Advisors may soon have more fee-based variable annuities to offer clients.
Until now, most VAs were sold on a commission basis, according to Jack Marrion, a research fellow at Webster University in St. Louis, Mo., and CEO of Advantage Compendium, a research and consulting firm that specializes in annuities. But the new Department of Labor fiduciary rule, which extends fiduciary standards to retirement accounts, is making retirement plan providers, broker-dealers and advisors take a second look at their offerings and how they charge for them.
Fee-based variable annuity sales have hovered around 4 percent of VA sales for the last couple of years, according to Morningstar. But the new DOL rule is expected to make VA commission sales more cumbersome and therefore more expensive for firms.
Some variable annuity providers are going to continue on a commission basis by using the best interest contract exemption (BICE), which allows those advisors who meet the requirements of acting as a fiduciary for the client to continue to sell on a commission basis. But some are thinking of providing fee-based products by the April 2017 deadline when the DOL rule goes into effect.
Fidelity Clearing and Custody Solutions has interviewed its broker-dealers to see what they are planning and has found that most firms that currently sell variable and index annuity products plan to continue selling such products on a commission basis by using the BIC exemption. Firms are considering the types of controls and process appropriate for the best interest standard environment, Fidelity says.
Some firms are considering a level commission approach across annuity products. Even those that are going with the exemption will continue to explore their options, including no-load, low-fee variable annuity products in a fee-based, managed-account model, Fidelity says.
Others, such as TD Ameritrade, Vanguard, Nationwide and Schwab, already have been offering VAs on a fee basis, with the fees determined by the amount of assets.
Matthew Sadowsky, director of retirement and annuities at TD Ameritrade says, “While we expect to make some changes to our business model as a result of the DOL fiduciary rule, in general we believe that our variable annuities offering is quite competitive. We believe we were ahead of the curve when we launched it four years ago, and that the industry will increasingly shift to fee-based variable annuities as a result of the rule.”
Judson Forner, vice president of investment marketing at ValMark Securities Inc., an independent broker-dealer based in Akron, Ohio, agrees. “I think fee-based variable annuities are the future of the variable annuity space.”
Fee-based variable annuities aren't anything new. RIAs tend to use them primarily for tax deferral and low contract costs, rather than for any sort of living benefit features readily available in the commission market, Forner says. Because they have until now made up a small fraction of total VA sales, insurers have not focused much on product development in the fee-based realm, but that is changing.
Annuity behemoth Jackson National Life Insurance Co., the largest seller in the market by far, is developing its first-ever fee-based variable annuity product, which offers a hint as to where the annuity market could be headed.
“Based on Jackson's ongoing conversations with our broker-dealer partners, we think the legal/compliance costs of managing a commission-based platform under the DOL rule will result in more demand for fee-based variable annuity products,” says Elizabeth Kosar, spokeswoman for Jackson.
Jackson National was the U.S. variable annuity sales leader last year, bringing in more than $23 billion in individual annuity sales, almost double the number two seller TIAA, according to Limra. The insurer’s new product, Perspective Advisory, is anticipated for launch in September.
Aside from producer compensation being fee-based, the Jackson annuity has low contract charges, a range of optional living and death benefit riders, and a relatively short surrender-charge period of three years.
“I think it's probably the first of many” new products to be introduced, says Samantha Chow, senior life and annuities analyst at Aite Group, a financial consulting and research firm based in Boston. “I think carriers will try to figure out the most creative ways to kind of get around this DOL ruling without hurting themselves or the relationship they have with the broker or advisor.”