While the Department of Labor’s fiduciary rule, released last month, will likely cause recent declines in variable annuity sales to continue, experts believe the products could evolve to survive.
However, the old fee-and-commission models that enticed advisors to sell variable annuities to clients are likely to become extinct—since any insurance broker, agent, broker representative or financial advisor offering advice about retirement accounts will now be deemed to be fiduciaries. Others think commissions may not disappear but will fall dramatically just as sales loads have in the mutual fund world.
Companies offering no-load variable annuities see the playing field moving in their direction. “I think this is better for consumers,” says Mitch Caplan, CEO of Louisville, Ky.-based Jefferson National, a leading no-load variable annuity company. “Every day, power continues to migrate into the hands of clients and consumers, and it should continue to do so.”
Previously, the commission sale of variable annuities was exempt from fiduciary standards under ERISA, but the DOL’s rule will make it difficult for product manufacturers to compensate advisors for offering their products. The regulation could lead to fewer product manufacturers creating variable annuities, and fewer advisors offering the products to the clients because of the lower incentives.
Thus the fiduciary rule could pour cold water on an already smoldering variable annuity business. According to a recent LIMRA report, variable annuity sales in the first quarter of 2016 were down 18 percent year over year to their lowest levels since 2001. LIMRA estimates that VA sales will drop by a total of 15 to 20 percent for the year, and will drop another 25 to 30 percent in 2017.
“Most of the variable annuity world doesn’t fit in with the rule,” Caplan says. “The underlying features and functions are too expensive, and the cost of manufacturing and distributing most of these products is too high.”
Some variable annuities already eschew the traditional commission model. For example, Jefferson National’s “Monument Advisor” product carries a level, monthly fee in exchange for offering investors simple tax benefits.
Most variable annuities don’t comply with the rule’s requirement that compensation paid to advisors must be “reasonable.” While “reasonable compensation” isn’t specifically addressed in the DOL’s rule, in practice it means that advisors’ revenue should not vary depending on the types of products used within client accounts.
David Girmann, senior consultant with Cincinnati-based Strategy & Resources, says that many firms will move their business to other distribution channels to avoid compliance with the rule.
“I don’t think it will kill annuity sales,” Girmann says. “Unless the SEC follows suit with its own rules, we could see the shift of variable annuities to non-retirement-type products, which might be better in the long run. Today, 61 to 62 percent of all VA sales are in IRAs or plans.”