from many insurance companies.

Jefferson National in New York, with its unique $240 annual flat-fee variable annuity pricing, says it is "hands down" less expensive than every variable annuity on the market for clients who invest more than $100,000. The low-overhead insurer touts a special platform, targeted to fee-based advisors. Among some 330 variable annuity fund offerings is what it says is the only gold bullion tracking fund within a variable annuity. Once again, there is a patent pending on its structure.

Despite claims that low interest rates make it tough to innovate on fixed annuities, Jefferson National President Laurence Greenberg says he is looking at introducing one or more fixed annuities by year-end. He actually is evaluating three products: a term product as an alternative to Treasury securities, a government bond or CD; an index annuity; and a short-term product of about six months that might rival money market funds as a place for cash.

Financial advisor Gaito says he is solicited daily on fixed annuities by companies like wholesaler Crump Group in Roseland, N.J., and Standard Insurance in Portland, Ore. Generally, the promotions show fixed annuity rates of 0.25 to 0.75 percentage points higher than bank rates.

Observers say the move to attract fee advisors to variable annuities has largely fallen flat. "I don't know anybody who has had widespread success," says Bing Waldert, director at Cerulli Associates.

Variable annuities historically have been commission-based and sold, which is not necessarily how the best fee advisors like to operate, he says. Insurers have "gotten into a self-defeating arms race of trying to one-up each other. It collapsed on itself in a bear market. It's difficult to make good on guarantees and stay solvent."

The two chief problems, as Waldert sees them: Annuities largely are not priced the way fee advisors like. Also, they have grown so complex that advisors don't want to take time to wade through a 200-page prospectus to track down the "gotchas." Now, he says, insurers are waking up and starting to reprice their products away from commissions to serve the fee-based advisor.

Kevin Loffredi, vice president of the annuity solutions group of Morningstar Inc. in Chicago, cites a move toward "I" shares, which he says cost about one-half of the 130 basis point industry average. Fees on variable annuity "I" shares typically run 65 basis points-including a 35 basis point mortality and expense fee, a 20 basis point administrative fee and a 10 basis point distribution fee. The latest "I" share offerings have no surrender fees.

Overall, Loffredi says, variable annuity contract fees have remained steady, but the cost of benefits [riders], like guaranteed lifetime withdrawal benefits, has risen some 5 to 10 basis points (see the sidebar).

A study released by the Washington, D.C.-based Insured Retirement Institute with data compiled by Morningstar reported a 10.3% increase in overall new variable annuity sales-to $136.6 billion in 2010 compared with $123.9 billion in 2009. Among the latest innovations it cites in first-quarter 2011 filings:

Western & Southern Financial Group in Cincinnati, Ohio, launched a variable annuity product (called VAROOM-the Variable Annuity for Roll Over Only Money) that claims to be the first to make exchange-traded funds available as subaccount options. Previously, ETFs were only available using a fund-of-fund structure. With this product, limited to IRAs, advisors can build portfolios using exchange-traded funds from iShares and Vanguard. It's less expensive and has fewer moving parts than other variable annuities with ETFs, according to Loffredi.

Allianz Life in Minneapolis, filed for a preliminary lifetime guaranteed withdrawal benefit-not based on age, but tied to the performance of the 10-year Treasury note.

Loffredi also cites a new twist on a type of guaranteed lifetime withdrawal feature that lets a client earn a higher withdrawal amount by locking in investment gains periodically. The benefit base upon which the withdrawal benefit is calculated now may decline with each withdrawal-provided that the policyholder does not exceed an allowable threshold. "This sounds like a bad thing," Loffredi says, "but in many cases it's a good thing because when the benefit base comes down, there are lower fees."

Lincoln National of Radnor, Pa., is rolling out a fixed annuity long-term care rider that Loffredi dubs "the first of its kind." Loffredi says the product, structured as a guaranteed lifetime withdrawal benefit, provides long-term care expenses of up to 300% of what a client initially puts in. Unlike with traditional long-term care insurance, he says, clients needn't worry about premiums rising.

Judith Alexander, director of sales and marketing for Beacon Research in Evanston, Ill., says that other long-term-care-linked annuities work differently. Often, they merge two different products-an annuity and a totally separate long-term-care insurance policy.

Alexander says Lincoln National's already existing life insurance benefit, MoneyGuard, has done well because the long-term-care benefit is leveraged against the death benefit. "You can get more money to cover long-term-care needs," she says. "Having said that, those are really great options for people who have some annuities sitting around and are past the surrender charge period."

Contrary to "tax-deferred" fixed and variable annuities, "income" or "immediate annuities"-which also can be fixed or variable, generally are purchased with a lump sum to provide periodic income. Such products are becoming more liquid and are adding inflation-adjusted payouts, Alexander says. There also is a longevity benefit. "You can pick an age, let's say age 85 [to get periodic income]," she says. The deferred feature lets clients buy a lot more income per dollar, she says.

However, with variable annuities, whether to go with simplified low fees or opt for a more costly guaranteed withdrawal benefit is a question.

Loffredi says that advisors, concerned with meeting suitability standards, want simpler variable annuities. But simplified products have not necessarily sold. On the other hand, the top variable annuity seller, Jackson National Life in Lansing, Mich., has a huge selection of investments and benefits.

Loffredi credits that company's success to its large selection. Also, he says, it has looser limits than most on how much of the contract holder's money can be invested in, for example, stocks.

Fee-only advisor Gaito often sees little advantage to no-fee products because the expenses of a regular mutual fund or exchange-traded fund are still cheaper.

"If you're not getting extra benefits other than the opportunity to annuitize at a later date, it's not always the best investment," he says.

Greenberg, of Jefferson National, counters that traditional annuities can improve returns for clients. The problem over the last 15 years has been that the annuity's basic advantage of tax-deferred savings has been erased by the average mortality and expense charge.

And Beacon Research's Alexander argues that annuity commissions need not be a barrier for fee-based advisors. Advisors who collect a commission can simply give clients a corresponding break on their own fee for those specific assets under management.

Sidebar: Pros And Cons Of Guaranteed Lifetime Withdrawal Benefits
Guaranteed lifetime withdrawal benefits were the primary innovations launched by insurers on variable annuities in the first quarter of 2011. But should you consider them for clients?

A guaranteed lifetime withdrawal benefit is a rider that lets the contract holder withdraw a specific percentage-typically 5%-of a "benefit base" annually for life, regardless of the performance of underlying investments. The benefit base frequently equals the contract holder's paid-up premiums. This rider, though, comes in exchange for a fee, which Morningstar Inc., Chicago, and the Insured Retirement Institute, Washington, D.C., say averages 1.032% annually per each $25,000 investment.

The fee, IRI indicates, is on top of contract and mutual fund expenses, which averaged 2.49% in the fourth quarter of 2010.
Insurers have been adding numerous innovations to this benefit on variable annuities (see main story). Guaranteed lifetime withdrawal benefits are also being added with equal fervor on indexed annuities, and less commonly on other fixed annuities, notes Judith Alexander, director of sales and marketing for Beacon Research, Evanston, Ill.

Fixed annuities, including index annuities, have lower hedging costs to insurers because they generally risk no decline in account value, Alexander says. So these riders are often cheaper on fixed annuities and may have better payouts than those on variable annuities. But expect the best payouts overall, Alexander says, to be on income or immediate annuities, which typically are purchased with a single premium and have payments that start right away.

Yet on variable annuities, guaranteed lifetime withdrawal benefits in the fourth quarter of 2010 were elected by a steady 65% of contracts in which a guaranteed living benefit was selected, according to LIMRA, Windsor, Conn.

And all 11 variable annuity living benefits introduced in the first quarter of 2011 were designed as lifetime withdrawal riders, IRI says.

Research has indicated that adding a variable annuity with a guaranteed lifetime withdrawal benefit to a retirement portfolio can decrease a client's chance of running out of money and improve a portfolio's return over time.

The benefit helps increase total income by permitting a higher stock allocation while lowering the income risk of the overall combined portfolios, according to a 2010 Ibbotson Associates study sponsored by Nationwide Financial.

The downside to a variable annuity's guaranteed lifetime withdrawal benefit is that, besides its added cost, the amount that can be invested in stocks typically is limited by insurers to about 60% of a portfolio.

Many also contend that inflation can work against fixed guaranteed withdrawal features.