Lack Of Clarity
Part of the frustration lies in the fact that, under the Employee Retirement Income Security Act (ERISA), it’s not certain what kind or degree of advisor compensation is considered “reasonable.” “It’s likely commissions will get slashed, but we won’t have the answer on how much for perhaps years,” says Thompson. Clearer definitions may only emerge after lawsuits and enforcement actions, but the end result, he says, will probably be “more streamlined and fiduciary-friendly annuity products without the bells-and-whistles add-ons that make these products complex.”
In the meantime, Thompson’s advice to advisors is: “Don’t be resistant to change, whether you’re commission-based or fee-only.” He adds that paying attention to academic research on the role of annuity products in a retirement portfolio would be a good way for some advisors to bone up on their fiduciary responsibilities. Many academics tend to like annuities as a source of retirement income due to their predictability.
Putting Annuities in Context
To Greenberg at Jefferson National, this transition is just the latest step in a broad-based movement that’s been going on for decades. “Even the big wirehouses have moved their businesses to a fee-based model where they’re managing money for clients in fee-based accounts,” he says. “Insurance products are the last bastion of commissions, and now that’s starting to change.”
Taking the long view, the annuities markets should be able to work out the kinks over time. But it may get worse before it gets better. “The annuity industry will go through a couple of transition years after the full implementation of DOL, but I predict sales will ultimately increase because carriers will have to focus on simplicity and transparency, which means that consumers will better understand their choices and subsequently buy more,” says Stan “The Annuity Man” Haithcock, in Ponte Vedra Beach, Fla.
He doesn’t think that will take too long. “The financial advisory industry always adapts quickly, regardless of what is thrown at them,” he says.
He further points out that the word “annuities” applies to many different types of products, which may contribute to the confusion. When viewed more as a type of insurance contract than an investment vehicle, the practical benefits become more obvious.
“The demographic tidal wave of baby boomers and retirees wanting contractual guarantees will still continue,” says Haithcock, citing income annuities, deferred annuities and qualified longevity annuity contracts (QLACs) among the products that “will always fill a need.” Most of these already offer a “pro-client design,” he says.
On the other hand, many FIAs and VAs will have to be redesigned to get away from their current sales models, many of which are “based on how much the agent army can sell,” says Haithcock. These are the products that “will see the most drastic product-design changes, which is a good thing,” he says.
When the dust settles, Haithcock predicts “advisors will use more of these transfer-of-risk contractual strategies for the non-correlated part of a portfolio.”
The Aftermath
Not everyone is so sure. “Right now, fee-only advisors don’t have a financial incentive to recommend annuities to clients who may need them,” says Michael Guillemette, assistant professor of personal financial planning at the University of Missouri. “In some circumstances, an annuity with a fee, but no commission, may help clients who are in the decumulation phase—as well as help annuity companies sell more product.”
But the post-DOL world could also help secure annuities’ place in retirement planning. “We expect guaranteed lifetime income products to become more mainstream,” says Will Fuller, president, Annuity Solutions, Lincoln Financial Distributors and Lincoln Financial Network. “As advisors move clients from accumulation to distribution, it is critical they recognize the need for guaranteed lifetime income that can never go down and that you can’t outlive.”
The guarantees inherent in these annuity contracts are even more crucial today as people live longer and traditional pensions can no longer be counted on. “The objective of qualified plans is to ultimately provide retirement income,” notes Fuller. “Given this great need, how can a solution that guarantees lifetime income—that an annuity provides—not be in the best interest of today’s clients?”
Lincoln isn’t scrapping commissions altogether, however. “We believe in choice,” he says. “If a client has an income need and the solution that best fits their need is an annuity, we will be prepared to offer commission- and fee-based options.”
One clear casualty of regulatory scrutiny appears to be the L share. For higher fees and an ongoing trailing commission, L shares offer a shorter surrender period than traditional B share annuities—there’s a period of four or five years before they can be sold, as opposed to a B-share annuity’s typical seven-year wait. Last August, both Jackson National Life Insurance Co. and Pruco Life Insurance Co., an annuity unit of Prudential Financial, announced they were ending sales of L-share VAs.
“Those types of offerings are going to eventually disappear,” says Haithcock. He doesn’t mind, noting that those who truly have their clients’ best interests at heart won’t miss the L shares either.
But don’t expect Lincoln to make such an announcement anytime soon. “If the market continues to see the need for this type of solution, we will continue to manufacture and distribute them,” says Fuller.
Savvy advisors had better stay tuned.